Monday 17 August 2015

Govt made shift in social and economic policies well before 2011 election: DPM Tharman at the ESS SG50 Special Distinguished Lecture

Changes meant to raise real incomes, narrow income gap and keep social mobility alive
By Rachel Chang, Assistant Political Editor, The Straits Times, 15 Aug 2015

The Government's shift to the left in social and economic policies began almost a decade ago, well before 2011, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said yesterday.

In a special lecture to the Economic Society of Singapore, he sought to debunk the myth that this shift was precipitated by electoral losses in the 2011 General Election.

"The world did not start in 2011," he said. "We made very clear our intentions and motivations in 2007, (stated that) it was going to be a multi-year strategy and, step by step, starting from the kids when they are young, through working life and into the senior years, we have been moving towards a more inclusive society, step by step. We intend to continue on this journey, learning from experience and improving where we can."

Mr Tharman cited how government transfers to the bottom one-fifth of the population had gone up in a linear trend since 2005, with no post-2011 spike.

In 2005, lower-income households received $1.03 in government transfers, after taxes, for every $1 they earned. By 2010, this was $1.36. This year, it is $1.63.

"I recognise that there's some political cunning in saying that this all came about because of GE 2011. I'm sorry, it didn't," he said.

Rather, the key architect of Singapore's progressive project said that its start point was the landmark Workfare policy - "a major break in our thinking" - which began topping up the wages of low-income earners from 2007.

In his hour-long address, Mr Tharman sketched out how the Government's decisive shift has involved a battle on three fronts: raising real incomes for all, tempering income inequality and keeping social mobility alive.

He brandished statistics that showed progress on all fronts. Real median household incomes - after taxes and government transfers - rose 39 per cent in the last decade here, compared with 17 per cent in Finland and 5 per cent in Hong Kong.

And Singapore has tempered its Gini coefficient, a measure of income inequality, from 0.43 to 0.37 through government redistribution. This was done while maintaining a light burden of tax on the middle-income group, he emphasised: In Singapore, middle-income households get $2 in benefits for every dollar in tax that they pay.

In contrast, the Scandinavian model is one where the Gini coefficient has been tempered more drastically, but with the trade-off of a high burden of taxation not just on the rich, but on the middle-income household, he said.

Mr Tharman reiterated his philosophy of "active government intervention for self-reliance" with a new twist: The Government will not be "hands-off nor give handouts" but build a system of "hand-ups", he said, defined by support especially for those from needy backgrounds, to discover their own strengths.

It has poured resources into early education for children from disadvantaged families. In housing, substantial grants have allowed over 1,800 families whose household incomes are $1,000 or less, to own their own flats.

But for Singapore to continue to succeed, inclusivity in its social fabric must be accompanied by innovation in its spirit, Mr Tharman said.

A highly innovative society, he added, is not one defined by a few ground-breaking creations, but one where every person is constantly striving for greater excellence.

He noted that it is countries such as Japan and Switzerland which top innovation rankings - not the United States, home of Silicon Valley.

Generous government support for start-ups and small and medium-sized enterprises is already bearing fruit here, he said, naming Singapore companies making headway in areas from fitness-sharing passes to designer maternity wear.

"We must do more in our own way to make it possible for every person, every firm, to unleash that innovative spirit in every regard," he added. "It's got to be the way we survive."

'No one model that we need to follow'
By Chia Yan Min, The Straits Times, 15 Aug 2015

The system of heavy taxation to provide a social safety net in Scandinavian countries is not "the only model", Deputy Prime Minister Tharman Shanmugaratnam said last night.

Singapore has managed to lower its Gini coefficient with redistribution without increasing the tax burden by as much, he said at a lecture organised by the Economic Society of Singapore.

More importantly, the middle-income group is heavily taxed there, while in Singapore, it is the rich who bear the load.

The Gini coefficient is the standard indicator to measure inequality: 0 means an equal distribution of income while 1 is the most unequal.

