ANNUAL BUDGET STATEMENT

Order read for Resumption of Debate on Question [28th February, 1992],

"That Parliament approves the financial policy of the Government for the financial year 1st April, 1992 to 31st March, 1993." -[Minister for Finance].

Question again proposed. 12.56 pm

Dr Ow Chin Hock (Leng Kee): Mr Speaker, Sir, I rise to support the motion standing in the name of the Minister for Finance.

My GPC Members have discussed the Budget Statement. We also met the resource panel and the panel members have raised some pertinent points. In the budget debate today and tomorrow and in the Committee of Supply, my GPC Members and I will raise a number of economic issues. Let me start by giving an overall view and comment on some specific issues.

First, allow me to participate in the debate on market forces and Government intervention. The Minister for Finance stated in his statement that the "free market is the best system known for allocation of resources efficiently." I agree with him. I support the free market system and I also believe in market forces. However, there are good reasons for Government to intervene in the event of market failures caused by public goods and externalities. Let me illustrate. Defence is a public good. It cannot be produced by the private sector and sold in the market at a price like any ordinary good or service. Hence, defence has to be provided by Government collectively and financed by tax. Pollution is a good example of externalities. Government needs to intervene by regulation or by imposing tax to force polluters to cut down their activities or to internalize the externalities. Government may also have to correct market imperfections due to monopolistic elements and incomplete information. Again, Government has to invest in physical infrastructure and provide social services where the rates of social returns are high or the initial capital outlays are large.

There are two areas that Government intervention is crucial: (1) macro economic management; and (2) income redistribution. With regard to the first point, I believe most economists, including those from MIT like Paul Samuelson and Robert Solow, would advocate that government should adopt macro economic policies so as to stabilize the economy and to reduce the magnitude of fluctuations of business cycles. No elected government can afford not to intervene when the economy is suffering from a prolonged recession or inflation. The question is what macro economic tools should be used, their timing, their dosage and their side-effects.

With regard to the second point, it is common for governments to implement progressive income tax and to provide social services for the redistribution of income. Market forces allocate scarce resources efficiently, but market forces do not guarantee equitable income distribution. An efficient economic solution is not necessarily socially desirable. Hence, government needs to intervene. In the context of Singapore, given the scarcity of land, if the Government did not intervene by subsidizing land costs and even part of the construction costs, most Singaporeans would not be able to afford HDB flats. The Government also intervenes in education and health care through subsidies so as to ensure that education and basic health care are affordable to the lower income group. 1.00 pm

Subsidy need not be a dirty word, but Singaporeans must be aware of the dangers of using subsidy: subsidy hides true costs, subsidy distorts prices, subsidy generates excessive demand, and subsidy perpetuates itself. There are four basic questions about subsidy and they are: (a) what is the purpose of subsidy - for production or consumption? (b) to what extent should a service be subsidized when its costs escalate? (c) to what extent should a service be subsidized when its demand increases and becomes more diversified and personalized? and (d) could the Government resist demands and pressures for new subsidies?

Some Singaporeans believe that the Government should use the reserves to subsidize social services and to lower the cost of living. The Minister for Foreign Affairs has made public the results of two straw polls on Singaporeans' opinions towards the use of the reserves. According to the Annual Economic Survey, our official foreign reserves have reached $55.8 billion at the end of 1991. This figure appears large. However, this is equivalent to only 5.9 months' worth of merchandise imports. Even if we confine it to retained imports, the ratio would be around 10 months. In other words, our foreign reserves cannot buy even one year of retained imports for Singaporeans. Another way of looking at it is that the accumulated reserves of $55.8 billion are less than one year's GDP which was $61.9 billion last year. Using the analogy of a family, the accumulated saving is less than one year of annual income. So I hope my fellow Singaporeans do not think of using the reserves for subsidies too readily.

It is in the interest of our citizens and of our future generations that we guard and preserve the reserves jealously. This is our only resource that Singapore could rely on if Singapore faces a severe recession or other hardships in future. In fact, we should aim to live within our means, and in good years, we should save as much as possible to build up our reserves. Another benefit is that the larger our reserves, the greater will be the Government's investment income from this source. The investment income, which amounted to about $5.6 billion in 1991, would help Government to finance defence, development expenditures and the provision of social services without raising tax.

Another issue is tax changes and tax burdens. I agree with the Minister that the GDP pie should be made bigger before we talk about distribution of the pie. Income redistribution should come after and not before economic growth. However, if income distribution is perceived by many as unfair, then social and political stability could be undermined. In recent years, we sense some resentment among some Singaporeans in the lower income group. These Singaporeans perhaps perceive that Government has not looked after their interest and that the middle and upper income groups have gained more from Government policies. Against this background the rebate on service and conservancy charges (S&CC) is important as Singaporeans living in one-room, two-room and three-room HDB flats who pay little or no income tax could also enjoy some form of tax benefit. The S&CC rebate shows Government's compassion for the lower income group and, at the same time, it does not set an unhealthy precedent for tax credit or negative tax.

Ministers have shown in this House how much Singaporeans, including those in the lower income group, have benefitted from the economic growth in the last 30-odd years in the form of increasing savings and also in the form of increasing value of assets and household appliances they have. It may be equally important to show the other side of the coin, ie, the relative tax burdens of different income groups. In the Year of Assessment 1982, 54.8% of taxpayers with chargeable income of less than $5,000 paid a total of 3.9% of tax revenue. The average tax burden of this income group was $101 per capita. At the other extreme, 0.9% of taxpayers who had chargeable income of more than $100,000 per year paid 37.7% of the total tax collected in that year. On the average, the tax burden of the higher income group was $55,569 per capita. Taxpayers with chargeable income between $10,000 -100,000 constituted about 22.6% in terms of the number of taxpayers that year. They contributed a total of 53.2% of tax revenue. On the average, the middle income group, ie, those who have $10,000 - $100,000 chargeable income, paid $3,326 per capita in that year. The figures I have quoted are for the Assessment Year 1982. These figures are outdated. May I request the Minister to update these figures to show that the tax burden is basically shouldered by a relatively few number of taxpayers in the upper and middle income brackets.

