MANAGING THE ECONOMIC RECOVERY (Statement by the Deputy Prime Minister)

BG Lee Hsien Loong: Mr Speaker, Sir, exactly, one year ago, I informed the House of the Government's package of economic measures to counter the regional crisis. The mood was heavy. The region was in turmoil, and global financial markets were nervous. Retrenchments were rising, and we braced ourselves for severe turbulence.

The $10.5 billion package was a decisive move to reduce business costs, build confidence, and help companies to tide over the very difficult period. It included significant wage and CPF cuts, and enjoyed the full support of the Government, workers and employers. Our response demonstrated our determination to ride out the storm, and bolstered confidence in Singapore.

Now, a year later, the mood has totally changed. Things have turned out much better than we feared. Except for Indonesia's problems with Aceh, the worst of the Asian crisis is behind us. Throughout the region exchange rates have firmed, interest rates have come down, confidence has returned, and growth is resuming. Our own economy has picked up sharply, boosted by our cost-cutting measures and the regional recovery. We expect about 5% growth this year, and between 4.5% and 6.5% next year.

Our challenge now is to manage the recovery, to restore the economy to full health without mishap. Growth has become broader based and unemployment is down. But the economy still has some weak patches. We must be especially careful with the manufacturing sector, as several industries continue to face severe cost pressure, including disk drives and petroleum refining. At the same time, restructuring is continuing, and is causing a steady stream of retrenchments. We must redouble efforts to help these retrenched workers find new jobs.

In the light of these developments, the Government has reviewed its economic stance, and particularly the measures in last year's cost reduction package. In general, last year's package will continue as committed. However, the tightening labour market has made it necessary to bring forward the restoration of employer CPF contribution rates. The improved economic outlook also justifies a higher quantum of year-end bonus for civil servants, and a restoration of the wage cuts imposed on civil servants. We need to adjust the Skills Development Levy, as skills upgrading is critical to keeping workers employable. In key areas of business costs, namely, industrial land rentals and port and airport dues, we will extend the rebates for an additional year.

CPF

Let me first take the CPF. The Government has explained the need to bring forward the restoration of CPF contribution rates to next year, instead of 2001 as originally planned. The labour market is tightening. And unless we do this, the CPF reduction will simply be converted to higher wage settlements. And this will make it harder to restore the CPF contributions later on.

The employer's CPF contribution rate will therefore be increased by 2% points to 12%, with effect from April 2000. This 2% point restoration will be allocated fully to the Special Account.

The Government's intention is to restore employer's CPF contributions fully to 20%, the rate which prevailed before the cut. The reduction to 10% last year was a temporary move to deal with an immediate crisis. It did not affect the desired long-term contribution rate of 20% plus 20%, which had been calculated to provide enough savings for workers' health care and old age needs.

The restoration of the CPF rate will be done as soon as possible at a pace which the economy can bear. If conditions are favourable, we should be able to restore it fully within about five years. Our priority will be to build up the Special Account first, as this is the absolute minimum nest egg which all Singaporeans should have when they retire.

Civil Service NWC Award

Now, the civil service. With the recovery in the economy, the Government has decided to increase the quantum of year-end bonus to civil servants.

Last year, civil servants received a total of 3/4 month of AVC (Annual Variable Component): 1/2 month in July and 1/4 month in December. And this was 1 1/4 month less than the two-month worth of AVC which they had been paid in 1997, the year before.

This year, the Government has already paid 1/2 month of AVC in July. In December, the Government will pay civil servants another 1/2 month of AVC. This makes a total of one month of AVC for the year as a whole, 1/4 month more than last year. The Government will, as usual, also pay the one month of Annual Wage Supplement.

In addition, because the economic outlook has improved significantly since the NWC recommendations were published in May, the Government will pay civil servants a one-off Special Bonus of 1/4 month.

Taking the AVC and Special Bonus together, civil servants will receive 11/4 months this year, still less than the two months of AVC which they were receiving before the crisis.

For the longer term, the civil service is studying ways to link pay more closely to performance. If the economy remains strong next year, and there is an NWC award for civil servants, I stress "if", the Government will use part or all of this to begin to build up a performance-based annual bonus for all civil servants. Concurrently, the Government also intends to continue to build up the AVC in future years, whenever economic performance justifies it. The Government will discuss the implementation of these changes with the unions in due course.

