ECONOMIC RECOVERY AND RESTORATION OF CPF CONTRIBUTION RATE

Mr Zulkifli bin Baharudin asked the Deputy Prime Minister (a) what is his assessment of the current economic recovery and whether this is sustainable in the long run; and (b) how will the recovery affect the Government's plans and commitment for the full implementation of the recommendations of the Committee on Singapore's Competitiveness.

Mr Low Thia Khiang asked the Deputy Prime Minister what is the Government's time frame to restore the employer's Central Provident Fund contribution rate back to the 1998 level.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, with your permission, I will take Questions 1 and 2 together.

Mr Speaker: Yes.

BG Lee Hsien Loong: The economy has been recovering well this year, faster than we had expected. This is because of favourable external developments in the region and an improvement in the global electronics industry. It is also due to the decisive measures we took to reduce business costs, which have helped to boost our competitiveness. In May, MTI upgraded its 1999 GDP growth forecast from the original -1% to 1%, to between 0% and 2%. Recent data suggest that the economy might outperform this range. MTI will revise the growth forecast again in August, when the full economic results for the second quarter become available.

The manufacturing sector leads our economic recovery. It grew by 8.2% in the first five months of 1999, on the back of robust expansion in the electronics and chemicals clusters. Indicators from the other sectors of the economy show that the recovery is becoming more broad-based, although not every sector is doing well.

The commerce sector will benefit from a pick up in tourism. Visitor arrivals grew by 7.2% between January and May, compared to the double-digit declines last year. The financial services sector has been boosted by the buoyant stock market. Shares transacted grew by 270% in value terms and 390% in volume terms in April-May 1999. But offshore and domestic lending activities are still lagging behind. The construction sector remains weak, despite the improved property market sentiment.

Prospects for continued growth in the second half of 1999 are favourable. But whether the current recovery is sustained in the longer term will depend on both external and internal factors.

Externally, we are heavily dependent on overseas markets. So we need the OECD economies to stay robust and to keep their markets open. In the region, a sustained recovery will depend on countries persevering with their restructuring efforts. The risk is that the current signs of recovery will cause countries to put off painful restructuring measures. Restructuring by our neighbours will mean keener competition for Singapore, but it is better for us to have strong and healthy neighbours, contributing to the stability and prosperity of the region.

Internally, we must persevere with the strategies mapped out by the Committee on Singapore's Competitiveness (CSC). We must not become complacent just because the economy has started to pick up. We must upgrade our capabilities and strengthen our competitive position. The CSC has emphasised the importance of building up our physical infrastructure, technology, market networks and manpower. We should make full use of the current window of opportunity to do this. This is vital to maintain our competitiveness in the long run, as the region recovers.

In the short term, we must continue to watch our business costs carefully. We need to nurse the present economic recovery, and not choke it off by allowing costs to rise prematurely.

The $10.5 billion cost reduction package announced by the Government last November covered taxes, industrial land rentals, utilities and transport charges, and other Government fees and charges. Some of these were outright rate reductions; others were one-off rebates to be reviewed after one to two years. Many of the reductions came into effect only this January. The Government will see through these cost reductions as promised.

A major part of the cost-cutting package was the reduction in labour costs, to be achieved by reducing bonuses and variable wages, plus a 10%-point reduction in the employer's CPF contribution rate, from 20% to 10%. The CPF cut was to be for two years from 1st January 1999, after which we would review the situation. We intended to progressively restore the CPF contribution rate as the economy recovered.

Competitive labour costs remain a critical factor to sustain investments and jobs in Singapore. Hence, continued wage restraint is essential. This is why the NWC Recommendations this year emphasised caution and wage flexibility.

Of all the measures we took, the CPF cut had the most impact on our business costs, and contributed significantly to the current recovery. It is total wage costs - both take-home pay and CPF - that matter to our competitiveness. If we allow wage settlements to go up too quickly now, we will be negating the effect of the CPF cuts, and making it more difficult to restore CPF contribution rates later on.