"The reduction in inequality that these countries see, goes hand in hand with a very heavy burden of taxation on their populations," said Mr Tharman, who is also Finance Minister .

"It's not just about taxing the rich. It's the broad middle class in these societies that pay very high consumption and income taxes, to generate tax revenues which the state then uses for redistribution."

The income tax rate on the average worker in Denmark is about 36 per cent, and in Finland, 23 per cent. In comparison, the income tax rate on the average worker here is 2 per cent.

Singapore's focus is on using its tax revenues in a fair and progressive fashion, while also keeping the burden of taxes on the middle-income group low, Mr Tharman said.

This must be combined with maintaining a culture of responsibility among individuals, in the government, and within communities, he added.

Extensive redistribution in some advanced societies has led to a weakening of civic culture - community organisations are less robust than they were a few decades ago, and voluntary activity is also down.

"That's not a better society... We have to keep a culture of everyone being responsible, and a civic culture where we all feel involved."

Mr Tharman noted that all countries strive to temper income inequality while also raising incomes for all and maintaining social mobility. However, few of them have succeeded on all three fronts.

For a period of two decades after World War II, the United States and many Western European countries were able to achieve rapid income growth, a sense of social mobility, and significant reductions in inequality.

But this lasted for only about two decades, and "things began to stumble by the late 1970s".

"Incomes began to stagnate, social mobility faltered and inequality has risen significantly.

"I don't say this because we think we are superior to them, but because what happened to them can happen to us... It's a challenge for every country and we have to keep working hard at it."

Singapore must remain confident in its own system, even as it continues to improve on it and experiment where possible.

"We should not think that there's only one model that we need to follow," Mr Tharman said.

Watch highlights from DPM Tharman’s speech at the Economic Society of Singapore here: can...
Posted by Ministry of Finance (Singapore) on Friday, August 21, 2015

Uniquely Singapore story: Broad-based social uplifting
The Straits Times, 15 Aug 2015

This is an edited excerpt of a speech by Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam at the Economic Society SG50 lecture last Friday.

In it, he highlights the most remarkable part of Singapore's success story beyond that of economic growth: the fact that the country has seen incomes grow across the board for the masses, while moderating inequality and keeping social mobility high.

The story of Singapore's first 50 years that is best known internationally is of a remarkable rise in gross domestic product (GDP) per capita.

But that is not the heart of the Singapore story. The unique Singapore story has been that of broad-based social upliftment: jobs for all, rising incomes for all, homes for all, quality schools and public healthcare for all, and neighbourhoods and parks shared by all.

It's impossible for our economy to have succeeded without effective social strategies - enabling people to develop their potential through education, housing policies that provided a sense of equity, or if everyone was just doing something for themselves and we did not have a sense that we were moving up together.

But it's also impossible for us to have had the very substantial and broad-based improvement in social well-being and life satisfaction without a vibrant economy - and real incomes going up across the whole span of the workforce. For both low-income and middle-income Singaporeans, real incomes have increased by five to six times since 1965. Economic and social strategies have gone hand in hand, and that's what created the Singapore story.

In the first three decades, we focused on the basics. It was about economic survival. It was about providing everyone with opportunities for education, for a job and to own a home, coupled with a very strong emphasis on self-reliance.

The first Budget speech in December 1965, by then Finance Minister Lim Kim San, was all about survival. It had a detailed assessment of the competition we faced and the constraints we had to reckon with. And one sentence to do with social subsidies: The Mount Emily Girls' Home was to get 40 more places to give it a total of 85 girls.

There was very little explicit support for the poor in those early decades, and a very limited array of social policies. But a whole generation was lifted out of poverty because our economic strategies worked. Jobs were created, incomes did rise and homes went up in value steadily as the economy improved.