The reduction of corporate income tax from 31% to 30% is welcomed by the business sector. However, businessmen are not particularly excited about this reduction, partly because the reduction is expected but mainly because businessmen and investors are worried about the rising cost of doing business. Because of the tight labour market, nominal wages continued to increase by more than 9% in the last three consecutive years - 9.8% in 1989, 9.3% in 1990 and 9.2% in 1991. I must clarify that the nominal wage here measured by payroll per worker includes bonuses but excludes employer's CPF contributions. The nominal wage of the manufacturing sector increased by 11.2% between 1990 and 1991 though that sector experienced the slowest growth of 5.3% among the major sectors. As a result, the unit labour cost index in manufacturing increased to 117.4 as compared to 100 in the base year of 1983. Business unit cost index in manufacturing also increased to 108.3 last year as compared to 100 in the base year of 1983. Some pessimistic business people see the replay of the 1983-84 pre-recession situation. I do not share this pessimistic view. However, we need to assess the accumulative impact of rising labour costs, increases in statutory charges and a strong Singapore dollar on business confidence and our export competitiveness.

While the Minister for Finance has maintained that our corporate tax is competitive with many countries, many investors and businessmen choose to compare our corporate tax with that of Hong Kong. The Hong Kong Government has just announced an increase of corporate profit tax rate from 16.5% to 17.5%. I submit, Sir, a mere comparison of tax rates does not show the true tax burden. We need to look at how dividends and interest incomes are taxed, and what tax allowances and reliefs are given. The Minister may wish to give some comparative figures of total tax burdens of corporate and personal income taxes between Singapore and Hong Kong investors, taking into consideration the various tax allowances and reliefs for companies and individuals. Further, the Minister may wish to compare the Government expenditures between the two places. The obvious difference is that our Government has to shoulder the defence budget while the Hong Kong Government has no such obligation. Even though the average tax burden of Singaporean investors is higher than that of Hong Kong investors, the tax differences can be argued as a contribution to defence, which helps to reduce the investment risk in Singapore.

Finally, Sir, let me speak on the prospects of medium term economic growth. Most people are interested in tax changes, but we need to focus more on the prospects of economic growth in the next few years. Last year, our GDP growth rate was 6.7%, the lowest in the last five years. It was the fourth consecutive year that our economic growth rate had declined. When our economy enters into a more mature stage and starts with a higher base of US$10,000 per capita income, it is much more difficult to achieve rapid economic growth, as in the past. Apart from this so-called law of diminishing returns, the performance of our open economy depends much on external forces. This is not by choice, but a reality we have to live with. Two-thirds of our demand come from external sources. Free flow of goods and services, free flow of capital and free transfer of technology are crucial to our open economy. The formation of the North America Free Trade Area and the Single European Market will affect Singapore adversely in terms of market access and investment diversion. While we need to strengthen and diversify our international linkages, we need to ensure that our competitiveness is not eroded by domestic factors.

Productivity growth, quality of workforce, technological change and the capacity to adapt and adjust in response to internal and external changes are crucial factors in determining our medium economic growth prospects. I shall confine myself to the first two factors: productivity growth and quality of our workforce. The productivity growth rate declined continuously from 4.8% in 1989 to 1.5% in 1991, based on value-added per worker. It is lower if it is based on value-added per man-hour. It is the third consecutive year that productivity growth rate fell below the increase in real wage. Productivity growth rates of all major sectors declined in 1991 as compared to 1990. Wage increase is mainly a consequence of labour shortage; it does not necessarily reflect workers' productivity performance. Our panel members informed us that even though businesses and sales have slowed down, many employers continue to employ less productive local workers because it is difficult and costly to recruit their replacements. Another reason is that some employers need to maintain the local-foreign worker ratio. These so-called labour stockpiling practices depress productivity.

Productivity growth does not necessarily reflect the quality of our workforce. The Business Environment Risk Intelligence (BERI) ranked Singapore workers as No. 1 in the world in the last few years. We are proud of such achievement, but we have to ask ourselves whether our workers are really better than the Japanese, Korean and Swiss workers. It is difficult to convince employers who face job-hopping problems to agree that our workforce is of such a high quality. BERI's Labour Force Evaluation Measure Index for 47 countries is based on four factors, namely, "legal framework", "relative productivity", "work attitude" and "availability of technical skills". Our workforce has been ranked not very high in terms of the last two factors, namely, "work attitude" and "availability of technical skills". Another BERI's index, "Quality of Workforce Index" for 10 countries is based on such criteria as "quality of equipment and physical facilities", "management quality" and "Government support for education and training". These criteria are not direct indications of the quality of our workers.

One thing, however, is certain: we need to invest more on education and training. One problem we face is that 19.4% of our workforce have no qualification and another 29.3% have only primary or post-primary education. Of course, the younger workers and the new entrants into the labour market have higher education. For older workers, we have to be more flexible to provide them with some training and find ways and means to upgrade their skills. In this context, the National Productivity Board should be commended for conducting some training courses in Mandarin. Older workers and some young Chinese-educated workers are more at home with Mandarin. If a worker can upgrade his skill, does it really matter whether he learns to acquire such a skill in English or in the mother tongue? Sir, productivity is not just about skills and better ways of doing things, productivity is also a mental state. It is crucial for NTUC, NPB and employer organisations to cooperate to improve work attitude, reduce job-hopping and enhance productivity consciousness among our workers. Unless we have a quality workforce to work with quality capital investments and level up to a higher level of technology, it would be very difficult for us to achieve 4-6% annual growth rate in the next stage of development.

Mr Leong Horn Kee (Thomson GRC): ( In Mandarin): Mr Speaker, Sir, thank you very much for allowing me to join in this debate on the proposed Government budget for the financial year 1992/93.

The economy of Singapore had a reasonably strong growth in 1991 of 6.7%. The expectation of this year is that economic growth will be between 4% and 6%. I shall confine my comments on the Budget on three areas - firstly, its impact on the local residents; secondly, its impact on local small and medium-sized companies; and thirdly, the use of our reserves.

Impact on locals

Concerning the impact of the Budget on the locals, I wish to highlight two new and innovative tax incentives. First is the rebate on the service and conservancy charges, and the second is the tax relief for reservists.

