Sunday, 10 June 2012

Singapore's economic strategy: PM Lee Hsien Loong at Economic Society of Singapore Annual Dinner 2012

'Growth the way to improve our lives'
Not an end in itself, but way to boost collective well-being, achieve goals
By Leslie Koh, The Straits Times, 9 Jun 2012

PRIME Minister Lee Hsien Loong yesterday mounted a robust defence of his government's economic strategy, saying that growth must remain a central plank if Singaporeans want to improve their lives.

Even as he promised to address the side-effects of growth, he rebutted the idea of slower growth as a way to ease social strains, a notion that has gained currency in some circles.

Without growth, he stressed in a speech to the Economic Society of Singapore, the country had 'no chance of improving our collective well-being'.

To those who championed the line that Singapore has enough material success and should give less weight to economic factors, spend more now and put aside less for the future, Mr Lee had this rejoinder: 'I respect these views. I agree fully that material goals are not everything in life.

'But we are not going for growth at all costs, nor have we done so. Growth is not an end in itself, but a means to improve our lives and achieve many of our goals.'

It was perhaps apt that he chose to make the speech at an Economic Society event. It was two months ago that economist Lim Chong Yah told a lecture by the society of a controversial idea to raise wages by sheer will, rather than sharing wealth.

Several Economic Society members have also suggested Singapore aim for slower growth, which they say will ease the tight labour market and make it easier to narrow the wage gap and cut the inflow of foreigners.

Last night, Mr Lee explained why the Government was keeping faith with its current approach.

Drawing lessons from Europe, and the United States, he noted that Singapore also had to grapple with the slowing growth that developed nations inevitably faced.

'Singapore is beyond the phase of effortless growth,' he said. 'As we venture into the next phase of our development, Singaporeans have to understand what is achievable, what the options are, and what trade-offs we have to make.'

The choices included where Singapore wanted to be in the future. While it ranked 11th worldwide among countries on a per capita GDP basis, it fell far behind and did not even make it to the top 20 when compared to top cities like Paris and New York.

'These cities are not standing still. They are moving ahead. So must we,' he said. 'Being near the front means that Singaporeans can enjoy a quality of life comparable to what people in advanced countries will be enjoying in 20 years from now.'

For this to take place, a successful, growing economy was essential. 'There is no other way we can do this,' he stressed.

If Singapore's growth slowed, he warned, investments would fall, jobs would become scarcer and unemployment would rise.

But Mr Lee added that the Government would always try to balance economic imperatives and social needs. 'Our vision of a global city cannot be defined by absolute economic numbers alone. It also has to be measured by how widely society benefits.'

So, while it focuses on creating wealth and jobs, it also acts to ensure that all Singaporeans benefit from growth. 'Every society has to strike a balance between individual rewards and social equity.' So, monetary transfers are carried out to aid the elderly and poor, and housing grants given to help people buy their own homes. As a result, he said, households in the bottom fifth have on average $200,000 of equity in their Housing Board flats. He said: 'Some critics argue we don't do enough for the less fortunate. The reality is that we do much more than we acknowledge or get credit for.'

At the same time, he promised to do more to raise wages, strengthen safety nets and resolve what he later called 'stresses and strains' from growth.

And for all this to work, he added, Singapore had to build public consensus to support the country's policies and leaders.

'Only when citizens accept the political system as legitimate, and economic order as fair, will they give the Government the mandate to run Singapore in their best interests. And only with this mandate can the Government do the best for Singapore and all of us.'







PM Lee: Nordic model won't work for growth in Singapore
Differences in culture, society mean outcomes unlikely to be the same
By Leslie Koh, The Straits Times, 9 Jun 2012

AS PUBLIC debate continues over what growth policies Singapore should pursue, one model that keeps coming up is the Scandinavian example.

Economists and social experts have repeatedly cited the Nordic experience, noting how egalitarian systems and pro-family policies have helped countries like Norway and Sweden achieve high growth, high birth rates and generous welfare, all at the same time.

Last night, however, Prime Minister Lee Hsien Loong explained why Singapore could not do the same thing.

Basic differences in culture, society and environment, he said, made it difficult for the Republic to achieve the same outcomes.