Restoration of Cuts/Freeze in Civil Service Salaries

As part of last year's package, the Government took the lead in implementing wage cuts for civil servants and political appointments. Monthly salaries of Staff Grade, Superscale, Division I and Division II officers were cut by 5%, 3%, 2% and 1% points respectively on 1st January 1999.

The Government will fully restore these wage cuts with effect from 1st January 2000.

Apart from the wage cuts, the salaries of Ministers and senior civil servants, which are normally pegged to private sector earnings, were frozen in 1998 and 1999. However, the private sector benchmark increased by 13% in 1998 and 29% in 1999, based on private sector earnings two years earlier, in other words, earnings in 1996 and 1997 respectively. The figures for next year's benchmark are not yet complete, but IRAS estimates that it has increased further, because some partnerships and companies continued to do well in 1998, despite the economic crisis.

Now that the economy is recovering, we must restore the proper relativity between private and public sector salaries. This is crucial if we are to retain and attract talent, and maintain the high quality of our public service and Government.

The Public Service Division is currently reviewing the salary formula for Ministers and senior civil servants set out in the 1994 White Paper on "Competitive Salaries for Competent and Honest Government". The White Paper had called for such a review after five years. PSD's conclusion is that the basic framework is sound, and the salary benchmarks selected are appropriate. However, we can refine the methodology for calculating the benchmarks and shorten the delay in applying the benchmarks to the public sector. We also need to review the structure of civil service salaries to create more flexibility, and increase the weight of performance bonuses in the total salary package.

PSD is still working out the details. The review should be completed and the changes announced and implemented by early next year.

Private Sector Salaries

The Government's approach to civil service salaries and bonuses is consistent with the NWC recommendations. In May, the NWC had recommended continued wage restraint, while providing companies that perform well greater flexibility to reward their workers. The NWC set guidelines for these companies to reward workers through bonuses or wage increases, preferably in the form of a monthly variable component. Because of the economic recovery, more companies will now fall into this category (ie, companies which are doing well) but the NWC guidelines for how they should reward workers remain valid.

Skills Development Levy

Training and retraining is vital to keep our workers employable, and to enable us to compete globally as a knowledge economy. Singaporeans must continually upgrade their skills and embrace life-long learning.

The Skills Development Fund (SDF) has been effective in encouraging employers to invest in worker training and skills upgrading. Set up in 1979, the SDF is funded from collections in the Skills Development Levy (SDL) on employers for workers below a monthly salary of $1,000. Today, the SDF supports over 560,000 training places per year, the majority taken up by workers with 'A' levels or below.

While training commitments from the SDF have grown substantially over the years, collections from the SDL have fallen. In FY98, the SDF committed more than $88 million in training grants but the levy collection was only $20 million. This is because as wages rise, the number of workers earning less than $1,000 shrinks. The base of the SDL has thus been declining - from about 800,000 workers in 1980 to about 350,000 workers currently. This is even though the size of the overall workforce has doubled and more higher paid workers need training. This is not sustainable or equitable.

For the SDF to continue to play its role in worker training and skills upgrading, the SDF levy has to be adjusted. This can be done either by increasing the levy rate, or by raising the salary cut-off below which the SDL is collected.

The Government has decided to keep the levy rate unchanged at 1%, but to progressively raise the salary ceiling for SDL contributions from the current $1,000 to $2,000 over the next five years to 2004. The first increase from $1,000 to $1,500 will take effect on 1st July 2000. This will expand the base of the SDL collection to around 670,000 workers, in other words, almost double the number paying today, and increase the SDL collection by $28 million a year, to $48 million.

The SDL salary ceiling will subsequently be raised to $1,800 in 2002 and to $2,000 in 2004. Beyond 2004, the Government will revise the ceiling regularly to keep it in line with wage levels.

Companies should not treat higher SDL contributions as an additional cost burden, as they can redeem these contributions by training their workers. They should instead look upon them as part of their essential investment in human capital.