Rebate on service and conservancy charges

I am particularly heartened by the rebate on service and conservancy charges for December 1992 for rented and owner-occupied 1-, 2- and 3-room HDB householders. This rebate is a clear signal that the Government is keen to find ways and means to assist and be equitable to the low income group. As we all know, the low income group do not normally pay tax, and therefore they do not enjoy the 5% rebate for income tax, which was given over the past few years for other citizens. By the rebate on the service and conservancy charges, the lower income group which do not enjoy such 5% tax rebate are indirectly able to enjoy an equivalent tax rebate worth between $15 and $28.50. May I urge the Government that, in future, whenever the 5% rebate on income tax is given, it should endeavour to give the rebate on service and conservancy charges.

We should also note that one small loophole of the rebate scheme is that there may be a small group of low income people who do not pay income tax and who do not live in rented or owned HDB flats in their own names. These people could perhaps be renting a room from a house owner or squatting with relatives and friends. These people could be given a one-time welfare contribution of $15, equivalent to the service and conservancy charges of a 1-room rental flat, if they do come forward to claim as such from, say, the Social Welfare Department of the Ministry of Community Development, because they do not enjoy this one-time payment of rebate on S&C charges.

Tax relief for reservists

The tax relief for reservists offers an appropriate recognition of the contribution of our reservists. Mr Speaker, Sir, during the entire service period of a reservist, the amount offered is not small. A reservist, for example, will enjoy a total of $15,000 of tax relief for about 15 years of active reserve service, and another $10,000 of tax relief for 20 years of non-active service at the rate of $500 tax relief per annum.

Mr Speaker, Sir, under this scheme, there is one obvious anomaly, and that is, the low income earners who pay zero tax or low tax rates will not benefit as substantially as the high income earners. And this is irrespective of their individual contributions and roles in the reserve service. Perhaps the scheme can be made more equitable if a flat amount of, say, $50 or $100 tax rebate per annum be offered to every reservist, and more be given to those who are in active service.

Personal income tax and consumption tax

Mr Speaker, Sir, the Minister for Finance has not reduced the personal income tax of 33%, although he has reduced the corporate tax by another 1% to 30%. Personal income tax still remains at a top 33%. There will be a 3% difference between the personal income tax and corporate tax rates. I would therefore like to ask the Minister for Finance whether this will encourage individuals in the above 30% income tax brackets to form companies so that they will enjoy the lower tax rate of 30%. Perhaps the Government should consider reducing the income tax rate to 30% at the maximum.

Mr Speaker, Sir, the general belief of why the personal income tax rate was not reduced was that the Government is waiting for the introduction of consumption tax and, at the same time, cut personal income tax. If that is so, then our concern is that the net effect will be that the overall tax burden will be shifted generally from the high income earners to a larger base of consumers who are in the low income group. The reduction of income tax will benefit the high income earners, and the consumption tax, when introduced, will be borne equally by the low income earners, especially their need for basic commodities and necessities. I understand that there will be a greater burden on the low income group. We know that the Government will be preparing a White Paper on consumption tax which will allow for a more in-depth and specific debate on the subject. The Government should take into account the above concerns in preparing the White Paper.

Impact on local SMEs

Mr Speaker, the corporate tax has been reduced by 1% while employer's CPF contribution is increased by half a percent. Depending on a company's profits versus its manpower costs, the benefit and cost would cancel out one another.

In this sense, besides those companies in the specific financial and insurance sectors which will enjoy new tax incentives, all other companies will see a nil effect of the Government Budget. They will benefit nothing from such a Budget. No wonder the companies are not enthusiastic about the Budget announcements, and the Singapore stock market did not respond positively to the Budget.

However, when we look deeper, we can see that the local companies, in particular the small and medium-sized enterprise, are facing increasingly serious structural problems. It may be helpful to identify and resolve these problems early. Let me list out some of the major areas of concern.

Rising labour cost

Firstly, rising labour cost. Our unemployment rate of 1.9% is one of the lowest in the world. Due to the acute labour shortage in the past five to 10 years, wage costs have been going up gradually. Employers have to resort to foreign workers but there are limitations imposed by the Government on local to foreign worker ratio and the cost burden of foreign workers levy which they have to bear.

Training and productivity

Secondly, training and productivity. Even if employers can get the workers, they have to train these workers. Because local workers are scarce, the poor work attitude and poor work discipline of the less mature workers may cause the companies' productivity to deteriorate. Job-hopping becomes more prevalent during periods of full employment. At the same time, because workers are difficult to come by, employers may be inclined to hoard workers, even when economic prospects are looking less buoyant. Hence, our productivity rate has been falling for the past three years, down to 1.5% last year.

Declining competitiveness and profitability

Thirdly, declining competitiveness and profitability. As a result of the tight labour market, lower productivity and rising cost of doing business, most local industries and enterprises are looking towards relocating their labour-intensive operations overseas. This is a very logical move. But the concern is, are we rapidly losing our competitiveness? What should we do when the neighbouring countries eventually become more and more competitive than us in attracting foreign investors? If it becomes increasingly difficult to make money in Singapore, would our best local entrepreneurs and professionals be attracted to work overseas? We are aware that Malaysia, Thailand and Indonesia are becoming increasingly attractive to foreign investors. They are more and more successful in doing this.

We would therefore like to urge the Government to study in greater depth the medium term implications of these problems.

Use of our Reserves

Mr Speaker, Sir, I now wish to turn to my final subject, which is on the use of our reserves. As our country progresses, we will encounter various rising financial costs, such as the cost of housing, health care, education, transportation and social services. As these costs rise, there will be increasing pressure on the Government of the day to dip into our reserves to help lessen the burden of the people. For example, the people may clamour for the Government to use the reserves for more social and health care services. Local industries may also try to persuade the Government to use the reserves to subsidise production costs.

I believe it may be timely for our Government to think through carefully and state clearly how it intends to use the reserves in the long-term interest of the country. The rationale and the justification should also be thoroughly and extensively explained to the people. The Government should also explain to the people the circumstances, when the reserves will be used, and when they should not be used, and to explain to the people why certain easy options are perilous.

We need to ensure that the use of reserves should not be in the short-term interest at the expense of the long-term interest. Until today, we often hear Ministers, at various times and at different places, mention the need to safeguard the use of the reserves. Perhaps, a comprehensive and coherent discourse on the matter would help to clear the air.

I am generally in support of the principle that the reserves should not be used as subsidies for consumption expenditures such as social welfare which do not generate long term and long-lasting benefits. The reserves, however, can be drawn upon to help develop and nurture capital assets, for example, education of children, upgrading of training and skills, and major infrastructural developments.

