EMPLOYERS' CENTRAL PROVIDENT FUND CONTRIBUTIONS (Reduction)

The following Question stood in the name of Mr Cyrille Tan -

Mr Cyrille Tan: To ask the Minister for Manpower, with regard to the Government's stand that a cut in the employers' Central Provident Fund contributions will only be considered as a last resort, what constitutes a "last resort".

Dr Toh See Kiat (Aljunied): Question No. 7, Sir.

Dr Lee Boon Yang: Mr Speaker, Sir, since 1987, we have built up a flexi-wage system to enable companies to adjust their wage costs through the variable component of wages, based on company's performance. This variable component now constitutes 16% of total wages. In the unionised sector, the variable component is 20%. This provides a cushion for companies to reduce wage costs in difficult times.

The NWC recommendation for 1998 is wage restraint. It was formulated in May, when the forecast for economic growth was 2.5%-4.5% for the year. Since then the regional outlook has deteriorated. We now expect the economy to grow by 0.5%-1.5% for this year. The figure is still positive, but this does not truly reflect current reality. In a rapidly changing situation, quarter-on-quarter figures give a better indication of the direction of the economy, although they are more volatile.

On a quarter-on-quarter basis, seasonally adjusted growth was only +0.3% in the first quarter, and was -1.7% in the second quarter. We can expect very weak or negative growth for the rest of the year and next year.

These difficult economic conditions are already being reflected in wage settlements. My Ministry's data on wage settlement achieved so far showed that the weighted average basic wage increase up to July this year is only 2.5%, compared to 5.9% last year. The average increase agreed between management and unions has progressively dropped since January this year.

Sir, NTUC data paint the same picture. NTUC has reported that over the last two months, 48 companies employing 4,490 workers settled for a wage freeze, out of which one company had a wage cut. Many more requests for wage freeze are now on the negotiating table. NTUC expects that for the year as a whole, the average basic wage increase will only be 1.5%-2.5%.

At the same time, variable payments are likely to be cut. NTUC expects bonuses, including the Annual Wage Supplement, to average 1.0-1.3 months this year, down from the 2.3 months on average that were paid out last year.

Sir, overall, total wages are likely to decrease by 5%-8% this year, compared to last year. This is a valuable contribution to cutting business costs, and helping firms to remain viable.

The flexi-wage scheme is therefore working. Union leaders have been very responsible, moderating the expectations of members and negotiating realistic settlements. Many companies are already exercising not just wage restraint, but severe wage restraint. This is a prudent interpretation of the NWC recommendations in the present circumstances.

But the question is whether flexi-wage adjustments alone will be enough. Flexi-wages are effective for making firm-by-firm adjustments, when individual companies are in difficulty. But if we need to lower wages across-the-board, as part of an overall reduction in our business costs, then flexi-wage adjustments may need to be supplemented by a cut in employers' CPF contributions.

The regional crisis has altered the competitive landscape. Many Asian countries have seen large currency depreciation of 25%-75% against the Singapore dollar. With unemployment rising, their wages have not increased to compensate for the reduced purchasing power. This has sharply reduced their labour costs, and made them more cost-competitive compared to us.

Our electronics exports have lost market share in the US. Other Asian countries have lost market share too, but by less than Singapore. The retrenchments in our electronics industry are partly caused by companies shifting production to other countries, including Malaysia, Thailand and South Korea. This goes beyond the normal process of industry upgrading. It is a sign that we are becoming less competitive. We must watch this carefully, and not allow our manufacturing sector to be hollowed out.

Mr Speaker, Sir, as the Prime Minister said at the National Day Rally, our solution is not to depreciate the Singapore dollar to match that of our competitors. That would erode the purchasing power of workers' wages, and reduce the value of workers' CPF savings, through higher inflation. It is better to maintain a stable exchange rate, and tackle the components of business costs directly, whether they are wages, rentals and land prices, and Government taxes and charges. Indeed I understand this has been the MAS' policy - to maintain a stable Singapore dollar exchange rate, but within flexible limits that reflect our economic fundamentals.

Mr Speaker, Sir, on a trade-weighted basis, the Singapore dollar exchange rate has risen only slightly since the crisis began, particularly if we discount the effect of the large depreciation of the Indonesian rupiah. The purchasing power of the Singapore dollar has been maintained, as seen in our very low consumer price inflation.

Sir, the Government will reconvene the National Wages Council to update their recommendations in the light of developments since May, and issue new wage guidelines to help the economy cope with the continuing crisis.

The Ministry of Trade and Industry is currently studying all components of costs in Singapore to establish how competitive we are in this changed situation, and what we must do to strengthen or restore our competitiveness. This will be a major focus of the report of the Committee on Singapore's Competitiveness, chaired by Mr Lee Yock Suan. The report will be ready before the end of the year. In an overall plan to reduce costs, wages will have to bear its share of the reduction through the flexi-wage adjustments and, if necessary, a CPF cut.

Mr Shriniwas Rai (Nominated Member): Sir, may I ask the Minister what are the chances of not having a CPF cut this year?

Dr Lee Boon Yang: Sir, in a nutshell, a cut in the employers' CPF next year is very likely, but we will have to wait for the report from the Committee on Singapore's Competitiveness to make its full recommendation.

Mr Ong Ah Heng (Nee Soon Central): Sir, I would like to ask the Minister whether the Government is taking steps to ensure that employers do their fair share to see an economic turnaround instead of taking the easy way out by cutting wages or cutting employers' CPF contribution.