The wage and CPF reduction for local workers last year was complemented by a reduction in the foreign worker levy. This was to assist companies, especially manufacturers, which depend heavily on foreign workers. Hence, the Government reduced the monthly levy for skilled foreign workers by $70 for all sectors in January this year. The levy for unskilled foreign workers in the manufacturing and services sector was also cut by $90.

The foreign worker levy reduction has helped to lower overall business costs in Singapore. Despite the levy reduction, there has been no surge in the number of foreign workers, while the number of Singaporeans in the workforce has gone up. The Government will therefore leave foreign worker levy rates unchanged for another year.

Industrial land - JTC and HDB rentals

In January this year, as part of the cost-cutting package, JTC reduced its posted rentals for industrial land and flatted and standard factories back to the levels of the early 1990s. This translated to a 20-40% rental reduction for lessees and tenants who are paying above the posted rates. Those on the 4% or 5.5% rental escalation scheme were also granted a 2-year freeze on their rental escalation to the end of December 2000. JTC lessees paying below their revised posted rates were granted an extension of rental rebates up to the end of this year.

Recognising the need to continue to be careful over costs for the manufacturing sector, JTC will extend the current industrial rental rebates for another year to December 2000.

HDB will similarly extend their rental rebates for lessees of industrial land and tenants of commercial and industrial properties for another year until December 2000. Tenants of HDB commercial and industrial properties who are paying above posted rates will continue to receive rent rebates, but subject to a cap of 10%, instead of the previous 20%.

Transport - MPA and CAAS fees

Sea and air transportation are important complements to the manufacturing sector and have a significant impact on our export competitiveness. Hence, the Government will extend cost rebates and concessions in these two sectors.

The Maritime and Port Authority (MPA) will extend the 20% port dues concession for container ships and harbour craft for another year until December 2000. PSA Corporation will extend the 10% rebate on lift-on/lift-off charges and wharf handling, as well as the 10% rebate on warehouse and office rentals, for another year until December 2000. Similarly, the Civil Aviation Authority of Singapore (CAAS) will extend the 10% rebate on landing fees for aircraft until December 2000. CAAS will also extend the rebate on warehouse, office and retail shop rentals until December 2000.

Financial impact

The two percentage point restoration of the employer's CPF contribution rate will cost employers $741 million per year, while the increase in the SDL ceiling from $1,000 to $1,500 will cost $28 million per year. These will be offset by industrial land and transport rebates totalling $237 million per year. However, employers will still enjoy substantial cost savings, compared to before the cost reduction package, because we are only restoring 2% points of the 10% point reduction in the employer's CPF contribution rate.

The Government remains mindful of the need to maintain cost competitiveness even as the economy picks up. However, we cannot freeze all charges and fees indefinitely, without accumulating distortions that will harm our economy. Charges and fees have to be revised from time to time to reflect rising costs. But the Government will exercise moderation in doing so and it will ensure that the cumulative burden on the economy and on households is not excessive.

Conclusion

The last two years have been a major challenge for Singapore. It is still too early to declare victory, but so far we have come through without major mishap. We benefited from the strong foundation of sound policies pursued consistently over many years, as well as our prompt, rational and cohesive response to a very grave situation.

The restoration of the CPF contribution rate, the civil service bonus award and salary restoration, the increase in the SDL, and the continuation of the rebates on industrial rentals and sea and air transport will help to position us for this phase of recovery. While we are confident of the future, we must never become complacent.

Post-crisis, we do not expect to resume high growth effortlessly. While Asia has been busy with immediate problems, globalisation and technology have continued to progress apace. We must keep up with these trends, and continually adjust our policies to meet changing circumstances. Only thus can we stay ahead of the game, strengthen our competitiveness and secure our long-term growth and prosperity.

Mr Speaker, Sir, I have a summary (Cols. 505-6) of the measures which I will ask the Clerk to distribute to Members. [Copy of document distributed to hon. Members]. Table - Summary of Adjustments to November 1998 Cost Cutting Package (Cols. 505-6)

Mr Chng Hee Kok: Mr Speaker, Sir, I welcome the Government's move. I would like to ask the Deputy Prime Minister whether we are now on track to achieving a long-term economic growth of 4-6%.