Mr Speaker, Sir, I wish to conclude by congratulating the Minister for Finance for introducing some new innovative measures 2in providing tax rebates targeted at the low income group such as the service and conservancy rebate. It demonstrates that we have a Government which is caring and interested in the welfare of every sector of our people. We wish that, through our collective effort, we will build a more stable and prosperous Singapore. 1.33 pm

Mr Chiam See Tong: Mr Speaker, Sir, according to the figures given by the Minister, Singapore's ranking, as far as the percentage of economic growth is concerned, is no longer the highest, or amongst the highest in East Asia and the region. We rank fifth after South Korea, Malaysia, Thailand and Taiwan. So the Government, unlike in the 1970s, does not have the privilege any longer, year after year, to boast of Singapore's high percentage growth rate in the region.

South Korea's economy expanded by a credible 8.6% in 1991. That was significant on two points. Firstly, that country, if you will recall, suffered many student and political riotings. Industries were disrupted because of the incessant political upheavals. Yet, South Korea could pick itself up and show an improvement on her economic performance. I am not advocating rioting in Singapore. But it does go to show that if a country's technological and industrial infrastructures are well entrenched, and its people are resilient, domestic political upheavals cannot destroy the economy. It could pick itself up and improve on it.

The second point in regard to South Korea's 8.6% growth, I would refer to the question of maturity. We can safely say that the level of economic development of South Korea can match that of Singapore. To that extent, and not taking into account its level of GDP per head of population, its economy must be as mature or, if not, more mature than that of Singapore, and yet it can achieve a sizeable 8.6% growth. Whereas in Singapore, in 1991, there was only a 6.7% growth. The Government predicts that the growth of Singapore shall be in the region of 4% to 6% in the years to come. South Korea's economy, in many ways, is just as mature as ours. Yet, it can still have an economic growth of more than 8% a year. Therefore, we start to wonder whether the excuse given by the Minister holds any water.

Perhaps, the true reason is that costs have been pushed up by Government policies. This is common knowledge. Some of the high costs incurred by businesses due to Government policies are the high foreign workers levy, high rentals, high cost of transport and the high employer's CPF rate. In fact, the local business community has already sounded its alarm bells. This was reported in a recent article in a local newspaper. The Government should take heed of that instead of waiting until another recession hits us, like in 1985 when we had a minus 1.8% growth. In that year, and the year after that, there were many untold hardships suffered by our Singaporean workers, especially those in the middle-aged group, ie, those above 40 years old. They were retrenched and it was impossible for them to get to find an equivalent paying job. Credit must be given to the Singaporean workers. Somehow they managed to pull through and survived. I hope that does not happen again.

Year after year, the Government's budget reflects two characteristics. One is the Government's policy to have a surplus budget. And two, it is distinctly a pro-business budget. From this year onwards, the budget must get the clearance of the President. The Government cannot spend the reserves which it has not accumulated during its term of office. The previous Government has accumulated about $50-odd billion, and Dr Ow has said $58 billion. Nobody really knows the true figure. This must put tremendous pressure on the present Government and any future governments. The Government must now be under pressure to try to accumulate as much reserves as it can to show that it can perform just as well as the previous Government. At the same time, it also needs funds for its current development projects. This Government has committed to spend or to put aside $1 billion of the reserves for its Edusave programme, and to top it up if there are surpluses from the revenue. What does all this mean to the common man? He will have to work even harder and pay higher costs. Otherwise, how does the Government accumulate money in Singapore? The answer is obvious - dip deeper into the pockets of Singaporeans. We hear of talks about restructuring and upgrading. This type of thinking in the Government circle only means one thing - the people have to pay more for their services or rentals.

The latest talk is about the restructuring of HDB shops. The sale prices put up by the HDB are so exorbitant. It has been worked out that, in some cases, sitting tenants of HDB shops shall have to pay double their present rentals over a 15-year period. Those prices are, in many cases, even more expensive than privately developed commercial units. In addition to these high prices, we must not forget that the HDB's costs in building those shops are much lower than that of private developers. Land cost to the HDB is also low. Some of the land acquired by the HDB are for a song. Some of those land which are originally used for burial grounds, or are zoned as agricultural land, or are in the green belt, have been acquired by the HDB for, I am told, about 75 cents per square foot. You might spend another 75 cents to clear the squatters, or to clear the land.

At the rate the HDB is pricing the commercial units these days, the land cost is probably inflated to $100 per square foot. On land alone, the HDB has inflated their land cost about 100 times. The Government has to make big profits to accumulate budget surpluses. The surpluses envisaged are from $1 billion to $2 billion each year. $1 billion is one thousand million dollars which is a very big figure. No wonder when the HDB increases the rentals, it does not do so by gradual steps of 10% or 20%, but a hefty jump of 30% at one go. This type of rental increase is much higher than those in the private sector. I am told the rent for a hawker stall in a coffeeshop situated in a public housing estate can be as high as $4,000 per month. To the people of my generation, this kind of hawker stall rental is mind-boggling. No wonder the hawkers now have to work 14 to 18 hours a day.

The Government says that it has to operate on a "lean and trim" basis. The average man-in-the-street has been operating on that basis for years. They have been lean and trim because they have to work at least 10 hours upwards per day for 361 days a year, save for the four days taken off for the Chinese New Year holidays. Indeed, it is not a wise policy to have high budget surpluses every year at this stage of Singapore's development.

Money should be spent more on nation building, on culture, on the arts and education. Culture and the arts are not trivial or frivolous matters. Indeed, you will note that those countries which have high economic development have people not only with a high level of education but they are also more cultured. We need to build a more cultured, dynamic and vibrant society, where we can cultivate a new generation of Singaporeans who are more creative and innovative, and who can rise to meet the challenges of a more competitive business environment, which will become even more competitive in the years to come.

I say that the budget has no balance towards the lower-income group; the budget should be tilted more in favour of the workers. For a long time now, there should be an adjustment to give a little more benefit to our workers who have really helped Singapore's economy progress in the last 30 years. I would favour a cut in the workers' CPF contribution to 20 percentage points instead of the miserly half percentage point. 33If we do give the workers more money, this would put more money in the market and it will help our local retailers. When they have got more money to spend, it would lift some of the hardships of our shopkeepers. The one-off 5% tax rebate and refund of the service and conservancy charges for one month in respect of 1-, 2- and 3-room HDB flats is only a token amount.

