Budget 2012 Speech (Part 3): Restructuring to sustain growth

The Government will also provide more help for our industries to restructure and upgrade. -AsiaOne
Fri, Feb 17, 2012
AsiaOne

Restructuring to sustain growth

Mr Speaker Sir, I will now move on to the first major priority of this Budget: restructuring our economy, to grow on the basis of skills, innovation and productivity.

We have to take further steps now to slow the growth of our foreign workforce. But the Government will also provide more help for our industries to restructure and upgrade, so that we can continue to grow despite the constraints in labour supply.

We will also provide further support for businesses that are innovating, establishing their mark internationally, and capturing growth opportunities in the region and further afield.We have to take further steps now to slow the growth of our foreign workforce. But the Government will also provide more help for our industries to restructure and upgrade, so that we can continue to grow despite the constraints in labour supply.

I will talk about each of these priorities in turn.

Adjusting to Slower Workforce Growth

Managing our Dependence on Foreign Workers

The Economic Strategies Committee in 2010 recommended that we moderate the growth of the foreign workforce, and in the long term, avoid its proportion of the total workforce increasing steadily beyond one-third. While the proportion may fluctuate above or below one-third from time to time, we should not indefinitely increase our dependence on foreign labour.

We have introduced several measures since 2010 to reduce the demand for foreign workers. We announced a schedule of increases in foreign worker levies in Budget 2010, which we extended in last year’s Budget. We are halfway through this process of levy increases, which will be fully phased in for every sector by July 2013.

More recently, we raised the eligibility criteria for Employment Pass (EP) and S Pass holders, to keep pace with the improving salaries of our Singaporean PMETs (Professionals, Managers, Executives and Technicians). This was implemented last month, and new applications for EP are now subject to the tighter criteria and higher qualifying salaries.

It will take time for these measures to have an effect on businesses’ demand for foreign workers. The foreign workforce has in the meantime grown rapidly, by 7.5% per year over the last two years[3], and is now at about one-third of our total workforce. This has happened in an environment of full employment for Singaporeans and shortage of labour in many sectors of the economy.

[3]: The foreign workforce growth of 7.5% per year over the past two years excludes foreign domestic workers.

We have no alternative but to slow down the growth of our foreign workforce. Some sectors, such as construction, will require significantly more foreign workers over the next five years, given our major housing and public transport projects. However, economy-wide, we will have to take further measures to avoid an ever-increasing dependence on foreign labour.

We will therefore introduce a calibrated reduction in Dependency Ratio Ceilings (DRCs) in the manufacturing and services sectors (The DRCs specify the maximum proportion of foreign workers that companies can hire). Firms that are the most heavily reliant on foreign labour will have to find ways to reduce their dependence. Many other firms in manufacturing and services are still well within their DRCs and have headroom to employ foreign workers. However, we should take the opportunity now of a slow growth year to lower the DRCs across the board in both manufacturing and services. All firms can then take this into account in their future hiring decisions. This will help to contain our dependence on foreign workers in the long term.

Depending on the growth of the foreign workforce in the next 12 months, we may also have to consider further increases in the foreign worker levy beyond July 2013.

The DRCs for Manufacturing and Services are currently 65% and 50% respectively. From 1 July 2012, we will reduce:

a. the Manufacturing DRC from 65% to 60%; and

b. the Services DRC from 50% to 45%.

We will also tighten up on the DRC for S Passes. We will reduce the S Pass Sub-DRC from 25% to 20% for all sectors from 1 July 2012.

We will give affected companies time to adjust to the new DRCs. From 1 July 2012, companies will not be allowed to bring in new foreign workers beyond the new DRCs. However, for their existing foreign workers, companies will be given until June 2014 to comply with the new DRCs. This two-year transition recognises that many companies would have already invested in their existing workers.

In total, we expect about 500 manufacturing companies and 8,500 services companies to be affected by the DRC changes. Most are small enterprises which will have to do with one or two fewer foreign workers.

We will also tighten up in the Construction sector. Besides the reduced S Pass DRC, we will further reduce the Man-Year Entitlement (MYE) quotas by 5% in July 2012, and raise levies for basic skilled workers hired outside the MYE quotas.

The Ministries of Manpower and National Development will share more details regarding these changes in a press release.

We will provide significant assistance to help our SMEs adjust to these changes. However, we have to do so in a way that will promote restructuring and upgrading. This means that greater assistance will flow to those that are willing to improve productivity, design better jobs to attract local workers, and innovate in order to grow.

There is in fact significant scope to step up productivity in the services sector, where the labour crunch is most severe. For example, our retail industry lags behind several other global cities – its productivity level is less than half of that in New York, Paris and London and remains behind Hong Kong’s. We will support efforts by our services industry to make the transition to a higher level of quality and skills.