'There is indeed much we can and should learn from the Scandinavian societies, such as their pro-family policies and their success in nurturing global companies,' he said.

'But there are basic differences between Singapore and Scandinavia, in our strategic situations and our approaches to growth and equity.'

Essentially, it came down to one fundamental choice: Low taxes and targeted welfare benefits - as Singapore has - or high taxes and comprehensive welfare.

'You can have one or the other, cannot mix and match,' observed Mr Lee, at a dinner for the Economic Society of Singapore.

Nordic nations, he noted, had natural resources, a rich hinterland in Europe, and long histories as homogeneous societies which were willing to pay high taxes for high social protection.


'I do not believe that Singaporeans would be willing to pay the taxes that Scandinavians pay, or that our economy could be competitive at such heavy tax rates,' said Mr Lee. He acknowledged that Singapore could raise its social spending as well as taxes 'moderately' - in fact, it was exactly what the country needed to do in the long term, with its population ageing and health-care needs growing.

'But the limits are tighter than many people realise,' he added.

Raising income tax rates, he noted, could affect Singapore's competitiveness in the region.

He nevertheless promised to keep strengthening social safety nets here, but also warned that this would cost more - and ultimately, mean higher taxes.

Said PM Lee: 'At some point - not in this term of government, but surely within the next 20 years - the government will need new sources of revenue, which means raising taxes.

'I hope that when this becomes necessary, the government of the day will have the courage to do so, and the electorate will understand why it is in everyone's interests that we do so.'

Otherwise, Mr Lee added, Singapore could face problems seen in parts of Europe, where citizens have resisted higher taxes but want to keep high welfare levels.

He said: 'We are a long way from that, but still we must proceed very carefully, because benefits once given can never be taken away... Spending is popular, but raising money to pay for it is not. One wins votes, one loses votes.'




PM Lee on...

STAYING AHEAD

'Do we want Singapore to be up among the global cities, or do we want to remain where we are today, while the world moves ahead? I believe that if Singaporeans think of our future from this broader perspective, most will want us to be among the leading global cities. These cities are moving ahead, and so must we. Being near the front means that Singaporeans can enjoy a quality of life comparable to what people in advanced countries will be enjoying in 20 years from now.'


TRADE-OFFS

'Singapore is beyond the phase of effortless growth. As we venture into the next phase... Singaporeans have to understand what is achievable, what the options are, and what trade-offs we have to make. Only then we can collectively choose an optimal path forward.'


MEANINGFUL GROWTH

'I agree fully that material goals are not everything in life. But we are not going for growth at all costs, nor have we done so. Growth is not an end in itself, but a means to improve our lives and achieve our goals.'


BALANCE BETWEEN REWARDS AND EQUITY

'Every society must strike a balance between individual rewards and social equity. Where to strike the balance, and how best to do it, is a fundamental question... Our approach has been firstly, to promote enterprise and create wealth and jobs, rather than merely redistribute a smaller pie. Secondly, to foster social cohesion, by investing in every child and helping all Singaporeans equip themselves for good jobs and own their own homes. Thirdly, to encourage self-reliance... saving for one's future, rather than a sense of entitlement.'






Govt 'cannot depend on land sales for income'
By Robin Chan , Janice Heng, The Straits Times, 9 Jun 2012

LAND sales are not a dependable source of government income, Prime Minister Lee Hsien Loong said yesterday evening in response to a question on other possible sources of revenue.

The income from land sales can be very good in some years but can be as little as zero in other years, he said during a question-and-answer session at the Economic Society of Singapore dinner.

'If we are renting out land for three to four years, fair enough it is current income. If it is 99 years and you want to spend it upfront, then I would consider doing it over 99 years. I would be hesitant as treating it as a bonanza,' Mr Lee said.

The audience member had asked if the Government would consider using money from selling land as a source of income as well as money from foreign assets in its current account.

Mr Lee said the amount of foreign assets in the current account is 'overstated', as significant amounts of these foreign assets are actually the earnings of multinational corporations which will be remitted back to their home countries.

But he said the Government taps on its reserves for spending through its net investment returns.