When we got to the 1990s, social policy was coming more to the fore. The Government began a proactive approach towards helping the lower-income group. Edusave for the young, Medifund for those who could not afford medical expenses and housing grants for the Housing Board resale market.


But it was in the last 10 years, starting from around 2006, that we made a more decisive shift - a deliberate rebalancing to ensure that we remained an inclusive society.

We needed to mitigate inequality. We had seen a trend that began from the mid-1990s, where inequality had risen in Singapore. This followed a similar trend in most advanced countries. We wanted to do more to ensure that social mobility remained alive, and to help young people to have a real chance of discovering their own strengths and doing well in different fields. And we wanted to provide more assurance for the elderly.

Starting from a decade ago, we began this series of shifts, but it was still part of that compact between the economic and social strategies.

We still had to ensure a competitive economy where incomes could rise, but we paid special attention to ensuring that the low-income and middle-income groups kept up as our economy progressed.

All societies would like to sustain income growth, mitigate inequality and keep their societies fluid and mobile. How have we done?

We've managed to sustain income growth across the board. It's been unusual among the countries in the same league as us. In the advanced countries, income stagnation has been the norm for the middle-income group.

Among the Asian NIEs (newly industrialising economies), Hong Kong and Taiwan have seen virtually no real income growth for the middle- and lower-income groups in the last decade.

Fortunately, in Singapore, we've managed significant income growth in the last 10 years. Chart 1 shows the significant income growth for the median household. It came about both because individuals' wages went up and because of increased job opportunities and participation in the labour force, full-time or part-time.

For the lower-income group (Chart 2), there's a similar trend.

In fact, very similar percentages - 37 per cent real income growth for lower-income households.


What about inequality? It remains a concern. First, it's useful to have some perspective of what it was like in the old days, and what the trends have been in the rest of the world. Inequality was always high in Singapore - we are a city-state.

As far back as we have the data, we find that inequality was relatively high in Singapore. It came down some over the course of the 1980s but, beginning in the mid-1990s, we saw a significant increase in inequality, following the trend that had started a decade earlier in virtually every advanced economy.

In our case, starting from the mid-1990s, for a whole decade, we saw an increase in inequality.

Our level of inequality based on incomes (before taxes and government transfers) is not particularly high by international standards.

The question then is what happens to inequality after taxes and transfers, because all governments engage in some redistribution, and we do too.

There are some countries that, in fact, achieve a very large reduction in their Gini coefficients, through taxes and transfers.

The classic cases are the Scandinavian economies and, to some extent, several other European economies. But we must recognise that the reduction in their Gini coefficients goes hand in hand with a very heavy burden of taxation on their populations. Denmark collects about 49 per cent of GDP in taxes, and Finland about 44 per cent. As shown in Chart 3, in our case, it's about 16 per cent. We get some investment income from our reserves, but our tax revenues total just about 16 per cent of GDP.

It's not just about taxing the rich, it's the broad middle class in these societies that pay very high consumption and income taxes, to generate the tax revenues which the state uses for redistribution.

The average worker in Denmark pays an income tax of about 36 per cent, and consumption taxes of about 25 per cent. In Finland, there is a somewhat similar consumption tax, about 24 per cent. Even if we look at their discounted VAT tiers - for instance, in Finland, it's about 14 per cent for food - the average worker pays a lot of taxes.

So that's the basic trade-off.

Our approach in Singapore is to keep the overall tax burden low, certainly low by international standards, but within the tax revenues that we have, we ensure that we use it in a fair and progressive way by targeting support for the low- and middle-income groups where it helps them most.

We must keep the burden of taxes on the middle-income group low. It's high for cars, especially, to control congestion, but we keep income taxes for the middle-income and their overall burden of taxes low. Our middle-income households get a fair deal in Singapore .

With the enhancements in Budget 2015, they get $2 in government benefits for every $1 of total taxes they pay (including income tax, goods and services tax, property tax and all other taxes) - not bad. In the United Kingdom, it is $1.40 of benefits, and it is slightly lower in Finland. The middle class in these other places get significant benefits, but they pay high taxes.