Mr Yeo Guat Kwang (Cheng San): Sir, the labour movement has supported the cost-cutting measures. We believe that such collective efforts help to save jobs for our workers. As DPM has just mentioned, it is too early now for us to declare victory and, in fact, we know that the recovery is uneven. Some of our sectors will still have a wage freeze, for instance, the cement industry and so on. May I ask the Minister: is it the right time to have such a big salary adjustment, that is, the 13% and 29% increase for top civil servants and political appointees?

Mr Iswaran: Mr Speaker, Sir, last year when the Government introduced the economic stimulus measures, it was felt that some of them, particularly the lumpy pump-priming type of measures, would take effect over a two-year period. I would like to ask the Deputy Prime Minister, since the recovery at this point appears to be driven more by external demand, whether we envisage greater cost pressures in the year ahead from the follow-through effects of the Government's stimulus measures.

Mr Jeyaretnam: Sir, may I ask whether it is true or not that the unemployment figures have gone up over June. Secondly, as I understand from the Deputy Prime Minister, we are not completely out of the wood but we are well on the way perhaps. Echoing the question that was asked by another Member, why is the Government in a hurry to reward the top civil servants, and I take it that Ministers are also going to be rewarded, when the economy has not fully recovered? Thirdly, does the Government appreciate the message that all these increases may be sending to the workers in the private sector?

Mr Ong Ah Heng (Nee Soon Central): Sir, the Government has kept faith with workers by restoring the CPF contribution rate and an increase in bonus for civil servants. Our workers supported the cost-cutting measures to help the economy to turn around. From the DPM's statement, I guess that the Ministers and top civil servants will receive a big pay rise. Could DPM enlighten us on this?

Mr Simon S. C. Tay (Nominated Member): Sir, in the past package, many of the costs that were to be saved were potential. Do we have an assessment of how much was actually saved in the period that the measures have been in force? Secondly, in announcing the earlier package of measures, there was a lot of consideration of the external cost factors and competitiveness. Do we have an indication now whether other countries' costs have also risen and that it is safe for us now to increase our costs? Thirdly, the Deputy Prime Minister has mentioned that certain sectors remain weak and there are restructuring and retrenchments in some. However, the measures he proposes are across the board. Will there be any undue effects on the sectors that remain weak and are experiencing retrenchments?

Mr Hawazi Daipi (Sembawang): Sir, I am sure that the workers are very happy that the Government has decided to restore the CPF contribution of the employers one year ahead of time. While the five-year timeframe for restoration of the CPF contribution is an achievable target, would the Government plan to shorten the restoration period should the economy perform better than expected?

Mr Sinnakaruppan: Sir, I just like to touch on the CPF restoration. Will the full restoration be done within the five years or is there a possibility of reducing the total 40% to any lower level?

BG Lee Hsien Loong: Mr Speaker, Sir, if I may take all the questions together. Mr Chng Hee Kok asked whether we are on track to make 4-6% growth. The answer is yes. The storm is not over yet because we still have to see how the region recovers, particularly Indonesia, where there are political complications which may take sometime to work out. Also, our own internal restructuring is continuing. While we are making the growth, there is restructuring, people are being retrenched, industries are being phased out and new industries are coming in. So we have to continue to make the effort, to be able to manage this turnover and make the growth.

If we do well and continue to make 4-6% growth year after year, then as I have said, we should be able to fully restore the CPF contribution rate in about five years to 40%. Of course, once I have said that, MPs have asked whether we cannot do it even faster. Let us not count our chickens because the eggs have not hatched yet. If all goes well and we can do about 2% restoration a year, then in five years, we will get back to 40%. But if there is a setback, we may be unable to restore. We may have to restore 1% or 1/2%. On the other hand, if we do exceptionally strongly, we might be able to get away with 3% in a good year. Let us put that as something to prepare our minds but not a hard target that we definitely will hit. You cannot tell.

Mr Iswaran asked about cost pressures from the stimuli. Most of the stimuli are in terms of spending by the Government in infrastructure, meaning schools, MRT, airport, roads and so on. As Members will know, right now the construction sector is still in recession. Volume is considerably smaller than last year. Building programmes have come down, and there is a slack capacity. It is a good time for us to invest in infrastructure, including reclamation. I do not believe that it will cause prices to go up or cause any tightness in the construction industry.

