Commentary: Active government oversight has reduced Singapore's income inequality

Commentary: Active government oversight has reduced Singapore's income inequality

Singapore's income inequality has narrowed over the past 17 years. But this is largely a product of government intervention in the form of taxes and transfers, argues OCBC's Selena Ling.

File photo of HDB flats. (Photo: Hester Tan)

SINGAPORE: Over the past year, the issue of income inequality has boiled over in many parts of the world, leading - to some extent - to the outpouring of populist sentiments in the United States, United Kingdom and elsewhere in Europe.

This is a subject the Singapore Government has long been working to address. Over the past decade, it has introduced a series of measures that have improved our Gini coefficient, the most commonly used statistic to measure the income distribution among a country’s residents. Just as importantly, Singapore has made strides in other measures of inequality, paving the way for its citizenry to, as our Budget 2017 prescribes, “move forward together”.

LOWEST LEVEL OF INCOME INEQUALITY SINCE 2000

Economic data tells us that Singapore’s income inequality has been on the decrease since 2007 and stands at its lowest today since official data first became available in 2000.

Each country’s Gini ratio falls between 0 and 1, with a score of 0 representing perfect equality among households (i.e., everyone having the same income level) and a score of 1 representing perfect inequality (i.e., one household receiving the country’s entire income).  

Singapore saw its highest income inequality levels in 2007, with its Gini coefficient after government taxes and transfers peaking at 0.412, compared to other developed economies like the US (0.376), UK (0.373), South Korea (0.312) and Japan (0.329 in 2006).

Since then, Singapore’s Gini coefficient after government taxes and transfers has gradually tapered down to 0.380 in 2016, a record low since official data became available. As of 2013, Singapore’s Gini score has also fallen below that of the US. (0.388 compared to the US’ 0.396 in 2013).

Another measure of the improving levels of inequality is the divergence of Gini coefficients before and after government taxes and transfers over the years. Again, the data tells us that Singapore Government policies are having a stronger effect on dampening income inequality today.  

Singapore’s Gini coefficient is increasingly lower after accounting for government transfers and taxes. (Source: SingStat, OCBC Bank)

REDISTRIBUTIVE POLICIES KEY REASON

Singapore has its fiscal policies and a redistributive stance in its annual budget to thank for this trend. Over recent years, the Government has introduced schemes aimed at supplementing the income and retirement savings of low-wage workers.

The Workfare Income Scheme, introduced in 2007, enhances the net income of low-wage workers through cash payments and CPF contributions. The Productivity and Innovation Credit and SkillsFuture schemes may also have helped, through aiding in skills-upgrading and levelling the playing field for workers of different wage levels.

Our progressive tax system also places a greater tax burden on the rich and helps low-income households. Our most recent adjustment to the tax system in 2015 raised personal income tax rates for individuals earning above S$160,000.

Meanwhile, the Government has lent a helping hand to low-income households, for instance, with the permanent implementation of the GST voucher scheme, which provides a small sum to the bottom 20 per cent of households to partially offset GST expenses.

International Monetary Fund data also shows that Singapore’s income growth for households in the lowest 20 per cent came in at 37.1 per cent from 2004 to 2014, compared to the US’ negative 8.2 per cent and the UK’s 2.8 per cent.

EDUCATION AN ENABLER FOR LOW-INCOME FAMILIES

Yet, the Gini coefficient is just one measure of inequality, and a fixation on Gini scores may not be entirely helpful. Other indicators of progress, such as inter-generational mobility, could be equally important for an inclusive, meritocratic society.

Singapore’s education policies appear to have been fairly successful over the years on this front. A study by the Ministry of Finance indicates that Singapore has the highest percentage of children born to parents in the bottom 20 per cent of income making it to the top 20 per cent, compared to other developed economies.

Proportion of children with parents from the bottom 20% income group reaching the top 20%. (Source: Ministry of Finance, OCBC Bank)

A major contributor to this statistic is Singapore’s heavily subsidised, world-class public education system that champions meritocracy. This provides low-income households with access to quality education for their children, allowing them to compete on an equal, or at least similar, level with high-income households, based on merit.

This is unlike other developed countries, where private educational institutions provide better quality education but are too expensive for low-income households.

Education may have also contributed to Singapore’s overall growth in GDP over the decades, which has in turn strengthened income equality in more recent years. 77.9 per cent of Singapore citizens aged between 25 and 29 years old in 2017 have a university degree, diploma or another professional qualification, while just 11.8 per cent have only a primary or secondary education.

This number flips to 10.1 per cent and 84.6 per cent for Singapore citizens aged 65 years and above. Clearly, Singaporeans’ educational profile has improved over time and across generations.

Singapore’s focus on engendering inter-generational income mobility extends to schemes such as the Workfare Training Support Scheme and efforts by dedicated agencies such as the Workforce Development Agency.

This combination of targeted manpower and education policies has helped Singapore to achieve a more equitable distribution of national income, allowing for greater income mobility and a more egalitarian income distribution in the medium term.

EQUALITY IN OTHER ASPECTS SHOULD BE DISCUSSED

Across both developing and developed economies, the lack of income growth and a rise in inequality levels appear to be key reasons for the recent rise of populist, inward-looking policies.

At home, there is room for optimism seeing that the gap in income inequality is closing, but this is likely a product of Singapore’s tax and transfer policies over the last decade.

Looking ahead, given Singapore’s ageing demographic and other socio-economic challenges, other forms of addressing inequality issues may grow in importance. Equality in other aspects outside of income, such as health, gender and job up-skilling opportunities, may be a good starting point for future discussion.

Selena Ling is Head of Treasury Research and Strategy at OCBC Bank.

Source: CNA/sl