What about social mobility? It's the defining challenge in every advanced country today. We are fortunate that we have so far done relatively well. Chart 4 looks at where people who start off with lower-income family backgrounds end up after they have finished education, and are well into their working lives, around their early 30s. How many of them end up in the top 20 per cent on the income ladder? If everything was equal, if their backgrounds, abilities and how they grow up play no role in eventual incomes, every child would have a 20 per cent chance of ending up in the top 20 per cent.

In the United States, among those who are born to lower-income parents, only 7.5 per cent make it to the top 20 per cent. The UK is not very different. In Singapore, 14 per cent of those with lower-income parents end up in the top 20 per cent of incomes. That's higher than in Denmark, and almost twice that in the US.

So we have a relatively fluid society. But we know it gets more difficult with time, and we will face the same challenges seen in more mature societies. It means we have to work actively to keep up social mobility, find every way, starting from the early years of a child's life, to help those with a weak start to have a real chance to move up in life.

Few countries have succeeded in sustaining income growth, tempering inequality and keeping social mobility alive over a long period.

For a couple of decades after World War II, the United States and many Western European countries were in fact able to achieve all three - incomes grew for most people, there was a sense that everyone could move up, and they achieved significant reductions in inequality. It was a special time in history. Young populations, rapid growth and, in the US, they had the GI Bill giving a college education for those who fought in the war.

It didn't last. Things began to stumble in the late 1970s. Incomes began to stagnate, first in the United States. Social mobility faltered and inequality began a long rise.

I don't say this because we think we are inherently superior to these societies. What happened to them can happen to us. It's a challenge we all face - sustaining income growth and social mobility, while mitigating inequalities. We have to work hard at it.

We must also keep our focus on what matters most to people: having a real chance to develop themselves and move up in life. Focus on maximising opportunities for everyone to do well, and especially for those who start with less. Focus on raising standards of living for all, even as we temper inequalities through redistributing. And we must do so with confidence in ourselves, not thinking there's only one model to follow.

Stay with strategies that are working well, learn from mistakes, keep improving and keep making a better Singapore.

The relentless effort that goes into keeping Singapore inclusive
The Straits Times, 19 Aug 2015

This is an excerpt from a speech by the Deputy Prime Minister and Finance Minister on Aug 14 at the Economic Society of Singapore SG50 Distinguished Lecture.

In the first part of his speech, reprinted on Monday, he spoke about Singapore's unique way of lifting up the masses while moderating inequality and keeping social mobility high.

In this segment, Mr Tharman highlights the need for Singapore to be both more inclusive and more innovative.

Two things matter greatly in our next phase of development. We have to make Singapore an innovative society. And we must continue to build an inclusive society. They go hand in hand.

We must be an innovative society to keep earning our place in the world and to raise standards of living for all Singaporeans. We have to move from value-adding in global markets to value-creation - through our own firms, with more brands of their own, as well as with multinationals based here, creating value in Singapore, in every field - developing new, cost-effective medical treatments, creating new products or apps, or finding new ways to reach customers.

An innovative society starts from young, of course. But we must resist the thought that we have to add something more in education to develop the innovative spirit. It is more a matter of taking things out of education than putting things in.

That's a more difficult task.

We have to take calculated but bold steps over time to provide more space for young people to explore as they grow up, and develop the originality of mind that comes from exploring things on their own.

And we must ensure too that they have enough time to interact with their fellow students, on the playing field, in dance, in adventure - every form of interaction.

The interactions when people are young matter not just for an inclusive society. They also matter for an innovative society. The world of innovation is not just about the brightest sparks but also about teams. In many international rankings of innovation, Switzerland tops the US. It doesn't have Silicon Valley, but it's a society where everyone is continuously improving, every worker is treated with respect, and the whole team becomes that much more innovative and competitive.