That makes up 2 percentage points of the 17 per cent of gross domestic product the Government spends each year.

In response to a separate question, Mr Lee said economic integration in Asia is a natural step as there is a 'trend of greater interaction between Asian economies' with the rise of China and India.

It is good for countries to expand their network further, he said, as long as 'individual pieces fit into the broader quilt'. But it would not be good if there are separate blocs, where 'Asia has free trade agreements amongst itself, the US is on its own and Europe is in its own corner of the world'.

He also said Singapore faces a domestic challenge of how to keep growing as it is 'now stretching at the seams' but cannot do so indefinitely.

'At some point we gradually have to slow down, and depend on qualitative growth, which means a transformation... people moving from old jobs to new jobs, old skills to new skills,' he said.

Singapore also needs 'some inflow of talent and people'.

'There is no country in the world where you can squeeze the economy, the size gets smaller and incomes rise at the same time. Never happens.'

His eyes then lit up when he was asked a question about robotics and its impact on workers.

Mr Lee said he could see the change 'happening dramatically'.

It was not just about robots doing household chores like vacuuming, but being able to deal with an environment, make mistakes and learn from them.

Robots would also be able to read company reports or press releases and make assessments of them. They may even be able to read scans of humans better than the human eye, he said.

He gave an example of a breakthrough in technology that has now enabled the creation of a robot that can debone a chicken.

He added: 'So robotics will be a big pressure on our society. If we can adapt to that, and our people can be smart enough to learn to operate the robots, use them and direct them, then of course we rise a level and life is better.'




What others say

DIFFERENT SOCIETIES

'You cannot look at an economic model without incorporating the societal structure. If you ask the Danes whether they would prefer high welfare and no growth or high growth and no welfare, all political results show that they prefer high welfare and no growth. And they are ready to pay for it. Singapore is a completely different society, facing different challenges.'
- Former Danish ambassador to Singapore Joergen Moeller, agreeing with PM Lee's point that the Scandinavian model may not suit Singapore


SHIFT CAUTIOUSLY

'In this year's Budget, there were indications that we are shifting a little bit more left. But it cannot become a very 'leftist' kind of system, because Singapore's growth is largely driven by foreign companies' willingness to be housed here. And once you make that uncompetitive, we will force ourselves out of this race.'
- Mr Jimmy Koh, head of research and investor relations at UOB, on stronger safety nets and the corresponding need to raise taxes





'If we are content to be average, we will fail'
PM Lee poses the question: Where do we want Singapore to be in 20 years' time?
by Teo Xuanwei, TODAY, 9 Jun 2012

Some have called for slower economic growth, arguing that we have enough material success and should shift the focus to social considerations. While he respects their views, Prime Minister Lee Hsien Loong cautioned that, without growth, there is "no chance of improving our collective well-being".

New investments will be fewer, good jobs will be scarcer and unemployment will rise, he said. Singaporean talents will then be lured away by the opportunities and incomes they can earn in other countries and low-income workers will be hardest hit.

Gradually, "the mood will change and our confidence will be dented", he added, pointing to such loss of optimism in the United States and Japan after years of slow growth.

"Growing too fast generates growth pains and stresses and strains. Growing too slow produces many other serious headaches," he said, acknowledging the dilemma.

Speaking last night at the Economic Society of Singapore's (ESS) annual dinner, Mr Lee said: "Growth is not an end in itself, but a means to improve our lives and achieve many of our other goals.

"And we've always got to maintain the balance between economic and non-economic objectives and ensure that the fruits of growth - enough of it - are invested for social purposes which benefit our society and the wider population."

In his 40-minute speech, the Prime Minister posed the question: Where do we want Singapore to be in 20 years' time? "Do we want Singapore to be up among the global cities, or do we want to remain where we are today, while the world moves ahead?" he asked.

He believed most people would want the former. "Being near the front means Singaporeans can enjoy a quality of life comparable to what people in advanced countries will be enjoying in 20 years' time.

"Being near the front means that our children can look forward to better lives than our generation."

It also includes intangible aspects: Citizens showing more grace and compassion to each other, a greater appreciation of the arts.