Dr Lee Boon Yang: As I have explained in my answer, it is not just a question of cutting wages. Government will also make a comprehensive review of all taxes, rates and levies to help minimise cost of business in Singapore. At the same time, it stands to reason that employers faced with this crisis will also be examining their business strategy, re-engineering their business operations, for instance, looking for new product mix, in order to survive this crisis. They will have to look for new markets and in their efforts, they will receive additional support from Government. The Trade Development Board will help them to look for new markets for their products. In the case of Singaporeans who want to invest abroad and to find new places where they can invest, Government will also provide the kind of support to help them reach out to new locations where they can invest to continue their business.

Mr Chiam See Tong (Potong Pasir): Sir, my question has partly been asked by Mr Rai. In the light of Malaysia implementing its currency control policy and its adverse effects on Singapore, will there be a possibility now that CPF will be cut this year rather than next year?

Dr Lee Boon Yang: Mr Speaker, Sir, Malaysia's imposition of currency control took place barely three days ago. We can wait a while to see the full impact on Singapore before we decide how it will affect us and what should be our response by way of improving our wage competitiveness.

Mrs Yu-Foo Yee Shoon (Bukit Timah): Sir, the NWC negotiation had indicated a downward trend. Furthermore, most of the unions have agreed to cut the variable component and I think we also know that if things become very bad, maybe a CPF cut will be the last resort. Then why is there a need to reconvene the NWC?

Dr Lee Boon Yang: Sir, when the NWC made its recommendation this year, it was through a series of deliberations in April and May. The situation then was very different. The regional crisis has got worse over this period, between May and now. In fact, the regional crisis has not bottomed out yet. Changes are still taking place almost on a day-by-day basis. Malaysia has just introduced exchange control, as Mr Chiam has mentioned. This is a sign of the seriousness of their economic problem. And as the Prime Minister had said at the National Day Rally, when there are economic difficulties in Malaysia, it will have a serious impact on Singapore. We will be affected when they have difficulties. Likewise, Indonesia continues to face serious economic difficulties. A shortage of essential food supply continues to cause social unrest and create problems of law and order. This year and the next year will therefore be very difficult years for Singapore. There is a real likelihood that we will end up with much higher unemployment than we have experienced since the mid-80s.

Reducing business costs, including wage cost, will help our companies to weather this crisis. It will help us to reduce job losses though it may not lead to a quick recovery because we are suffering largely from the impact of the regional crisis. Hence, I think it is necessary at this juncture for us to take another look at our wage policy. So by reconvening NWC to review its recommendations made in May this year will give the trade unions representing the workers and the employers who are component parties of the NWC to re-examine the whole changed environment and come to a new consensus on how we could improve our wage competitiveness.

Mr Seng Han Thong (Ang Mo Kio): Sir, may I ask how soon will the NWC be reconvened and what is top on the agenda, whether it is a CPF cut or implementing a wage freeze?

Dr Lee Boon Yang: Sir, I will try to get the reconvening of NWC settled as soon as possible. I expect that we will be able to make an announcement by next week. The priority for NWC to consider would be the wage guidelines, what should be the wage guidelines for the rest of the year. NWC will also examine the background to the need for a CPF cut and make its recommendation in that respect.

Mr Ahmad Mohd Magad (Pasir Ris): Sir, it is indeed laudable to note that the NTUC has taken the initiative by urging its members to go for wage restraint. In view of the worsening economic situation, what further measures are being considered to save jobs and to restrain and, wherever possible, prevent further retrenchments?

Dr Lee Boon Yang: Sir, as I mentioned in my main answer, the Committee on Singapore's Competitiveness will be looking at all these issues and to develop a new strategy for us to cope with the crisis. This would include how to seek new investments, how to look for new markets for Singapore, how to reduce our overall cost of business so that we can become more cost competitive in view of the changed condition. And it would include, of course, how much more effort and investment we must put into upgrading the skills of our workers so that they can take on the new jobs that are created by the flow of investments coming into Singapore. This will be settled by the Committee on Singapore's Competitiveness.

Dr Lee Tsao Yuan: Sir, may I ask the Minister when will the Government announce the public sector bonus in December and whether the 13th month annual wage supplement is part of flexi-wages for the public sector?

Dr Lee Boon Yang: The NWC, as I said, will be reconvened sometime next week. After the NWC has the chance to meet and to discuss and make its recommendation, the public sector will then announce its position. As to whether the 13th month annual wage supplement is part of the variable component, as I said in my answer, the NWC has already indicated that it will be considered adjustable. In the case of a company that is doing very badly and making losses, certainly the AWS may also be reduced.

Mr Chuang Shaw Peng (Nominated Member): Sir, I would like to ask a question related to the consequences of a CPF cut. Would the Government encourage or allow the banks to reschedule loans for private properties if there is a CPF cut, because this will be the main concern when the CPF is cut, especially now that the HDB has announced that it will help those who have bought HDB flats? But in the private sector, there does not seem to be any clear direction on this.

Dr Lee Boon Yang: Sir, should there be a need to cut employers' CPF contribution, we understand that it will cause difficulties to home owners who are servicing their home mortgage loans. This includes those who have bought HDB flats and those who have bought private properties. In the case of those who bought HDB flats, HDB will look into how to assist them over this period. When we made a similar cut in 1986, HDB offered rescheduling of their loans, longer repayment period and a ballooning repayment scheme. There is a whole host of alternatives that can be found and can be offered to home owners who have difficulties. In the case of the private properties, during the mid-80s when we had to cut CPF, Government offered them a soft loan pegged at CPF interest rate. It is a bridging loan to help them over this period. We will look at all these possibilities. We will look at all these means of helping home owners who are adversely affected and implement those that can help them to cope with the crisis.