We will also help companies in their efforts to attract local workers. Even the more successful players in the services industry are finding it hard to recruit local workers. We have to do more to tap on the latent pool of local manpower which is still available. Many of our homemakers and Singaporeans who retired early say they are willing to work, either part-time or full-time.

Attracting these Singaporeans will require a few changes. First, jobs will have to be designed with the worker in mind, especially for homemakers and older workers. They will also have to pay enough to attract local workers.

Take Sakae Sushi for example. They have been actively hiring homemakers for the past 15 months, for jobs during meal times. Sakae Sushi gets the manpower it needs during the busy hours, while the homemakers are able to earn an income and still spend time with their children. Employees have spread the word to their friends and Sakae Sushi hopes to employ more homemakers, up to half of its total workforce. Some of these employees, although working part-time, have risen up the ranks to hold supervisory positions as shift leaders.

Better pay and working conditions are necessary but we will also need a collective effort to re-instil pride in every job. Waiters and cooks in restaurants; chambermaids in hotels; crane operators and other construction tradesmen; machine operators and salespersons. Everyone has to play a role – employers, employees and customers – if we are to bring back respect for these jobs, attract locals and develop high-quality and experienced teams. These are good jobs in every developed society.

Helping SMEs Make the Transition

I will introduce several measures to help our SMEs to restructure, attract local workers, and grow. Besides these longer-term measures, I will also provide some temporary assistance to help our companies cope with the current environment of higher business costs.

Special Employment Credit

Older workers will be an increasingly important resource for companies. Compared to a decade ago, our businesses now recognise much more clearly the value of older workers.

I will provide a significant incentive to help them attract and retain older workers. All employers will receive a Special Employment Credit (SEC) for their Singaporean workers who are above 50 years old and earning up to $3,000 per month. The SEC will be 8% of wages. A lower SEC will also be provided for workers with a monthly wage of between $3,000 and $4,000. The SEC will cover almost 350,000 workers, or four-fifths of older Singaporean workers.

The SEC is unlike the Jobs Credit Scheme, which applied to all workers and was a one-off, counter-recessionary measure. The SEC will be in place for the next five years (2012-2016), to enable employers to plan ahead in hiring older workers. Beyond that, depending on labour market conditions, we will consider if the SEC should be retained, and if so in what form.

This is a substantial enhancement to the SEC[4] which I first introduced in last year’s Budget. It will provide employers with benefits of about $470 million per year – more than twice the increase in their wage bill of $190 million as a result of higher employer CPF contribution rates for older workers, the details of which I will elaborate on later.

[4]: In Budget 2011, a one-off Special Employment Credit (SEC) for Singaporean workers aged above 55 was introduced. This previous Special Employment Credit cost the Government an average of $33 million per year over three years.

I therefore strongly encourage companies to make full use of the SEC to hire older Singaporean workers and reward them well. The higher CPF contributions will also encourage older workers to participate in the workforce.

SME Cash Grant

Besides the SEC, I will provide a one-off cash grant to help companies offset higher business costs, which may persist in the business slowdown. The grant is sized to benefit smaller companies more. Companies will receive a cash grant pegged at 5% of their revenues in YA2012, capped at a payout of $5,000. They will receive the grant as long as they have made CPF contributions to at least one employee[5]. The scheme will cost Government around $320 million in FY2012.

[5]: The employee must not be a shareholder of the company.

Transforming through Productivity and Innovation

However, the only lasting solution for dealing with the labour shortage is to improve productivity.

We introduced a number of major new measures to help businesses address this challenge over the past two years. First, we provided broad-based support through the Productivity and Innovation Credit scheme, or PIC, which I will further enhance in this year’s Budget. Second, we set aside $2 billion for the National Productivity Fund (NPF), which will provide more targeted support for industry efforts to restructure and upgrade over the next decade. Third, we are investing significantly in Continuing Education and Training (CET) to help our workers develop new skills and expertise and increase their versatility.

Enhancement of Productivity and Innovation Credit (PIC)

2011 was the first year in which businesses benefited from the PIC scheme, which provides for a 400% tax deduction on up to $400,000 spent on a broad range of productivity-related expenses, such as training or investment in equipment.

Our companies will enjoy tax savings totaling $650 million from the PIC claims they have made in this first year alone. Any company, be it small or large, new economy or old, can take advantage of the scheme. In fact, one in three small companies[6] – those with turnover of $10 million or less – have used the PIC. They will see their taxes come down by 40% on average. And they will also see their benefits quickly because 90% of all PIC claims are processed within three months.