I now refer to the relief of $1,000 and $500 given to our national service boys. This material incentive, I say, is wrong in principle. It is too big an issue to settle it with material perks. As expected, most of our national service boys think that the tax reliefs given to them are peanuts. I am surprised to read that the Minister for Finance tried to justify the reliefs given as not insignificant when compared to the personal and earned income relief of $2,000 and $1,000 respectively. He must surely know that the personal relief and earned income relief have been fixed since 1967 and in fact they have attracted criticisms from all sectors of the public in that they are too low.

Our national service is a necessity and our young boys must do compulsory military training under our law. They have got no choice. But what should be taught to them surely must be patriotism, duty to the country and to defend our way of life. That must surely be inculcated in all our national servicemen. And once an incentive is given there is no end to it. Of course, the end result is mercenaries. Surely we do not want that.

I think a better solution would be to give them more equal opportunities in relation to education and jobs. At one time the Government had this policy of giving priority of jobs to our national service boys, but it was found that one section of the community was not doing national service and I believe that policy was scrapped. I would urge the Government to look into this policy again.

The national servicemen have to lay down their lives for the country. How are we going to peg an amount to their lives? This is an issue which cannot be equated to material benefits. And the end result is that this material benefit will in fact lead to greater dissatisfaction. Although one Member has said that the Minister has thought of innovative policies, this one policy must not be allowed to continue if we really want cohesive and patriotic national servicemen to defend our country. 1.50 pm

Mr Peter Sung (Buona Vista): Thank you, Mr Speaker, Sir, for allowing me to join in this debate.

I would like to touch on consumption taxes. We are all familiar with the criticisms against indirect taxes. These are that they are regressive, they are inflationary, they have a snowballing effect, there are difficult problems on the retail and tourist trade, and perhaps they are cumbersome to collect.

These arguments have been made in this House before and I believe that they must be known to the Government even if they were not made in this House. Is it that the Government is ignorant of these shortcomings? If not, is the Government insensitive to the needs of the people? I do not think so.

Why indirect taxes?

Why are indirect taxes useful? The basic reasons for replacing some direct taxes with some indirect taxes are sound. Direct tax is a tax on production whilst indirect tax is a tax on consumption. Therefore, direct tax discourages the accumulation and creation of wealth. Whereas indirect tax discourages consumption. A switch from direct tax to indirect tax means that the people can choose to spend less. If they spend less, they will be taxed less. Perhaps they would choose to spend less in Singapore and save up for spending elsewhere where they are not taxed.

The need to reduce direct taxes is quite clear. With the world economy slowing down, there is that much less foreign investment available and there are more and more countries vying for this foreign investment. Foreign investors will naturally go to countries where their investments will yield them maximum returns. In this respect, if our direct taxes remain high we may drive away foreign investors.

Mr Speaker, Sir, we must not underestimate the contribution of foreign investment to our growth. Indeed, over the last two decades or so, it was foreign investments which enabled us to generate higher levels of income and it was indeed foreign companies that have paid higher wages resulting in a higher standard of living for Singapore. Even for local businessmen, a high rate of direct tax would discourage enterprise and stifle entrepreneurship.

A tax on consumption, accompanied by an equivalent reduction in direct income tax, means that individuals will not be worse off. However, this gives him more choice in his use of his income. If he spends more, he will pay more tax. If he spends less, he will pay less tax. Therefore, this will certainly discourage wasteful consumption.

Implementation

Mr Speaker, Sir, whilst the principles for consumption taxes are logically based, I would like to make a few comments on its implementation.

First, the low-income group. The low-income group will be hit. The Government needs to study the pattern of consumption and provide exemptions for some of these items. In this respect, I would like to quote some statements. In February 1986, the then First Deputy Prime Minister, Mr Goh Chok Tong, now the Prime Minister, said:

'Essentials will not be taxed, in order to minimize the regressive effects of consumption taxes.'

In March 1986, Finance Minister, Dr Hu, said:

'... my Ministry officials who are now studying the issue will make every effort to ensure that the less desirable side-effects are mitigated.'

He added:

'... the needs of the lower income group will be looked after by ensuring that essential commodities will not bear this tax whenever possible.'

Mr Speaker, Sir, these are laudable statements. They show that the Government cares for the poor. What is required now is for the Government to announce details of these exemptions in order to allay public apprehension and to relieve the anxiety of the people.

Second, fixed income earners and pensioners, especially those who are now not paying income taxes, will be the worse hit. Government may wish to review pension payments and other forms of assistance to the really poor. This may be a one-time adjustment. However, I emphasise I do not advocate any scheme that would encourage dependency.

Exemptions

Since one objective of consumption taxes is to avoid unnecessary consumption, the Government may wish to waive taxes on those consumption which are necessary, such as basic foodstuffs as well as those expenditures which are not wasteful such as health and transport. The Government may wish to consider exemptions for hawkers and shopkeepers in HDB and Ministry of the Environment markets. These are usually small-time businessmen whose livelihood is often difficult. The Government may also wish to find ways to identify those transactions which result in the creation of wealth rather than consumption and exempt them from the new taxes.

Import duty

As most of what we consume are imported, would it not be simpler to introduce an import duty instead of consumption taxes? Import duty will be easier to collect. There will not be a snowballing effect when an item is sold from one company to the next before being bought by the consumer. However, having said that, I wonder how an import duty will be justified in these days of liberalization.

Selective consumption taxes

Mr Speaker, Sir, a word about selective consumption taxes. At present, consumption taxes are already levied on tobacco, liquor, petroleum, cars, utilities, foreign workers and on entertainment, such as expenditure in hotels, restaurants, cinemas and horse-racing; although in the case of horse-racing, I am not quite sure what is being consumed.

The Government intends to extend the list of selective consumption taxes in order to meet shortfalls in revenue. The time-based telephone charges might have been one example. When introduced, it raised a big howl and I feel sure the Government has learned from the exercise. If a way had been found for the "poorer people", then some of the emotions might have been dissipated. For example, subject to some mechanism to prevent abuse, residents in 1- and 2-room HDB flats could have been treated differently.