Mr Simon Tay asked a series of questions. Firstly, potential versus actual savings. Most of our package were actual savings because it was statutory like the CPF cuts and Government charges. The only one which was potential was adjustment to bonuses in the private sector which we projected would have accounted for about half of the reduction of 15% in wage cost last year. My guess is that it probably accounted for somewhat less than that because as the economy recovered, the pressure on companies to cut back on bonuses and for workers to settle for less diminished. I do not have the number but my feeling is probably we might have made 3% or 4%, rather than 7% or 8%, as we were hoping for. But the CPF cuts, the Government rebates, the rental rebates, all those are actual.

As for external comparison with other countries, if you look at the nominal exchange rates of Thailand, even Indonesia and Korea, they have strengthened. In so far as the nominal exchange rates reflect the cost to exporters, because they are exporting in US$ but their costs are in Won or in Baht, then this means that their costs would not have gone up very sharply but would have firmed. Their internal costs within their countries, I believe, have been stable. Their inflation has been stable because they are in the throes of restructuring and unemployment is still quite high. So I would not say that their costs have gone up sharply, which is why we have to watch our costs too. In a tight labour market, wages will settle for higher than last year but, at the same time, we have to try and ensure that the wage settlements are justified by productivity improvements, so that while we pay people more, they are also producing more and, overall, the companies are able to maintain their competitiveness.

As regards weak sectors versus across-the-board measures, although the CPF adjustment is across the board, the focus of our continuing rebates on industrial land, flatted and standard factories, as well as the rebates on port and airport dues, is more on the manufacturing sector. The reason is because many of the weak industries are in the manufacturing sector, either weak because of costs like petrochemicals and petroleum, or weak because they are in the process of restructuring, like disk drives or computer manufacturing. So we have tried to make an effort to focus on the manufacturing sector. Beyond that, it is not possible and I do not think it is desirable for us specifically to direct rebates or Government assistance to particular industries, because it is really for the market to sort out which industries do well in Singapore and which do not. We will make sure that there is a manufacturing sector in Singapore, but which particular industry, that depends on supply and demand and on our cost structure. What we can do is to help the industries which are in the process of restructuring to make the transition and help the workers, who are being phased out by one industry, find new jobs in another industry, and that we will continue to do.

Lastly, the questions by Mr Yeo Guat Kwang, Mr Ong Ah Heng and Mr J.B. Jeyaretnam on wage freeze and salaries for the public sector. I gave Members numbers just now which showed that the private sector benchmark which the Government is supposed to follow went up 13% in 1998 and 29% in 1999. And this was based on private sector earnings two years before, because there are lags in the way we calculate. Actually, this meant that private sector earnings went up 13% in 1996, calculated in 1997, and applied in 1998. It went up 29% in 1997, calculated in 1998 and to be applied in 1999. And 1996 and 1997 were not bad years for the economy. If we had followed the formula, we should have just applied this to the civil servants, as we applied the earlier reductions in 1997 when the private sector went down 7% and we followed them down 7%. So if you go down, you go up again. But because we could see difficulty coming up over the horizon, so in 1998 and 1999, we froze the adjustment and let the private sector go its own way.

Now the economy is recovering. For the year 2000, the adjustment for next year - we do not have the data yet - we think that the figure has gone up compared to last year. And the reason is that even though the economy, as a whole, was not doing well, there were companies which were doing well. Many foreign banks were doing all right. Many multi-nationals had chief executives who had stock options - these are stock options of MNCs on the American market - so they were worth something and benefited the CEOs. Other professions like the lawyers or the accountants, which are not salary-based but are fee-based - they get a profit share from their business - their services were in demand and so their earnings went up. And so our benchmark is likely to go up again next year.

The question is what do we do? If we were to apply the formula rigidly, we would simply multiply and apply. I think that would be the wrong thing to do, because it is quite a significant adjustment, and we should take this opportunity to free up our public sector salaries further. Presently, we rely too much on fixed salaries without enough room for adjustment within a grade, and also without enough weight on the performance element of the overall salary package. We have built up the performance element over the years. It is now up to six months out of the 20-month total package for the year, but that is quite small compared to what you can get in the private sector. Because in the private sector, in a good year, you can go to 12 months, sometimes even 18 months in some industries. And then next year, if it is no good, you come down again. Or next year your responsibilities are lighter, you come down again. We do not have that flexibility.