The Prime Minister pointed out that, despite Singapore's impressive per capita gross domestic product, the country still has "much work to do to assure ourselves of a brighter tomorrow", because its productivity and wages still lag other developed countries.

Globalisation - apart from increasing the vulnerability to global shocks and uncertainty - will also widen income distributions all over the world, said Mr Lee, and angst and social pressures will likely increase.

Responding to criticism that not enough is being done for the lower-income here, Mr Lee said the reality is that more is being done than the Government gets credit for - for instance, it has emphasised boosting assets more than incomes.

Still, he pledged to progressively build on some of the new schemes introduced in this year's Budget, such as the Goods and Services Tax vouchers scheme for the low-income households.

He reiterated that a prospering, growing economy was necessary to investing in "making life better for all of us". It will be important for Singapore to maintain the virtue of always striving to be the best and not taking success for granted.

"If we just set our ambition to be above average in the league of cities, then we will fail. That is the greatest danger if we tell ourselves, 'Let's slow down, enjoy life today, don't worry about tomorrow'," Mr Lee said.





Find middle ground: Economists, MPs
Choice between S'pore and Scandinavian models 'need not be either/or'
By Robin Chan , Aaron Low, The Straits Times, 11 Jun 2012

ECONOMISTS and Members of Parliament yesterday were in agreement with Prime Minister Lee Hsien Loong that the Scandinavian welfare model is unlikely to work here.

But they observed that Singapore appears to be moving towards a middle ground of higher taxes and increased social spending, which some welcome.

They were responding to Mr Lee's speech to the Economic Society of Singapore (ESS) last Friday, when he said there is a 'fundamental choice' between the Singapore model of low taxes and targeted welfare, and the Scandina-vian way of high taxes all around and comprehensive welfare.

He defended the Singapore model, saying that Scandinavian countries have natural resources and a homogenous society, and higher taxes would likely be unpopular among Singaporeans and make the economy less competitive.

But economists and MPs said Mr Lee appeared to leave the door open for a middle ground, when he said social spending and taxes will rise moderately and within limits in the longer term, to meet society's needs.

In the speech, Mr Lee said: 'As we enhance our social safety nets, expenditure will inexorably rise, and revenue must keep up. At some point - not in this term of government, but surely within the next 20 years - the Government will need new sources of revenue, which means raising taxes.'

Singapore's public spending averages about 17 per cent of its gross domestic product (GDP), and it has a top personal income tax rate of 20 per cent.

Countries such as Denmark and Sweden typically spend about 50 per cent of their GDP and have tax rates in the same region.

Barclays Capital economist Leong Wai Ho agreed that the Scandinavian tax model is not for Singapore, as the Government here cannot afford to spend as much as the Europeans. 'We are more open an economy than Scandinavia and more vulnerable to economic shocks,' he said.

ESS vice-president Yeoh Lam Keong said he was heartened that Mr Lee 'renewed his commitment to inclusive growth that benefits all Singaporeans' but disagreed that it was 'a case of either/or' between the Singapore and Scandinavian systems.

'The rational choice for us is probably balanced public spending of 25 per cent to 30 per cent of GDP and a tax rate of 25 per cent to 30 per cent. This would enable us to have much better social security, more affordable public housing and health care and a higher-quality, more egalitarian education system,' Mr Yeoh said.

ESS vice-president Donald Low noted that up to the late 1990s, Singapore's public spending was above 20 per cent.

'Even if we decide that Nordic tax rates of around 50 per cent are too high, and public spending of 50 per cent of GDP crowds out too much private enterprise, that's not the same as saying that Singaporeans will not accept some increase in our tax rates and public spending,' he said.

MP Inderjit Singh (Ang Mo Kio GRC) said that finding the middle ground is 'inevitable' and that while Singapore may not have the natural resources of Nordic countries, it can tap more on its reserves and find ways to further grow them.

Higher corporate and income taxes will also not make Singapore less competitive as there are 'many more things going for us and not just tax to make Singapore attractive', he added.

Nominated MP Tan Su Shan agreed that raising taxes, especially progressively, 'may work if it is calibrated correctly and done slowly and gradually'.

