03 March 2014

Budget 2014 Thoughts

Some thoughts on Budget 2014.

Real Median Wage Growth
Citizens' real median and 20th percentile wage growth in 2013 was about 5 per cent and 7 per cent, respectively.

Citizens' real median and 20th percentile wage growth in the five years to 2013 was about 9 per cent.

The 5-year wage growth data include employers' CPF and refer to full-time employed citizens.

The actual 5-year wage growth is likely lower than that given in the Budget Statement higher because the Ministry of Manpower changed the definition of full-time employment in 2009. Prior to 2009, a person was considered to be employed part-time if his normal hours of work were less than 30 hours a week. This criterion was changed to 35 hours a week in 2009.

Much of the real wage growth of the past five years occurred in 2013 — the result of modest nominal wage growth combined with somewhat benign consumer price index inflation[2].


Productivity
The labour productivity numbers have been revised upwards, in conjunction with the revision in the national accounts:

Source
2010
2011
2012
2013
Economic Survey of Singapore 2013
(published Feb 2014)
11.4
2.1
-2.0
0.0
Yearbook of Statistics 2013
(published Aug 2013)
11.1
1.3
-2.6

Nevertheless, productivity is still dismal.

Progressive Wage Model
The Progressive Wage Model will be a licensing requirement for companies in the cleaning and security services sectors.

I previously wrote that it is wrong to impose the Progressive Wage Model as a licensing requirement. Companies operating in any sector should be licensed for reasons of regulation, control, quality standards, etc., not because the Government wants to introduce structured minimum wages in that sector, however noble the intention to set a minimum wage.

Healthcare Costs
To ensure that healthcare cost inflation is controlled in the years to come, the Government will reshape the healthcare system as follows:

Reduce the over-concentration of patient load in the acute-illness hospitals.

Enable patients to receive continuing long-term care from primary healthcare providers like family physicians and polyclinics, instead of hospitals.

Ensure that hospitals, doctors, insurers and patients have the right incentives, so that citizens receive treatments that are both clinically sound and cost effective.

For details, we will have to wait for the Committee of Supply debate on the Ministry of Health.

MediShield Life
To ensure that MediShield Life premiums are affordable for lower- and middle-income groups, the Government will provide significant permanent subsidies so that they can pay for their remaining premiums out of their regular Medisave contributions.

It is not clear how this will work. The requisite Medisave contribution for an individual varies according to his age and employment income. Will the Government vary the subsidy according to an individual's regular Medisave contribution? What about those who don't have any employment income e.g., children, full-time students, housewives, retirees?

Even assuming that the Government provides subsidies to such an extent that an individual can pay for the premiums out of his regular Medisave contributions, will the individual have enough in his Medisave account to meet excess and co-payment hospitalisation expenses and other approved non-hospitalisation uses?

Pioneer Generation Package ("PGP")
The PGP beneficiaries will be those who were at least 16 years old in 1965 and who became citizens before 1987. This is because the Government does not know for certain when some people became citizens, although it "knows" that more than 90 per cent of those who became citizens by 1987 were already living in Singapore before 1970.

So up to 10 per cent of the PGP beneficiaries may be people who were not first-generation citizens. It is surprising that before starting to talk about the PGP last year, the Government had not thought through how to exclude from the PGP people who were 16 years or older in 1965 and who became citizens between 1966 (or 1970) and 1986. That's up to $900 million that will be spent on non-first-generation citizens.

The Government will set aside $8 billion in a Pioneer Generation Fund in Budget 2014, which together with accumulated interest, will be enough to pay for the full projected cost of the PGP, including a buffer for inflation. The Government expects that about half of the $8 billion will be drawn down in the first ten years, due to the age profile of the Pioneer Generation and the higher benefits for older members.

I wonder how the Government is confident that the $8 billion will be enough, inasmuch as details of MediShield Life have not been finalised and hospitalisation insurance inflation is difficult to estimate. Unless the Ministry of Health already knows the details of MediShield Life, or at least the operating and cost parameters.

DPM Teo Chee Hean says he is happy that the PGP includes the first generation of national servicemen.

It is purely coincidental that the PGP includes the NSFs born in 1949 and earlier (students in institutions of higher learning and civil servants who were compelled to enlist even though they were born before 1949). Otherwise, there is no reason why this group of NSFs is more special than those born in 1950 or later.

Generous Budget
Minister for National Development Khaw Boon Wan said that the Budget is very generous by any measure.

The State had a budget surplus of $5.82 billion in FY2012 and $3.92 billion in FY2013 after topping up the endowment and trust funds by $7.40 billion and $5.59 billion, respectively. The State is projected to have a budget deficit of $1.16 billion in FY2014 afer topping up the endowment and trust funds by $8.50 billion.

Had the Government proposed spending less than what was spelt out in Budget 2014 (even if transfers to the endowment and trust funds are considered to be current expenditure by the Government but are really provisions for future expenditure), what does Mr Khaw want to do with the surplus that would have resulted otherwise? Spend more on ostentatious and wasteful projects and events such as the Youth Olympic Games, Singapore Days? Lock it away?

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Notes

1. MINISTRY OF FINANCE Budget 2014.

2. MINISTRY OF TRADE AND INDUSTRY Economic Survey of Singapore 2013.

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