Also, in the private sector, you do not have a person at a single grade at a single point. You have a person in the rank and his pay can vary from X to Y, and he might get a pay adjustment without getting a rank upgrade promotion. And it gives you some flexibility to reward individuals in a way which fits the organisation and which fits what he deserves. Whereas in the civil service, you cannot. If I want to pay somebody more, I have to promote him, and similarly with the Ministers or the Parliamentary Secretaries, and this is a rigidity. So we have got to find some way to make this more flexible and to build up the performance bonus for the top, just as we are intending to introduce a performance bonus across the board, even for all civil servants. It is something which we are studying and which we hope to work out by the beginning of next year.

We have said that we will no longer be freezing the civil service salaries. How we make the adjustment, what form we will evolve to and how quickly we get there are things which we have to consider. We may take one or two years to get there, but I think it would be the wrong thing for us to say we do not do anything and we freeze it, because we are going to lose good officers. It has happened before and we are already beginning to notice this because the opportunities are in the private sector. You can say, "Tighten your belts." He says, "I will go the other side." So we have to be realistic. We have had a system which has worked and which has got us through quite a major crisis without an accident. I think we had better look to improve and strengthen the system. We will work out the schemes and the sums, and a proper statement will be made in due course.

Dr Vasoo: Sir, I would like to ask the Deputy Prime Minister a few questions. First, with these changes, how much inflation is likely to be generated? Second, whether the Government charges and fees would be revised in the light of all these changes that are being planned? Third, what concrete plans would be undertaken by the Government to help older workers who are less skilled and untrained?

Mr Jeyaretnam: Mr Speaker, Sir, may I ask the Deputy Prime Minister to answer the questions that I asked earlier? One of them was: is it or is it not true that unemployment has risen over the last two months? Secondly - I made it as a passing reference - are Ministers going to be paid this bonus and annual wage supplement, besides top civil servants and Members of this House? And I asked why are we in such a hurry, and will it not send the wrong message to those in the private sector?

BG Lee Hsien Loong: Mr Speaker, Sir, may I first respond to Mr J B Jeyaretnam's question which I overlooked. Unemployment is now 4%, slightly higher than what it was in June, but lower than 4.4% in December 1998. I do not believe this rise is significant, from all the accounts. The labour market is tightening. If you ask me what it could mean, one possibility is that it is some indication of a structural problem we have to address and which we are addressing, which Dr Vasoo raised, of older workers who may be having difficulties finding new jobs and for whom we must make an exceptional effort to help to find new jobs.

Dr Vasoo asked what efforts are we making. We have the Manpower 21 programme. We are introducing training schemes. We are linking up with the ITEs, polytechnics and the training institutes to work out programmes which are tailored to the older workers, and to present them in a way which will fit them. And also to break them up into small modules, so that you can do it one piece at a time, master that, collect a boys' scout badge, go on, get another badge, and finally you become a President's scout, or you get a new job. I think that is a practical approach. There is no easy way to do this, because for somebody who is in his 40s or 50s with teenage or grown-up children and family responsibilities, to go back to school, learn, sit down, take notes, study, take examinations - you know you did it many years ago but now, when you sit down to try and do it, it does not come so quickly any more. But it is an effort which has to be made and we will help them to make it.

Dr Vasoo also asked about the effect of this package on inflation, I do not think there will be, because inflation is generally low. We have been watching it. This year, it should be about 1%, I think. Next year, maybe about 2%, but we keep a very close eye on inflation in Singapore. We are helped because world-wide inflationary pressures are down. So imported inflation would not be significant, and domestic inflation, as long as we manage our economy carefully and do not allow it to overheat, will be controlled.

On charges and fees, there were a series of charges and fees which had rebates in the package last year including medical charges, public transport, service and conservancy, and GST rebates which were extended for two years. Some expire at the end of this year and some will expire at the end of next year. We will let them run their course. The economy is recovering. I expect to see wages rising gradually over the next few months. They have already started to rise, and I do not see workers losing their jobs in very large numbers and being unable to find new employment. There will be retrenchments but at this time, the retrenched workers really have the best chance possible to find new jobs. So I think that we should let the rebates and fee concessions to run their course. And, as I have said, beyond that, we have to make some adjustments, but we will be careful and mindful to be moderate and to make sure that the overall impact will be something which people will be able to bear.