MP Liang Eng Hwa (Holland-Bukit Timah GRC) said choosing between models or even something in between 'is academic'. 'We have to find our very own optimum; factoring in our own economic, social and political circumstances and realities.'








Contemplating Singapore's future as leading global city
This is an edited excerpt of Prime Minister Lee Hsien Loong's speech at the Economic Society of Singapore's annual dinner last Friday.

What will the world be like 20 years from now? Nobody can predict exactly how events will unfold, but we can see several trends which will shape the landscape around us.

Globalisation will continue, barring extreme scenarios such as war. More economic integration will generate greater prosperity for many countries, but it also has its downsides. Shocks will be transmitted more quickly and widely, economic cycles will become shorter and more unpredictable, and the potential for worldwide contagion will be much greater, whether in financial crises or global pandemics.

Developed economies will gradually recover from the current crisis, though each will have its own problems: European countries will be troubled for many years by the euro zone's structural flaws, the US by its fiscal imbalances, and Japan by its ageing and shrinking population. Emerging economies will continue to grow in importance, even if their path will not be smooth. The leading cities will continue to attract capital and talent in a globalised world. Capital and talent in turn will attract more of the same, thus transforming these cities into even more vibrant centres of business, ideas, and influence.

Cities like New York, Munich, and London can prosper even if the countries they are in run into problems, because their fortunes are tied to the global economy. And in the emerging economies, cities like Shanghai and Mumbai will become even more exciting places to live and work, long before their income levels catch up with the cities in the West.

Globalisation and technology will widen income distributions in many countries. This trend is evident in all developed economies, from capitalist US to socialist France, over the last 30 years. Talented and enterprising individuals will continue to earn a high premium, while pressure will grow on jobs in the middle, where competition is intensifying globally. Angst and social pressures will increase.

Where do we want Singapore to be?

Where do we want Singapore to be in 20 years' time? Do we want Singapore to be up among the global cities, or do we want to remain where we are today, while the world moves ahead?

I believe that if Singaporeans think of our future from this broader perspective, most will want us to be among the leading global cities. These cities are moving ahead, and so must we.

Being near the front means that Singaporeans can enjoy a quality of life comparable to what people in advanced countries will be enjoying in 20 years' time. Being near the front means that our children can look forward to better lives than our generation. Being near the front includes softer, intangible aspects too: Singaporeans showing more grace and compassion to one another; dedicated and passionate volunteers contributing to a better society; greater appreciation of the arts, and of our cultural and historical heritage. All these aspects are important, and in all of them, we can do much better than today.

Beyond these broad aspirations, what tomorrow's Singapore will be like is for all Singaporeans to imagine, and create, together. A new generation is growing up, brimming with fresh ideas on how to change Singapore for the better. With imagination and hard work, we can turn vision into reality, and ensure that Singapore continues to be the best home for us all, and a shining red dot we will always be proud of.

A successful, growing economy

But being near the front also means we must have a successful, growing economy. There is no other way we can achieve this. We cannot do it by spending what we have inherited from the older generation. We certainly cannot do it by pumping oil or gas from the ground. We can do it only if our economy is prospering and creating wealth that we can invest in our city and our people, to make life better for all of us.

Singapore cannot avoid slower growth in the next decade and beyond. This is natural because we are now more developed. We are also running up against land and labour constraints, especially as we reduce the inflow of foreign workers. Plus competition is fiercer, not only from hundreds of millions of hungry workers in the emerging economies, but also from new technologies that will transform industries in even the developed economies.

I know that some Singaporeans welcome the prospect of slower growth. Some go further, and want us to slow down even below our economy's potential. They argue that we already have enough material success, and should give less weight to economic factors, and more to social considerations. And that we should spend more on ourselves, and put aside less for the future.

I respect their views. I agree fully that material goals are not everything in life. But we are not going for growth at all costs, nor have we done so. Growth is not an end in itself, but a means to improve our lives and achieve our goals. We must always maintain the balance between economic and non-economic objectives, and ensure that the fruits of growth are invested for social purposes which benefit the wider population.