It's also not just about the first 18 or 22 years of education, but learning through life. That's why SkillsFuture is a major social and economic investment in our future. We will invest in every Singaporean, so we all keep improving through life, keep learning something about ourselves we didn't know, a strength, an interest. And keep expanding our potential together. We are going to provide the resources, all around the island, to make this happen.

Making ours an inclusive society is a major goal. Step by step, for young Singaporeans, for working adults, for our Pioneers and the seniors of the future, we've been introducing changes over the last decade. They amount to a significant shift when you add them up.


For our young, we start off with the advantage of a public school system where high average performance is not just due to a segment of top performers. Our Normal Tech students perform far better than their counterparts internationally.

But we have to do more to keep social mobility going. The challenge as we've seen in the advanced societies is in sustaining mobility, beyond the first waves that are achieved through meritocracy.

Meritocracy is fair, but it will not on its own ensure we keep up social mobility. We therefore have to find every way to help kids who start with less, so that birth is never destiny.

Since 2006, we've been enhancing support for those with a weaker start. More specialists, smaller classes, more activities outside class to build confidence and perseverance. We now spend 50 per cent more on the kids who have a weak start in learning than the average student in our primary schools.

We are also intervening earlier. We've made preschools more affordable, and are introducing many more, near the home. We are improving the quality of the preschool experience, which helps especially for those who come from lower-income homes. And as we go forward, we have to pay more attention to the initial years of life, before preschool.

The studies on children's development show that these first few years are critical. No country has found a good way to intervene in these very early years without intruding into parenting decisions. We must try different ways - to help both parent and child - through both government and local community initiatives.

In higher education, we've expanded subsidised places and have introduced a diversity of pathways. They cater to different interests, and open up strong, skills-based routes to advancement, including applied university programmes. This diversity makes for both an innovative and inclusive Singapore.


What about workforce inequalities? Fortunately, income growth for the lowest two quintiles (bottom 40 per cent on the income ladder) has been the most rapid in the last five years.

But we have also put Workfare to work. We piloted it in 2006, made it a permanent scheme in 2007, and have enhanced it twice since. Low-income Singaporean workers now get up to 30 per cent more in their wages through Government top-ups.

Our cleaners had been stuck with very low pay levels for some years. Besides helping them with Workfare, we are helping them see higher pay through the Progressive Wage Model (PWM). Already, the median pay of a resident cleaner has risen from $820 to $1,000. Security guards will be on their own PWM in future.

We must also make sure Singaporean PMEs get a fair deal. The tripartite Fair Consideration Framework is being enhanced to ensure that Singaporeans have a full and fair chance in the job market. They have to be at the core in every sector, and have opportunities for development so that they are part of the best global teams.


Home ownership for all is a key priority. We have moderated the property market cycle. But we have also delinked our Housing Board Build-to- Order (BTO) prices from the market cycle, to ensure homes remain affordable.

We can't go back to the old days. In the early 1980s, which was when the parents of today's young couples bought their first flat, a 4-room flat was $55,000. But, remember, the median household income was just $990 then (compared to $7,320 last year). Incomes have in fact grown a little faster than prices since 1980 - taking the average prices in the latest BTO launches in May, for example.

What we will ensure, through regular review of our housing grants, is that young couples, both lower- and middle-income, can purchase their homes. Since 2012, more than 1,800 low-income households, with incomes of $1,000 or less, have taken advantage of our $60,000 grants to own a 2-room BTO flat. We have sized the grants to ensure that they can pay down the loan from their CPF savings. It is better than using their cash incomes to pay for rentals, and at the same time gives them an asset that can appreciate.

Home ownership goes hand in hand with Workfare, the Progressive Wage Model, a more progressive CPF and our other schemes to uplift their lifetime incomes, which we must keep working at. However, it doesn't just help them financially. It gives them real pride to own their own home.

