Governance of a City-State
Budget 2015: The Next Lap of Singapore’s Economic Restructuring

This year’s Budget announced on 23 February unveiled a slew of measures to help companies sustain efforts to further develop and transform their business.

These support measures do not stand independently; they build on the foundation established by previous Budgets, underscoring the core theme of economic restructuring that began in early 2010. The items in this year’s Budget however recalibrate the focus of economic restructuring decisively to increase innovation and accelerate internationalisation.

As Deputy Prime Minister (DPM) and Minister for Finance Tharman Shanmugaratnam pointed out, Singapore’s productivity level today is 13% higher compared to 2010, but most of the gains were achieved in 2010 and 2011. Furthermore, productivity growth of the domestic-oriented sectors was less than 1% per annum. Singapore’s economic restructuring is now at its halfway mark. As the nation moves into the next phase of the restructuring process, it will need to ensure that any further policy measures can unlock productivity gains, as massive resources have already been spent on this national endeavour.

Being a trade-dependent country, Singapore’s restructuring efforts are dampened by the weak global economy that is still struggling to gain meaningful growth momentum. Gradually phasing out the Transition Support Package will help companies cope with the new environment of rising business costs while they restructure. Launched in 2013, the Transition Support Package consists of three components: the wage credit scheme (WCS), Corporate Income Tax (CIT) Rebate and the Productivity and Innovation Credit (PIC) Bonus. In Budget 2015, the government has decided to end the PIC bonus and lower the qualifying threshold of the CIT to $30,000. The WCS will be extended, but the government will now only fund 20% – not 40% – of the wage increase given to Singaporean employees earning a gross monthly wage $4,000 and below in the year 2016 and 2017.

Doing away with the PIC bonus and refining the CIT should not affect businesses too greatly, but the change to the WCS could. Companies, especially SMEs, may experience a surge in wage costs as the previously subsidised 40% wage increase for year 2013 and 2014 is shifted onto their cost accounts come 2016. In a closed-door discussion held by the Institute of Policy Studies early this month, one participant said that the original three-year time frame for the WCS was based on the critical assumption that productivity growth would soon follow. While many companies have made efforts to raise productivity – and in the process incurred higher costs – their investments have not yet borne fruit.

The decision to postpone the rise in foreign worker levies is appropriate. We feel it does not derail the overall long-term policy objective to wean business off the reliance of cheap labour. Instead, it shows that the government is cognisant of adapting policies to changing economic conditions. Companies are struggling with a tight labour market and rising business costs. Not having to pay more in levies gives them a respite and allows them to channel energy and funds into exploring ways to utilise government schemes to innovate.

Innovation and internationalisation will drive the next phase of Singapore’s economic restructuring. Speaking about innovation, DPM Tharman said that “every form of innovation counts, and must be supported – whether it is a new process or brand, developing online marketing or leveraging on big data”. This sentiment is shared by the business community. Members have highlighted on numerous occasions that limiting innovation to major technology breakthroughs and invention is too narrow and would exclude many equally innovative efforts made by SMEs to improve their productivity.

The definition of innovation used by the government should be expanded so that genuine and productive innovative efforts by SMEs are recognised and given ample support. Enhancing the Capability Development Grants by allowing them to support a wider range of innovation activities, simplifying the application process for projects below $30,000 and extending the enhanced funding support level until 2018 is an important step in the right direction, and this should encourage SMEs at the margin to finally take the extra effort to make use of the scheme.

The ability to innovate depends a lot on the access to adequate financial resources. Hence, it is good news that the government will increase its co-investment cap for SPRING’s Startup Enterprise Development Scheme and Business Angel Scheme. The introduction of a new venture debt risk-sharing programme also adds to the available funding options to start-ups. Overall, these initiatives bode well for development of the start-up landscape in Singapore.

Budget 2015 recognised the need for SMEs and “born global” companies (which are ventures started to exploit a global niche) to break out of the small domestic market. The measures to boost internationalisation should provide companies exploring overseas business opportunities with a substantial amount of financial support. The measures include: the introduction of the International Growth Scheme that allows qualifying companies to enjoy a 10% concessionary tax rate on qualifying income, the increased support to SMEs under IE Singapore’s grant schemes and the enhancement of the Double Tax Deduction for Internationalisation scheme to cover salaries incurred for Singaporeans posted overseas. But it is worth noting that many smaller companies operate with tight cash flow, and this would hamper their ability tap on these schemes and spread their wings.

In addition, adequate financing is only one aspect of a multi-faceted challenge that companies face when venturing overseas. Access into foreign markets is difficult often because companies lack the knowledge of local customs and regulations and they have little local social capital to help overcome the cultural, social and sometimes even economic barriers in foreign markets. Hence, expanding the role of IE’s overseas offices and broadening its non-monetary support to companies both in breadth and depth would be critical in raising the number of companies successfully expanding beyond Singapore.

The expansion of incentives to help spur Mergers and Acquisitions (M&A) through greater tax allowance and extending the International Finance Scheme to support such activities could have far-reaching effects on national productivity growth. For industries that are too fragmented, the more attractive M&A incentives could encourage more companies to merge, consolidating the industry so that the remaining companies attain the critical size required to benefit from economies of scale in terms of costs, production capacities and innovation capabilities. Local companies, through merger and acquisitions involving foreign companies, could realise synergies from complementing business operations, acquire new technologies to augment their business capabilities or gain access to foreign markets. Many of our companies and start-ups, such as Asia-Pacific Breweries and Viki, were acquired by foreign companies precisely for these reasons. Hence more Singapore companies should consider M&A as a strategy to expand and advance their businesses.

This year’s Budget is a generous top-up and refinement to existing efforts to stimulate business transformation, laying the foundations for Singapore’s next 50 years of growth. But there is always more that can be done for Singapore’s smaller businesses, which face financial constraints and may not benefit much from subsidies in the form of reimbursement or tax deductions. Strengthening access to financing for SMEs will allow them to better utilise these government schemes.

Dr Faizal bin Yahya is a Research Fellow, and Chang Zhi Yang is a Research Assistant with the Economics and Business Research cluster at IPS.

Top photo from Flickr

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