[6]: These exclude companies whose status according to ACRA is dormant, inactive, no business done, in liquidation, receivership or has been dissolved.

We have received useful suggestions on how we can improve the PIC further, from business groups such as the Singapore Business Federation – SME Committee. I will introduce a few changes in this Budget:

a. To give businesses more cash upfront for their investments, I will enhance the PIC scheme to provide a 60% cash payout for up to $100,000 of firms’ PIC expenditures. This means a $60,000 payout from the Government, compared to the $30,000 given previously. This is a substantial subsidy for any SME investing in its workers or its operations. It is especially useful to companies with limited taxable income, which would not be able to benefit fully from the PIC tax deduction.

b. Next, they will get their cash payout faster, to help them with their cash flow. From 1 July 2012, companies will be able to apply for and obtain their cash payouts on a quarterly basis instead of having to wait till the end of their financial year.

c. I will also make it easier for companies to claim PIC benefits on their in-house training costs, by removing the requirement to have these training programmes certified by the Singapore Workforce Development Agency (WDA) or Institute of Technical Education (ITE). This will be for in-house training costs of up to $10,000 per year, which will cover the majority of training initiatives by smaller companies.

d. I will make other refinements to the PIC scheme which are contained in Annex A-4.

Enhanced Training Support for SMEs

I will introduce three further enhancements to support worker training.

First, more help will be given for SMEs who upgrade their workers through all courses certified by WDA, and Academic CET programmes at the polytechnics and ITE. They will henceforth get a 90% course subsidy. Together with the enhanced cash payout under the PIC, our new subsidies will effectively cover almost the full cost of training for SME-sponsored employees[7]. Further, we will increase the absentee payroll cap from $4.50 to $7.50 an hour. This is therefore a very generous scheme, and we will let it run for three years. About 8,400 courses could potentially come under this scheme. More details will be announced by the Ministries of Manpower and Education in the Committee of Supply (COS) debate.

[7]: For example, for a training course that costs $1,000, the SME will only pay $40.

We will provide similar training benefits for self-employed persons. WDA will work with our industry associations and agencies, such as the National Taxi Association and Media Development Authority (MDA), so that self-employed individuals such as taxi-drivers and freelancers in the creative sector can benefit.

Grants to Support SME Upgrading and Productivity

Second, we will step up grants to help SMEs transform their operations and raise productivity. L.S. Construction is an example from an industry with significant scope for improvement. We have all seen the traditional scaffoldings, covering the whole façade of a building and with working platforms at every level. Erecting such structures is labour-intensive. Their solution, using a grant from the Productivity Improvement Project (PIP) scheme under BCA’s Construction Productivity and Capability Fund, was to replace the current system of scaffoldings for high-rise building construction. L.S. Construction has introduced an integrated climbing scaffold and safety screen system commonly used in developed countries. This system moves up via cranes as the building construction progresses. The benefits – only 40% of the manpower required previously is needed to construct the scaffold.

This is not an example that involves major breakthroughs in technology. But I mention it to illustrate how companies can take advantage of our schemes to bring in existing innovations that can make a meaningful difference to their daily operations.

Third, we will increase grants for capability development amongst our SMEs from the current 50% to a 70% subsidy rate for the next three years under schemes managed by SPRING and IE Singapore. This will provide a $200 million boost over the next three years, which will help SMEs attract local talent and automate or upgrade.

Taking all these schemes together with those introduced in the last two Budgets, we will be providing substantial support to our businesses, mainly to help them upgrade and to hire older workers. This amounts to a total of about $1.4 billion this year, which will more than offset the additional amount businesses will pay due to increased foreign worker levies. This is true for our small businesses as well.

Renovation and Refurbishment Deduction Scheme

The next scheme is targeted especially at companies in the services sector. We introduced the Renovation and Refurbishment Deduction Scheme in 2008 to help businesses renew and refresh their premises, such as showroom displays or the décor for a restaurant. The scheme is due to expire next year.

Our service sector SMEs have found the scheme helpful. I will therefore make the scheme a permanent feature of our tax system, just like our capital allowance regime which our manufacturers have found helpful. I will also double the amount of expenditure that may be claimed from $150,000 to $300,000.

Mergers and Acquisitions

Another dimension of the restructuring of our economy will be through business consolidation or acquisition. It is how many of the more efficient and competitive players in each sector can gain economies of scale, acquire new capabilities, and raise overall industry productivity.

In Budget 2010, I introduced the Mergers and Acquisitions (M&A) Allowance scheme to support this. Companies are able to enjoy tax allowances of 5% of up to $100 million of the value of the acquisition. To provide further support to SMEs contemplating business consolidation, I will grant a 200% tax allowance on the transaction costs incurred, such as legal and tax advisory fees, subject to an expenditure cap of $100,000. More refinements to the M&A Allowance scheme are provided in Annex A-4.