Finally, Mr J. B. Jeyaretnam asked what signal are we sending to the private sector. The answer is we are sending them the signal that we are still lagging them. We have a benchmark. We should have followed the benchmark. Because of the circumstances, we have not done so. We will make a partial restoration. How? We will settle later on. But at the end of it all, it will still take us some time to catch up, and we have always said that we will lag the private sector, and we are not leading it. But we have to keep in step and we must not be too far behind.

Mr Yeo Guat Kwang: Sir, last year, when we announced the cost cutting measures, there was a 5% rebate for public transport which will also expire at the end of this year. Could the Deputy Prime Minister enlighten us whether this will also be extended?

Mr Chng Hee Kok: Sir, despite the fact that the economy is growing, as a result of the restructuring, retrenchment is likely to continue. Will the Deputy Prime Minister indicate his forecast what the retrenchment numbers are likely for at least the next one year?

BG Lee Hsien Loong: Mr Speaker, Sir, the public transport rebates will run out at the end of this year. They will not be extended.

Mr Chng Hee Kok asked about retrenchment. I do not have an accurate figure but we think it will be more than 15,000 workers this year.

Mr Jeyaretnam: Sir, I am afraid the Deputy Prime Minister does not understand the import of my question. I am not concerned so much with those employees in the private sector against whose salaries the benchmark for Ministers' salaries is fixed. I am concerned with those in the lower ranks in the private sector. What message is the Government sending to them when you are in a hurry to pay Ministers and everyone increased bonuses, including top civil servants?

BG Lee Hsien Loong: Mr Speaker, Sir, today is not a debate on Ministers' salaries. We have had several debates on Ministers' salaries in this House. The Non-Constituency Member has participated in many of them. The matter has been deliberated, discussed. White Papers have been tabled. The policy is well established. The message which we have consistently presented to Singaporeans is that we are looking for quality leadership in the public sector, in the political leadership. If you want good people, you have to be realistic. The more you are able to recognise what people are worth and pay them what they are worth, the better the quality of government we are going to have. So I do not think there has been any change. It is a system which we will have to continue to argue, discuss and defend repeatedly because Mr J. B. Jeyaretnam and others will often ask why this is so and it is quite understandable because it is not an intuitive solution. Many countries do not do this. But many countries envy us that we are able to do this.

I was in America recently and one person I met, who is head of Brookings, said to me, "We envy your system. We are unable to do it. We have to squeeze our public sector salaries. So we have two or three different grades all paid exactly the same pay because there is not enough room to make a differentiation between them. And we will still get some people coming in because in the public service, there is a strong tradition in America, you come in for one term and you go out, and you have made your reputation. But it is starting to tell, and we are beginning to see a shortage of qualified, high-calibre people in their public sector." So these are issues which confront every country. We have chosen the approach of coming out, discussing it openly and defending what we do rather than making believe, and I think that is a right approach.

Mr Yeo Guat Kwang: May I ask DPM why a 5% rebate for public transport is not considered?

BG Lee Hsien Loong: Mr Speaker, Sir, we have to manage the recovery and move on. When we run into a crisis, we have to introduce measures to buffer the crisis. When we emerge from the crisis, and put it behind us, we must gradually wean ourselves off the measures so that the next time we run into a crisis again, we can apply them again. It is like the CPF. When we run into a crisis, we make a 10% cut. As soon as the crisis is over, we have to begin to restore it. If we bring it down and we hold it down, and say, no, it is too comfortable, let us leave it there, we will never come back up again. Similarly, with rebates on transport, on health and on other items. If we bring it in and leave it there, then the next time what do we do? The next time we must have a 10% rebate, and a 20% rebate. Eventually, we will have to give free bus rides, or pay people to ride buses.

Therefore, these are adjustments which have to be made. They are not going to disappear overnight because some of the rebates last till next year, some of them run out this year. It is something which is not pleasant to do but which we cannot avoid.