Apart from this, and the occasional murmur when foreign worker levies were increased, selective indirect taxes seem to have been accepted. The Government may wish to review expenditure patterns and introduce indirect taxes which will fall less on the lower income group and more on conspicuous consumption and on those who can afford it. After all, if the Government plans to reduce income tax to 20%, as recommended by the Economic Committee, nobody needs to be worse off if he is frugal.

Timing

A word about timing. Currently, the economy is facing a slowdown. Quite coincidentally, when consumption tax was first mentioned in this House in 1986, the Singapore economy was then also experiencing a slowdown. I think the Finance Minister must be complimented on this timing. He is introducing this topic at a time of a slowdown in the economy, meaning that the tax will not be introduced right now and that the people can be assured that there will be no immediate implementation. Of course, I am sure that the Minister will bear in mind the economic situation of the country when he decides eventually on the introduction of consumption taxes.

Sir, we may want to ask when more taxes are necessary. I would like once again to quote Dr Richard Hu who, in March 1987, told this House, and I quote:

' ... consumption tax will only have to be introduced at a time when we are compelled by international competition to reduce direct taxes to the point where compensatory consumption taxes will have to be introduced.'

I take comfort in two words. First, the word "compelled", and the other wword is "compensatory". It means that he will not move unless he has to do so. It also means that he will take from us only what he would return to us in a different form.

Singaporeans know that the physical infrastructure is by and large in place, thanks to the good work of the Government. The need for development expenditure over the next few years is reduced unless, of course, if there are new ideas for spending huge sums of money for infrastructure. I also believe that our defence equipment are by and large in place. These two items are the biggest users of development expenditure, and if they are not needed in the future, the need to have more taxes may be reduced.

I again quote the Finance Minister. In March 1987, he told this House that:

' ... a broad based consumption tax will only be introduced if the revenue shortfall is substantial and a permanent deficit inevitable.'

A year earlier, he said:

'With increased economic activity, it may be possible to reduce direct taxes without necessarily introducing consumption taxes.'

And in this year's Budget speech, he said:

'If the economy performs as well as we expect, and we are careful with Government expenditures, we should run a budget surplus in the next few years.'

Sir, with this happy situation, the people should encourage the Government to continue to be frugal and be prudent in order to avoid the need for more taxes. In this regard, it may be necessary to note that consumption taxes will be levied sooner if the people were to ask for more subsidies for education, for health or for other expenditure.

As the Chinese saying goes: (yang mao chu zai yang shen shang). In other words, he who calls the tune must pay the piper.

With a prudent Government and a circumspect approach by the people in asking for additional social services, a broad based consumption tax may not have to be imposed even after the machinery is in place.

In conclusion, Mr Speaker, Sir, the Government must know the arguments for and against consumption taxes. It has decided to proceed, not because it is heartless or insensitive to the people's needs but because it is being prudent. This is one characteristic that has enabled us to prosper in the past. We should not compromise on this very basic principle. However, I urge the Government to consider the points I have made. They may mitigate some of the undesirable, and perhaps unintended, effects of consumption taxes and may make the taxes politically more palatable.

The Finance Minister himself had suggested that consumption taxes may not be levied for some time yet. However, he wants to put the administrative machinery in place. Another Chinese saying goes: (wei yu chou miao), ie, we must be prepared before a rainy day. This again is a hallmark of good Government. Of course, I would urge the Ministry of Finance to develop a machinery that is itself not too elaborate or expensive in order not to increase the cost of implementation both in the public as well as in the private sector.

The Senior Parliamentary Secretary to the Minister for Information and the Arts (Mr Ho Kah Leong): ( In Mandarin): Mr Speaker, Sir, on 29th February 1992, the Finance Minister presented the Budget for the next financial year. It can be said to be a prudent and thoughtful Budget, although it is inevitable that certain people in some social strata may receive more benefits than other people in the other social strata. But, generally speaking, the Budget is a fair one. That is to say, people who pay more taxes will receive more rebates in absolute terms, than those who pay less taxes. However, the spirit of the whole Budget is aimed at encouraging and stimulating the further growth of our economic development and to appropriately distribute its expenditure on social development and looking after the welfare of our people.

Generally speaking, the Budget reflects the ruling Party's ideology and the model of society it seeks to mould. Therefore, in formulating its policy, the Government must have a thorough understanding of the domestic and foreign situations and the global trend of changes so that it can take a broad and long-term view to put our Republic in an invincible position in the long-term and to chart out the right direction ahead.

Sir, although Singapore is a small country with a small population, we have enjoyed a good reputation internationally over the years. Leaders from the superpowers are frequently visiting us. This is due in no small measure to the fact that we have a very strong Government to lead us over the last decades. Senior Minister Lee Kuan Yew has rendered outstanding services in the construction of modern Singapore. His name will go down in history and be crowned with eternal glory. The solid foundation that he has laid down will be carried forward and be manifested by Prime Minister Goh Chok Tong and his team. So long as we put in our concerted effort, there is no reason why we should not succeed.

Sir, Singapore is a country without any natural resources. To survive, we have to expand and develop externally, and to develop externally, we have to face keen competition from outside. Therefore, we have to be fully prepared. The Finance Minister has allocated more funds in the field of education, training and research. This is a move in the right direction.

With our people generally receiving education, their wisdom will be enhanced and their vision widened. No matter which trade or work that we are engaged in, we must not close our door or be complacent and conservative. We have to take a broad view of the world and also to look ahead to the 21st century.

Sir, let us take a look at the world situation today. Communism has collapsed and the Soviet Union has disintegrated. The traditional confrontation between the East and the West no longer exists. Although there may be, from time to time, some conflicts in some sectors, the situation of the world as a whole is inclined towards peace and harmony. Under these circumstances, there will come a day when the various countries of the world will spend only on basic military facilities. There is no more need for them to spend large sums of money to compete in armament. This would also mean that the money originally meant for military facilities could be used to improve the standard of living of our people. There will come a time when the material life of our people has reached a saturation point and then they will start to seek a fuller and richer spiritual life.

Sir, from the simple analysis above, we could see that the 21st century will be a time when people begin to pursue better spiritual life. Culture and the arts will receive unprecedented encouragement and sponsorship. People will pride themselves with their artistic cultivation. Sponsoring and participating in art activities and the collection of work of arts will be a major activity of our people in their leisure. In fact, some people say that the 21st century will see another Renaissance.