Capturing opportunities for growth

Let me go on to speak about the support we will provide for companies to capture new opportunities for growth. This too is part and parcel of restructuring our economy. Our companies must seize opportunities to grow in markets abroad or move up the value chain in their Singapore operations, so that we can sustain economic growth.

Internationalisation

The demand for urban services and infrastructure in emerging markets is growing rapidly. Many of our companies are well-placed to benefit from these opportunities, in areas such as water and sanitation, and construction and engineering works. In last year’s Budget, I mentioned that the Government was working with Temasek Holdings to develop a specialised institution that will plug gaps in financing for larger, long-tenure projects overseas. Temasek has since put together a consortium of reputable financial institutions to establish a specialised project finance company (PFC).

The PFC will aim to have about 80% of its portfolio comprising cross-border projects with significant Singapore-based corporate participation. Once it has built up its operations and market presence, the PFC is expected to provide about $400 million of financing annually, in turn catalysing an additional $2 billion to $3 billion of projects.

As with similar institutions internationally such as the EXIM banks, some government support is necessary to ensure its viability, whether in the form of direct government loans, capital injections or guarantees for fundraising by the institution. The Government has decided that the best approach is to provide a guarantee on the debt instruments issued by the PFC, rather than to get more directly involved in the business through capital injections or direct loans to the PFC. This more arms-length approach is a better way of ensuring commercial discipline and sustainability in this project finance company.

The guarantee will allow the PFC to raise funds competitively, and thereby also offer terms to our companies that will help them compete internationally on a more equal footing. However, losses on any of the loans made by the PFC will have to be met in the first instance from its overall revenues and the consortium’s equity. This substantially reduces the risk of the guarantee being triggered.

The PFC is expected to be operational by the second half of this year, by which time more details will be made available.

Trade Financing and Political Risk Insurance

Another gap in cross-border financing that we had identified earlier was in trade financing for SMEs dealing in emerging markets.

We will expand the current suite of trade financing schemes under IE Singapore. This will include helping companies secure insurance coverage for political risks for projects overseas, especially in emerging markets.

The Ministry of Trade and Industry will elaborate further on this in the COS.

Double Tax Deduction for Internationalisation

I will also provide further help for companies to meet the direct costs of overseas marketing and business development by simplifying the Double Tax Deduction (DTD) for Internationalisation scheme. The details are in Annex A-4.

Developing New Competitive Strengths

In this year’s Budget, I am also providing further support to some of our growth industries so as to help them develop capabilities and to align the tax rules applying to them with international norms.

Tourism

To develop distinctive and high-quality tourism offerings, and thereby attract higher visitor spend, we will inject an additional $905 million into the Tourism Development Fund (TDF).

Further, to capitalise on the vibrant growth of international cruise tourism, I will extend the GST Tourist Refund Scheme (TRS) to international cruise passengers departing from the Singapore Cruise Centre and the upcoming International Cruise Terminal.

I will also simplify and enhance the GST relief for goods brought in by travellers and residents returning from abroad, so as to keep pace with rising expenditures and bring the relief quantums closer to international practices. The details are in Annex A-4.

Marine and Offshore

Our Marine and Offshore industry, already a leader internationally, is developing new capabilities to take advantage of new growth opportunities. We will allocate $150 million from the National Research Fund to A*STAR and EDB to help our companies build R&D capabilities to develop solutions for deepwater oil production.

Gold Trading Hub

We will facilitate the development of gold trading, which can draw on Singapore’s strengths as an international financial centre and trading hub, to meet strong demand for investment-grade gold in Asia.

Investment-grade gold and other precious metals are essentially financial assets that are actively traded and are just like other financial instruments that do not attract GST. I will therefore exempt them from GST. This change brings our tax treatment of investment-grade gold and precious metals in line with the practices of many developed economies, like Australia, UK and Switzerland.

Providing Tax Certainty

One of the concerns of our business chambers in recent years has been the treatment of capital gains. Although Singapore does not have a capital gains tax, businesses face some uncertainty about whether the gains from the disposal of their investments would be subject to income tax. I will set out clear guidelines specifying when a company will not be taxed on their gains from disposal of equity investments. Details on this and other tax changes are in Annex A-4.

Tobacco Tax

Finally, a quick word on sin taxes. I will raise the excise duties for beedies, “ang hoon” and smokeless tobacco by 20%, and unmanufactured tobacco by 10%. This is a continuation of our policy to harmonise tax rates on cigarette and non-cigarette tobacco products which we started last year.

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