theonlinecitizen

a community of singaporeans

Budget 2007 – Reviewing the GST & the WIS scheme

Posted by theonlinecitizen on February 22, 2007

by Dark Matter

What is the GST Offset Package going to do for Singaporeans? To answer this question, the Ministry of Finance prepared a table to illustrate the benefits the package provides.

The table is reproduced here for public reference:


Table 1: Impact of GST Offset Package on Households

 

The following table is some calculations derived from Table 1:


Table 2: Derived Information of Impact of GST Offset Package on Households

If we divide the Total Benefits from GST Offset Package by Additional GST Payable Annually, we get values of 16.17 and 1.46 for HDB 1 RM and Private House and Flats households respectively. How these figures are related to the values 19 and 2 for respective households in Number of Years of Additional GST Payable that is offset by the GST Offset Package is a puzzle.

 

Lower income groups are not earning enough to cover expenditure

The next point worth noticing is that the low income groups have their annual household expenditure exceed their annual household income (with GST offset benefits included).

In fact, the report Trends in Household Income and Expenditure, 1993-2003 had shown that lower income groups are not earning enough to cover expenditure as early as 2003.


They will have to spend every cent they receive from the GST Offset Package and get some additional financial assistances elsewhere to make ends meet. How is it possible for them to set aside the GST Offset Package to pay for the additional GST payable in the next 10 to 15 years is another puzzle.

Given that low income families need to depend on various government assistance programs to make ends meet, including the GST hike, it may not be meaningful to say if the GST hike is a regressive tax or not. It is more like a way to fund another set of “Progress Package” for the next four years.

 

The Workfare Income Supplement (WIS) Scheme

The Straits Times articles “Workfare: Not an ideological shift, just economics” and “Rewarding work” (Feb 17, 2007) provide some interesting insights into the Workfare Income Supplement Scheme.

“The significance of Workfare lies in this statement made by Second Finance Minister Tharman Shanmugaratnam: ‘For the first time, the state will be supplementing the market wages that low-income workers receive.’

 

The statement recognises there is a gulf between the income needed to live decently in Singapore and the income a ruthless market dictates. The state has decided it needs to bridge the gulf.”

 

There is a need to make sure workers earn enough to live a decent life. This is the principle behind the idea of Minimum Wage (or Living Wage as some call it).The Singapore People’s Party and the Singapore Democratic Party are two proponents of the Minimum Wage idea.

 

While the government rejects Minimum Wage law as the way to go, it acknowledges the need to help with market oriented schemes like training fund and programs that help workers to acquire skills to earn higher wages and Job Redesign schemes to raise their productivity and pay.

 

The move to have a permanent wage supplement scheme is a more direct way to address the need. But, why is the government doing it now? Is it a sign that existing schemes have their limitations, like they do not work as well as expected or they do not work for some low income workers?

 

The Income Supplement Scheme is seen as a better approach than Minimum Wage law:

 

“SMU economist Pang Eng Fong added that supplementing incomes makes more economic sense than having a minimum wage which distorts the labour market.

 

‘Workfare does not change employers’ costs, and is simply a system to transfer resources to the most vulnerable members of society, and is therefore much more targeted than a minimum wage scheme.”

 

With Minimum Wage law, individual businesses will have to absorb the cost burden first and then pass on the cost to businesses and customers they serve. Some will bear a heavier share while others bear little. On the other hand, funding wage supplement via consumption tax like the GST will spread the cost across society. Individual businesses are not heavily impacted and those who are able to consume more bear a bigger share of the cost.

As such, the Workfare Income Supplement (WIS) Scheme has a better funding mechanism. However, the scheme that “benefit 438,000 Singaporeansand cost about $400 million a year over time” is a disappointment. The scheme is only offering low income workers $913.24 a year (or $76.10 a month) on average, with a larger share going to the CPF. It falls far short from doing enough to help low income workers “live decently”.

 

No “ideological shift”

The fact that the main share of the state’s ‘supplementing the market wages that low-income workers receive’ goes to CPF shows how cautious the government is. It can be seen as a step in turning ad hoc CPF top-up exercises we see over the years into a regular top-up scheme. The cash portion of the WIS scheme hardly produce any impact. The difficulty of making ends meet will continue to push workers to find ways to move up the wage ladder.

So, it is fair to say that there is no “ideological shift” in government policy. What we have is a more formal and structured mechanism of funding and distributing financial assistance to low income workers. It may also mean that the government acknowledges that the low income groups need long term attention, and hence a formal and structured funding mechanism.

——————–

Here is how the rest of the figures in Table 2 are calculated:

Annual Household Expenditure:

Dividing Additional GST Payable Annually by the 2% GST hike.

Annual GST offset benefits:

Dividing Total Benefits from GST Offset Package (over 5 years) by 5.

Net saving / debt:

Adding Annual Household Income from work and Annual GST offset benefits and minus Annual Household Expenditure.

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