Sir, I must declare my interest as an amateur artist. But I must tell our hon. Members in the House that the collection of work of art is not a consumption. It is in fact a valuable investment. This activity will not only promote the development of art, but also increase your wealth. The only thing in the world that will unfailingly appreciate in value with time is the work of art. For instance, 100 years ago a painting by Van Gogh cost not more than US$200, but today a painting by Van Gogh can easily cost as high as US$20 million, and many antiques are being auctioned off in international markets at millions or even tens of millions of dollars.

Sir, facing the 21st century when people will be enthusiastically pursuing a richer spiritual life, are we prepared for it? I think this is something which we are very concerned with. I think we should put in more efforts in the following fields: Firstly, the Government should provide adequate infrastructure. Government has already announced the establishment of five museums and the construction of an ultra-modern National Arts Centre for the performing arts. Apart from this, we should also encourage our private sector to set up art galleries and to increase the exchange and sale of work of arts.

Secondly, we have to cultivate more talents in the various arts. The Government should sponsor the two private arts schools that we have in Singapore today. We have the Nanyang Academy of Fine Arts and the La Salle College of Arts. Apart from this, the Government should also provide more scholarships for our students to go overseas to improve themselves in their arts. We should also encourage the private sector to set up more scholarships for the study of arts, in addition to the existing scholarship for academic studies.

Thirdly, the Government should take the lead in the collection of works of art and also allocate more funds for the purchase of works of famous artists. The reputation of a museum can be greatly enhanced if it has a good collection of famous paintings and antiques. Once the Museum is completed, we must try our best to enrich it. We would encourage private collectors to donate their collection to the museum for display. The Government on its part should also set up more funds to purchase works of art.

Fourthly, we must relax our regulations and provide tax incentives to develop Singapore into an international auction centre for works of art, because with the establishment of an auction centre we can stimulate more related activities. We also need more experts, for example, the art authenticators, valuers, and framers. With the gathering of all these experts in Singapore, it would surely stimulate and develop Singapore into an art activities centre.

Fifthly, we must let art reach out to the people. We must systematically organise and cultivate our people's interest in the arts and improve their standard of appreciation. On the other hand, the Government should also assist and help our artists to venture into the international market.

Mr Speaker, Sir, in order to do that, we need a lot of money. So I hope the Minister for Finance would be more generous in allocating more funds for the promotion of the arts in Singapore.

Mr Speaker, Sir, Singapore is but a tiny island. Yet, it has occupied a prominent space in the economic map of the world. Let us put in a concerted effort to make Singapore occupy also a very important position in the art map of the world.

Sir, I support the financial policy of the Government as presented by the Finance Minister.

Mr Chin Harn Tong: Mr Speaker, Sir, the Minister for Finance is to be congratulated for drawing up the 1992 Budget on the prudent principles of a balanced budget. As such, it does not stir up the emotions. I have not heard any loud cries of joy or pain over the Budget, in or outside this House.

However, I have some comments to make. My comments are concerned not so much with what has been stated as with what has not been stated in the Budget. Sir, the Budget Statement mentioned about the low productivity figure, the higher labour cost relative to Taiwan, South Korea and Hong Kong and the relatively higher cost of manufacturing in Singapore. It is clear from the Budget Statement that the economic barometer reading for Singapore in 1991 is the most ominous since the 1985 recession.

It is nowhere expressed but nonetheless strongly implied that something must be done about wages to maintain Singapore's competitive position. I do not think there would be many people who would dispute that wages have to be pegged to productivity gains for Singapore to remain competitive. But, I wonder, all the same, shouldn't something be also done about pegging the prices of consumer goods and services to wages?

I expect there would be many objections to what I have just said. One would be that any control or regulation of prices would be inconsistent with Singapore's free market system. A second objection would be that a comprehensive regulation of prices would be difficult to administer, while a selective regulation of prices might not be effective. A third objection would be that it is not sure whether wage increases would be the cause or effect of price increases.

Sir, it is easier to identify wages as a production cost item than to assess the part played by the cost of living element in the fixing of wages. In an industrial system like Singapore's, where there are negotiations on wages or wage increases, I am sure the cost of living aspect would not be far from the mind of the negotiators. The only question is how far.

The Consumer Price Index or CPI, published by the Ministry of Trade and Industry, does not help to answer this question. I am not saying that the CPI is not the state-of-the-art in its field. I am sure the CPI is a work of art in its portrayal of a stabilised cost of living on paper. But individual negotiators on wages may be influenced more by their actual cost of living than what the Government has published to be their notional cost of living.

Moreover, what individuals perceive to be their actual cost of living are likely to be influenced by what they themselves have read, heard or learned about Government policies or plans which are bound to affect their cost of living. I refer to the proposal, for example, to privatise the food centres.

The Government's proposal to privatise the food centres is a good illustration of my point on how popular perception of cost of living can be influenced by Government policy. Members in this House may recall that the successful bidder for a stall at the Newton Food Centre was prepared to pay as much as $15,000 a month. It is also not surprising for the successful bidder of the tenancy of a HDB coffee-shop to pay a monthly rent as high as $50,000.

But these high rentals, though initially paid by the stallholders or coffee-shop operators, must in the end come out of the pockets of the consumers, the vast majority of whom are workers. Even if the prices are fixed to protect the consumers, the stallholders may be compelled by their high operating costs to short-change on quantity or quality, or both.

I do not place much faith on the argument that consumers have the free market choice of shopping around for the best value for their money. One reason is that consumers cannot do so regularly because of the constraint of time and extra transport cost. A more telling reason is that, with the eventual privatisation of all food centres as proposed, all the food centres would be equally expensive.

Once there used to be many coffee-shops operating in rent-controlled premises which served as a check on the prices charged by HDB coffee-shops. These non-HDB coffee-shops have gradually disappeared because of urban redevelopment. I do not think an extension of the Rent Control Act would be the answer nor the regulation of prices alone at food centres would be enough to ensure a fairer deal for consumers. A better way would be to ensure the stallholders at food centres and HDB coffee-shops do not feel compelled by high operating costs to jack up prices or cut down on quantity or quality.

Public food centres and HDB coffee-shops are built on land which has been acquired at controlled prices. Even if economic rents are to be charged for food stalls at food centres and coffee-shops to cover their actual construction costs, the monthly rent surely cannot be as high as $15,000 per stall or $50,000 per coffee-shop.