But social equity is not just about individual home ownership. It's about shared ownership of the neighbourhoods, which are probably the most unique feature of Singapore's landscape. The playgrounds and parks, the rivers and lakes, the hawker centres, the whole neighbourhood. Even in the first Budget speech in 1965, when it was all about economic survival,

Mr Lim Kim San found space in the Budget for 10 more playgrounds. That thinking started early.

Shared neighbourhoods are not in the Gini coefficient, but they are part of social equity. And very importantly, we've avoided the segregated cities that we see in so many parts of the world.

It's not just about Baltimore and Paris where we've seen riots.

It's about the quiet discrimination that exists when you live in segregated neighbourhoods, and the different aspirations that are bred over time. We have disadvantaged families, but we must never have disadvantaged neighbourhoods, where social problems get more knotty, and solutions more difficult.


We are doing more to provide assurance to older Singaporeans. We have enhanced the Central Provident Fund system, and made it more progressive. It's not just the guaranteed 3.5 per cent interest rate on the Ordinary Account (OA) for most individuals, or 5 per cent on the Special Account.

It is also the regular infusions of Workfare, the NS Home (National Service Housing, Medical and Education) Award and the housing grant that is put in the OA. If you take it all together, a young low-income worker today would get a 6.5 per cent per annum return on his OA. By the time he is 65, he would have received about 40 per cent of his total CPF savings from the Government.

Besides the special package of benefits to honour the Pioneers, we have increased healthcare subsidies and introduced MediShield Life to help lower-and middle-income Singaporeans across the system, from general practitioners to the hospitals and specialist clinics to the step-down care institutions.

And we've introduced Silver Support, an important new pillar in our social security system.

We are in essence tempering inequalities throughout our adult lives - during the working years through Workfare, and now in our senior years through Silver Support.

When you add it all up, the changes that we've put into place in the last 10 years amount to a significant increase in support for the low-income group. In 2005, it was already quite significant - government transfers to the low-income group, after subtracting all the taxes they pay, effectively doubled their income. By 2010, it had increased by another third. And Government support has moved up further in the last five years. (See chart.)

I recognise of course that there is some political cunning in saying that this all came about because of GE 2011. I'm sorry, it didn't. The world did not start in 2011.

We made very clear our intentions and motivations well before 2011, made clear that it was a multi-year strategy, and step by step, starting with the kids, through working life, and into the senior years, we have been moving towards a more inclusive society. We intend to continue on this journey, learning from experience and improving where we can.

But this is a far more important agenda than a reaction to 2011.


We've got to do more to give everyone a fair deal in life, but do it in a way that gives everyone the pride of contributing in their own way.

No government can have a hands-off strategy, where people are left to fend for themselves.

Neither should we have handouts all along the way, because that just takes the dignity out of people.

Let's instead keep providing hand-ups, especially for those who start with less, helping them develop their strengths and have a real chance of doing well.

Empower people, and enable them to earn their own success.

We've got to make sure too that this doesn't end up the way it has in many other advanced societies, where it becomes a contract between me and the government - "I pay these taxes, I want this much back in benefits".

Civic society is far weaker today in almost every advanced country compared to a few decades ago. We've got to keep a culture of responsibility across our society: individual responsibility, government responsibility, but also a civic culture where we all feel involved and take the initiatives as individuals, voluntary bodies and as businesses.

And we should never lose our Singapore culture, of thinking about our children and grandchildren. As the Chinese saying puts it: the ancestors plant the trees, the next generation enjoys the shade (前人种树,后人乘凉).

But it's not just for one generation. We've got to keep planting trees for the next generation, and know too that each generation will enjoy the shade as they grow old.

Let's keep that culture in Singapore. Not making the short-term political calculation as to what's best, but always looking out for the opportunities beyond today. That's how we got to where we are, a society that has transformed itself for the better, for all its citizens, and that's the way we go forward.

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