Nevertheless, without growth, we have no chance of improving the collective well-being. Far more countries worry about growing too slowly, than growing too fast. For Singapore, slow growth will mean that new investments will be fewer, good jobs will be scarcer, and unemployment will be higher.

Enterprising and talented Singaporeans will be lured away by the opportunities and the incomes they can earn in other leading cities. Low-income workers will be hardest hit, just as they were each time our economy slowed down in the last decade.

Over time, our confidence will be dented. Thoughtful Americans have told me that a major challenge for the US after years of slow growth has been a profound loss of optimism. The same is true for Japan, and will be true of Singapore too if ever our economy stagnates.

Beyond the issue of resources is the deeper question of spirit. We have been successful precisely because we have not taken success for granted. Our sense of vulnerability and consciousness of the competition we face are important parts of the Singapore psyche.

Changi Airport strives to be the best airport in the world; it does not aim to be No. 2. Singapore too must aim to be outstanding. If we are content to just be above average in the league of cities, we will fail. That is the greatest danger if we tell ourselves to slow down, enjoy life today and not worry about tomorrow.

I am confident that the Singapore economy can remain vibrant and dynamic, provided we work together and set ourselves to it. We have the ability to invest in our workforce, in every worker, and catch up with the developed countries.

Tripartite cooperation is strong, as is our will to upgrade and adapt. We are open and confident, and embrace talent and enterprise from around the world even as we nurture Singaporeans to their fullest potential. Our reserves are a valuable buffer against external shocks, and give us the confidence to transform our economy. Not many other countries, or cities, in the world can claim the same.

An inclusive Singapore

Our vision of a global city cannot be defined by absolute economic numbers alone but also by how widely society benefits. Singapore has been a success because growth has benefited all. It is crucial that growth continues to benefit all in the next 20 years. Yet, this is more challenging too, as incomes are becoming less equal worldwide, and as our population ages.

Every society must strike a balance between individual rewards and social equity. Where to strike the balance, and how best to do it, is a fundamental question that each society must work out for itself.

Our approach has been firstly, to promote enterprise and create wealth and jobs, rather than merely redistribute a smaller pie. Secondly, to foster social cohesion, by investing in every child and helping all Singaporeans equip themselves for good jobs and own their own homes. Thirdly, to encourage self-reliance wherever possible, including saving for one's future, rather than a sense of entitlement. This approach has served us well.

Critics argue that we do not do enough for the less fortunate. The reality is that we do much more than we claim or get credit for.

We have equipped people with the skills and ability to do well for themselves. But we also recognise that not everyone will do equally well, and have developed social safety nets and transfers, especially for the low-income and elderly. In the past five years, transfers added one-fifth to low-income household earnings. Over a lifetime, a low-income household will receive more than $500,000 from the Government.

Unlike most other countries, we have emphasised boosting Singaporeans' assets more than incomes. In particular, our HDB programme has been a major means of uplifting our people. The large majority of Singaporeans own their homes, including low-income households. They have used their CPF (Central Provident Fund) savings and received very generous subsidies from the Government.

In recent years, we have gone further to enhance housing subsidies for low-income home buyers, through the Additional Housing Grant and Special Housing Grant. In fact, households in the lowest income quintile (20 per cent) have, on average, more than $200,000 of equity in their HDB flat! This is the direct result of government policy. It is unmatched by any other country, but our capital grants do not show up in the Gini coefficients.

Therefore to assess the well-being of low-income Singaporeans, we cannot look at nominal wages alone. Nevertheless, in the next phase, we must do more to raise wages at the lower end.

Skills upgrading and sharing productivity gains fairly with workers are key to this. Tightening up on unskilled foreign workers will help. So will progressively enhancing Workfare, which has some advantages over a statutory minimum wage. We cannot simply push up wages by command overnight, but we can and must, through concerted and sustained efforts, improve the earnings of our workers over time.

Beyond wages and Workfare, we will strengthen our social safety nets. This year's Budget marks a significant new beginning. We introduced many new schemes that will be part of our social protection system: support to low-income households like the GST (goods and services tax) Voucher Scheme, and help for middle-income families such as subsidies for home-based medical care. We will progressively build on these schemes. It will cost the Government significantly more in social spending, but I believe it is necessary and justified.