Sir, balloting, rather than bidding, would surely help to prevent the inflationary trend of prices in food centres and coffee-shops because of ever increasing bids. The latest announcement by HDB to sell shophouses does not invalidate what I have just said because those shops, which are not bought by the occupiers in certain cases, will be sold to the highest bidders.

Sir, from the viewpoint of workers, the situation may be likened to a person being given a leaking pail and a time limit to collect water from a low-pressure tap. The low-pressure tap is the National Wages Council-regulated wage system and the pail is the pay packet of a worker. The leaks in the pail represent the unnecessary increases in the cost of living manipulated by various public bodies.

Sir, if it is reasonable to expect workers to moderate their demands or even tighten their belts in the national interest, it should be also reasonable to expect statutory boards to reduce their surpluses or even unlock their coffers in the national interest. I do not think it is reasonable to expect workers to march strictly to the tune of productivity, when the various public bodies provide the accompanying music to the tune of profiteering under the banner of free market transaction.

Mr S. Chandra Das (Cheng San GRC): Mr Speaker, Sir, much has been said on this year's Budget Statement, both in public and in private, and in this House.

Sir, the Feedback Unit conducted a closed-door dialogue session on 4th March 1992 with 20 representatives from the various Chambers of Commerce and Industry, business associations, NTUC, institutions of higher learning, basically to obtain their views on the Minister's Budget Statement.

Sir, as expected, there were numerous requests. These included reductions in property tax, foreign workers levy, increase in personal tax relief, further reduction in corporate tax, tax incentives for businesses to remit overseas profits to Singapore and assistance for manufacturers to relocate their operations overseas. There were also calls for part-time workers to be exempted from contributing to CPF. This, many felt, would increase their take-home pay and therefore attract more housewives to join the workforce.

Mr Speaker, Sir, two noteworthy points surfaced during the dialogue session. Firstly, a number of participants pointed out that the Government had, in recent years, adopted the market mechanism to regulate the demand for scarce commodities, like foreign workers, Certificates of Entitlements (COEs), foreign maids, etc. The unintended benefit to the Government of this policy was that it increased its revenue. In the case of the foreign workers levy, Government should use these funds to help and encourage businesses to automate, to invest in R&D and to globalise their operations. If possible, they would like to see a direct correlation between what they pay to the Government and what they get back from the Government. Sir, the Government's implementation of the Skills Development Fund is a good case in point. Nobody complains paying to the Skills Development Fund because they can see that whatever is paid to the Skills Development Fund, the benefits go back directly to the contributors. But in the case of the foreign workers levy, the business sector feels that having paid the money, they cannot see a direct correlation how this can be reverted for the benefit of businesses.

Secondly, Sir, reservations were expressed about the proposed consumption tax, and my colleague, Mr Peter Sung, dealt at great length on this subject. What I would like to say is that it was felt that if consumption tax is imposed, Singapore's image as a duty-free shopping paradise would be shattered, apart from imposing additional hardships on the lower income in our midst.

Mr Speaker Sir, I now have a few personal observations of my own to make on this year's Budget Statement. Firstly, Sir, the one point percentage reduction in corporate tax is most welcome. However, I believe we should work hard and the Finance Minister should work harder and accelerate towards the planned reduction to the target of 25%, as indicated by the Economic Committee in its Report in 1985. However, Sir, I would urge the Finance Minister also to consider similar measures for personal income tax. The gap now is 3%. If nothing is done to narrow this gap, our tax regime would favour only the business community against the individual. Our tax system, Sir, must not penalise or be biased against hardworking Singaporeans. Government should consider reducing the personal income tax also to the level of the corporate tax. Sir, it must be remembered that the ordinary individual taxpayer has no recourse to tax planning or other devices.

Mr Speaker, Sir, my second point concerns the projected lower growth of our economy. This is really cause for concern - the so-called maturing of the Singapore economy is a very dangerous concept. Whilst lower growth may be a reality, we should strive to improve on the growth rate. It should not become an excuse to hide our inability to induce more and better foreign investments.

Sir, with a strong Singapore dollar coupled with the opening up of Indochina and China, especially the Pearl River Delta, Shenzhen and the Indian sub-continent, more and more of our manufacturers and businessmen would go overseas. This is sound for the medium term, even painful for the short term. But we should also be careful in this area. Otherwise, we might see a "hollowing" of the Singapore economy. Moreover, Sir, there is no assurance that the weakening in export trade would be offset by strengthening service-earnings over the long run. Profit-earnings from Singapore investment overseas might not be sent back to Singapore for various reasons.

Sir, next I would like to turn to our tax treaties. So far, the Government's aim in concluding tax treaties with foreign countries has been to promote foreign investment into Singapore. However, Sir, the situation has now reversed and we see a reverse flow of Singapore investments in overseas markets. A fresh look should be taken at our various tax treaties. Although the present section 13(8) allows for tax-free repatriation of profits earned overseas, it is still, I believe, very restrictive. Exemption requires support from various Government agencies. It may be useful if profits from overseas investment be given a generous treatment when remitted back to Singapore. Would the Finance Minister be prepared to review the present situation and remove the administrative hurdles that are currently present?

Sir, the rebate for the December 1992 conservancy charge for 1-, 2- and 3-roomers is most welcome. But, at the same time, it must not send the wrong signals - it must not be the beginning of free "give-aways".

Next, Sir, I would like to touch on CPF. The 1/2% point increase is reasonable, especially taken in the context of the total wage bill. On the issue of part-time workers, it may be necessary for the Government to have another look at the CPF contributions, both by employer and employees. Many, especially women, refrain from part-time work, because after CPF deductions, the take-home pay is really not attractive. Maybe one suggestion that is worthwhile considering is to exempt the employee from contributing to CPF. This, in fact, would increase the take-home pay. In any case, Sir, some form of adjustments must be made, either a reduction in the percentage or the total amount. The employer's contribution, I believe, can stay, especially in this tight labour market. Any adjustment of CPF contribution of part-time workers will only improve the situation and encourage part-time workers, especially the women in Singapore, to get into the labour force.

Finally, Sir, in my view, the 1% restoration of the hotel cess could have been delayed to a more favourable time. As stated in this House, the economy is expected to grow slowly and the hotel industry is no exception. Frankly, I see no compelling reason to restore the cess back to 4%. It just adds on to business costs and to the surplus of the Singapore Tourist Promotion Board.