However, we recognise that in a strong recovery, wage pressures are unavoidable. Therefore, if the recovery continues to gain momentum, it will be better for us to manage these pressures, by beginning to restore the employer's CPF contribution earlier, while continuing to exercise restraint in wage settlements.

We will review the position towards the end of this year. By then we will know this year's economic performance and the outlook for next year. We can then decide whether to make a first adjustment to CPF rates in 2000, instead of 2001 as we had originally planned.

Mr Leong Horn Kee (Bishan-Toa Payoh): Mr Speaker, Sir, I have two supplementary questions. The first question is whether the Ministry would have the revised forecast for the GDP growth for 1999 in view of the strong recovery of the economy in the first half. The second question is, in view of the strong recovery of the economy, would the Deputy Prime Minister consider advancing the reinstatement of the CPF cut to an earlier date than two years so as to enable depositors to use their CPF money to help finance existing housing loans and make new investments.

BG Lee Hsien Loong: Mr Speaker, Sir, as I explained, we will review the forecast when we have the full second quarter figures. We expect to make a revised forecast come National Day, which is our usual timing.

As for advancing the CPF restoration, I had explained also that we have to look at CPF and wage take-home pay as one package because it is the total wage cost which makes the difference to the competitiveness of the economy. If we hold down CPF but allow wage costs to rise, then we are actually negating the effect of the CPF cut and, in effect, making it more difficult for us to increase the CPF later on because the wages would already have risen. If there is wage pressure because the economy is doing well and exports are strong, then it may be better for us to restore CPF earlier and maintain wage restraint longer, so that we can restore the CPF cut sooner, not in full, but progressively, and manage our total wage cost as the economy recovers.

It is too early for us to commit now. We have said two years but, as I said, if the economy grows strongly, at the end of the year we will revise this and consider whether we will begin to restore the CPF come the year 2000, a year ahead of schedule.

As to whether this will make a contribution to housing loans, we will have to consider which components of the CPF we restore first. When we cut the CPF we cut 6% from the Ordinary account and 4% from the Special account. The Special account is the first priority for CPF members to build up, because that is put aside for old age and as the absolute crucial nest-egg, as opposed to something a little bit more than that which you can use for housing or other investments. When we restore it, my preference would be to restore the Special account first. But we will decide that later on. I think it is premature to count our chickens now.

Mr Zulkifli Bin Baharudin (Nominated Member): Two supplementary questions, Sir. First, in view of some present fundamental challenges, both internally and externally, as mentioned by the Deputy Prime Minister, whether there is a likelihood that our economy may be poised for a w-shape recovery instead of a v-shape recovery, as most people think. The second question is: what about the Government department charges and statutory board charges? Are we committed to lowering these charges despite the economic recovery because they do form the bulk of expenses for companies?

BG Lee Hsien Loong: It is possible that we have a w-shape rather than v-shape pattern. "W-shape" means you go down again before you recover. I hope not, but you cannot be sure because the risks are there. The American economy looks strong but you cannot say how the present boom will eventually be managed - whether they will contrive a soft-landing or not. If you look at the situation in Japan, it also looks improving but not yet out of the woods. China is slowing down and has less impact on the region now, but potentially it has a psychological effect on the rest of Asia.

Of course, we have got to look at our neighbours. Thailand and Malaysia are economically picking up. Indonesia is still dependent on political circumstances. That is why we are not making any premature celebration now. We are going to watch carefully and take it very soberly, step by step.

As for the other Government rates and charges, there are many items which we announced - rentals, rebates on property tax, utilities and so on. They will remain for the periods which we have stated. At the end of those periods, we will review them.

Mr Low Thia Khiang (Hougang): I welcome the Government's decision to review the restoration of CPF earlier if the economy is good. Would the Deputy Prime Minister give us more details such as the time frame for the restoration, the percentage and the components, instead of just saying it is the Special account that would be restored first?

BG Lee Hsien Loong: If the Member could tell me what our growth rate will be this year and what the position will be next year and where the Americans next year, I will give him a good answer.