Some critics of Singapore's approach propose the Scandinavian model as a more egalitarian and humane alternative. There is indeed much we can learn from the Scandinavian societies, such as their pro-family policies and their success in nurturing global companies. But there are basic differences between Singapore and Scandinavia, in our strategic situations and our approaches to growth and equity.

We face a fundamental choice as a society - do we want low taxes and targeted welfare benefits; or high taxes on all and comprehensive welfare? Singapore has chosen the first; the Scandinavians the second.

The Scandinavian model works for them, because the Scandinavians are very different societies from Singapore, and developed Europe is a very different region from emerging Asia. The Scandinavians are rich in natural resources, with a large and affluent continent as their hinterland and major market. They live in a peaceful and stable continent, and can safely spend much less on defence. They have very long histories as homogeneous societies, whose members are willing to pay high taxes in exchange for high social protections for all.

I do not believe that Singaporeans would be willing to pay the taxes that Scandinavians pay, or that our economy could be competitive at such heavy tax rates.

Of course, without being as generous as the Scandinavians, we could still increase our social spending and raise our taxes moderately as part of a new social compact. Within limits, that is indeed what we need to do in the longer term, with an ageing population and growing health-care needs. But the limits are tighter than many people realise.

For decades we have gradually reduced our income tax rates, and partially made up with indirect taxes like the GST, in order to stay competitive with other Asian economies like Hong Kong. This has helped to foster growth, and increase the resources available to strengthen our social compact. Raising taxes will do the opposite, long before they reach Scandinavian levels.

We run an exceptionally lean system of government. Our expenditure is 17 per cent of GDP (gross domestic product), including defence. Our tax revenues amount to only 15 per cent of GDP. Returns from investing our past reserves contribute another 2 per cent.

As we enhance our social safety nets, expenditure will inexorably rise, and revenue must keep up. At some point - not in this term of government, but surely within the next 20 years - the Government will need new sources of revenue, which means raising taxes.

I hope that when this becomes necessary, the Government of the day will have the courage to do so, and the electorate will understand why it is in everyone's interests that we do so. Otherwise we will eventually end up like the Southern Europeans, or the US.

We are a long way from that, but still we must proceed very carefully, because benefits once given can never be taken away.

Spending is popular, but raising money to pay for it is not. For all our good intentions, the ever present danger is that step by imperceptible step, over time good intentions morph into unintended outcomes. As Dr Goh Keng Swee (former deputy prime minister) once observed of welfare systems, their conception is always immaculate, but the ultimate results are often quite different.

Whatever we do, we must uphold and strengthen the spirit of self-reliance that has enabled us to succeed. We will always give Singaporeans the means and the incentives to help themselves, for personal effort and achievement are essential to our sense of dignity and self-worth, and the means to achieve our vision of becoming a leading global city.

Politics that work

While I have focused mainly on economic issues this evening, in fact, politics underpins our economic and social choices.

For Singapore to rank among the global cities in 20 years' time, and to achieve the social objectives that we hold dear, our politics must work. Only when citizens accept the political system as legitimate, and economic order as fair, will they give the Government of the day the mandate to run Singapore in their best interests. And only with this mandate can the Government do the best for Singapore and all of us.

We need to build public consensus to support sound policies and capable leaders. This is easier when growth is high, and incomes are rising across the board, as was the case in our first 40 years of independence. It becomes harder when growth is lower, incomes rise unequally, and dividing up the pie becomes more contentious. It is almost impossible when the economy is shrinking, policies are malfunctioning, and there is no way for the population to avoid severe pain.

Under extreme stress, political consensus fractures. We see this playing out in many European countries today, and even in Japan. More than a dozen European governments have fallen since the financial crisis began. Their successors have not had an easier time.

Singapore is beyond the phase of effortless growth. As we venture into the next phase of our development, Singaporeans have to understand what is achievable, what the options are, and what trade-offs we have to make. Only then can we collectively choose an optimal path forward.

I am confident that, by working together, we can build a strong economy, inclusive society and cohesive Singapore, and make ours one of the leading cities in the world in the next 20 years and beyond.









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