Mr Thomas Thomas: Rather than looking forward to future downturns in the economy, are we going to use CPF as a tool to reduce cost or will there be other tools as far as wages and salaries of workers are concerned?

BG Lee Hsien Loong: CPF should only be an absolute last resort. If you are in a very desperate spot and the situation looks very grave, then it is a card which we can play, which nobody else can play. No other country has this possibility. We can do it but only if it is really a very serious situation and only if we make an exceptional effort to explain and justify and get people to understand why it is necessary. But it is not something which you want to use as a standard macro economic policy tool. What we really want to do is to build in flexibility into the wage system so that if there are ups and downs, it can be buffered by the wage system. After the 1985 recession, we built in the variable bonus and the flexible wages over the next 12 years. So this time when we had the recession, we were able to use that to absorb part of the reduction in cost and could make a smaller reduction in the employer's CPF contribution.

The conclusion we have drawn from this experience operating the flexi-wage system is that it is very good to have the variable component. But there is a draw-back because the variable component works on an annual basis and most of it are annual bonuses. So by the time you adjust and cut, it may be eight or ten months later, and by that time either you may have hoped for the situation to have changed or the company may already have run into cash flow difficulties and gone under. So we really would like to develop a monthly variable component of the salary which will be adjustable more quickly and flexibly. This is what the Government was able to do because we have this monthly non-pensionable variable component, which we could bring down, and now we can bring up again. The NWC has endorsed it. How to do it is something which we have to study. There is an issue because if you do not do it properly, then although you call it a monthly variable component, it will be monthly but it may not be variable. So you need to have a clear understanding of how it will operate, what the formula will be, either based on the economy as a whole or based on the company and its performance, so that when it is necessary to revise it up or down, it is easy to do.

Mr Hawazi Daipi: Sir, on SDL, how would the Government try to encourage more SMEs to retrain their workers, especially the older ones, whom we really want to help, and especially also for companies whose workers may not be able to enjoy the training facilities under the Skills Redevelopment Programme?

BG Lee Hsien Loong: It is a difficulty, because the big companies are better organised to take advantage of the SDF. So companies like SIA or DBS, which are very well organised and pay a lot of attention to training their people, are able to take full advantage of SDF. In fact, I believe many of them collect more from SDF than they put in the SDF. They are not wrong to do so, but I think it means other companies are not using the SDL enough. We have to encourage the small companies to do this. We need to design programmes which will fit the small companies. At the same time, maybe we should consider whether there should not be some cap on how much you can take out of the SDF in comparison to how much you put into the SDF. There must be some relationship. It need not be at most one to one, but some reasonable relationship. Then we would be able to free up some money and use it for the smaller companies.

I understand from the Ministry of Manpower that in fact last year the withdrawals for small companies from the SDF actually went up by 6%. So while we are concerned, there is improvement.

Mr Tay Beng Chuan: Would DPM enlighten us whether Government will still be advocating the wage restraint measures, as the measures introduced last year were meant to retain our competitiveness? If we were to restore the wage cut so quickly, then our competitiveness will still be eroded vis-a-vis our neighbouring countries. Besides, some sectors of our economy have yet to recover from the economic downturn.

BG Lee Hsien Loong: I referred in the statement to what the NWC had recommended this year. Their overall recommendation was wage restraint but they also made specific provisions for companies not doing well, companies doing well, companies doing very well, and depending on which category you fell into, there were different guidelines. If you are doing well, then you should reward your workers through bonuses or wage increases, preferably in the monthly form, and if you are doing very well, then you should do it and put most of the money into the monthly variable bonus. That was at the time when the economy was forecast to grow between zero to 2% for the year. Since then we have revised our forecast. Now we think the economy will grow by about 5% for the year.

I think that overall the recommendations are still valid because they have built into them flexibility to allow for a range of performances of companies and next year in May the NWC will meet and discuss again. I would expect that, from the company's point of view, what really matters is your company's performance. If your company is doing well, and more companies fall into that category, then more companies will be able to pay bonuses, increases and monthly variable components. But if you are not doing well, and you say, "Now, I wish to treat myself more generously because I do not feel quite as pessimistic as before" then I would say, "Have a care."

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