The Challenge of the Widening Income Gap

But globalisation brings with it challenges for Singapore. We face a worsening of our income distribution, and slow or no increases in wages at the lower end of the workforce. Not just over the last few years or for now, but in all likelihood for several years to come. It will be a key challenge for us, just as it is in other developed countries.

The reasons for the widening income spread are by now well known. China, India, Russia and Eastern Europe have doubled the global workforce, putting downward pressure on wages everywhere. Companies have more choices on where to invest, locating their plants where they can get the lowest cost or best workers or latest technology. At the same time, technology has continued to advance, relentlessly, in every sector and industry. It is increasing the demand for workers with high skills and knowledge. And technology is making many types of workers redundant, especially those with low skills - and also making it easy for their jobs to be exported abroad to where wages for the same skills are lower.

The result is widening income gaps between the skilled and the low-skilled, between young and old, between those who adapt quickly to the market and the rest. Incomes are stretching out in the developed world, with the top rising rapidly, the middle much slower, and the bottom stagnating or even declining.

In the US, the income gap has been widening for some time, especially in the last decade. In the last five years, despite strong economic growth, wages of non-management workers have grown by only 1.7% in real terms. The same is happening in Europe and Japan - incomes going up at the top, but stagnating or declining at the bottom. Even in China, with an economy growing at 9%, workers in the bottom 10% have seen a decline in real incomes.

Singapore is facing similar pressures. Because we are a much more open economy, we are in fact more exposed to these pressures of globalisation. Over the last five years, lower-income households have seen little growth in their incomes. In fact, in real terms, the lowest 20% of households has seen their incomes per capita decline from 2000 to 2005. However, the strong pick-up in employment within the lower-income group over the past year has more than reversed the decline. Nonetheless, household incomes at the top end are pulling away faster.

This is a key item on our agenda. Although our economy is growing well, incomes are increasing only slowly at the lower end, and income gaps are widening. This is a problem for those at the bottom, but it is also a problem for the rest of society if those at the bottom feel left out from growth.

The solution is not to grow more slowly, or to focus less on growth and more on redistribution - although some people think we should do this. If we do this, it will only hurt the people we are trying to help. Slow growth will make everybody worse off, but it will have greatest impact on those at the bottom. Jobs will be lost and incomes will fall through the floor for those at the lower end of the workforce, while at the top end, talented Singaporeans and those with the ability to seize opportunities elsewhere will up and go. Slow growth will not assure us of a more equal society, as long as we live in a globalised world.

Singapore’s Response – Growth with Opportunity for All

Our response must therefore be to focus on growth and embrace globalisation, but manage its downsides and make it work for everyone. We will do this by maximising opportunities for all Singaporeans — the opportunities to get a good education, to work or grow a business, to retrain yourself and upgrade, and to own your own home. We must maximise opportunities for all, but we must also accept that doing so does not result in equal rewards for all. We should never reduce the incentive for Singaporeans to work and to make the most of their skills and talents, so as to get higher reward for themselves. That has to be the basis for our society, for how we keep our economy growing, and for how living standards of Singaporeans can rise over time.

Our first priority therefore is to grow the economy. We must now build capabilities for the future. We must attract new investments, grow new businesses, and create new and better paying jobs to replace old ones. We must build on our strengths and compete — not just on efficiency and low cost, but on trust and value.

As we grow the economy, we must ensure that no one is left behind and that all Singaporeans have the opportunity to succeed. Over the years, the Government has been helping the lower-income groups through various assistance measures. Since 2001, the Government has distributed more than $7.5 billion through the Progress Package, U-Save and S&CC rebates, CPF top-ups and New Singapore Shares, to share budget surpluses with Singaporeans. In all these distributions, we have made deliberate efforts to ensure that the lower-income groups get the greatest benefits. But going forward, we have to do more to help needy Singaporeans, and to do it more systematically. This is why we are introducing Workfare. Workfare will give those at the lower end of the workforce a stronger incentive to get a job, stay employed, and save for their future.

We also have to prepare now for the challenges of an ageing population. Healthcare spending will rise over time, as our people grow older and medical science advances. Our living environment and physical infrastructure will have to be adapted to meet the needs of our growing ranks of senior citizens. This is the generation that has helped to bring Singapore up from Third World to First World. We must ensure their well-being.

Building capabilities for the future, strengthening our social security system and providing for the needs of older Singaporeans will require Government to spend more in future. This means we will need additional revenues. We cannot raise direct taxes. Countries the world over are reducing corporate and personal income taxes. To continue to attract talent and investments, and maintain strong incentives for our people to excel, we will in fact have to lower our direct taxes further over time.

We will therefore raise additional revenues by extracting more income from our reserves and increasing the GST. Because we are doing this now when the economy is doing well, we are able to provide a very comprehensive set of measures to help Singaporeans cope with the GST increase.

This Budget is therefore about preparing Singapore for the future and for the world. It ensures that we retain our dynamism as an economy while we take significant steps forward to preserve an inclusive society. It sets out the key changes we must make to:

1. Build capabilities for the future;
2. Strengthen our social security system;
3. Reduce direct taxes and raise additional revenues, including GST;
4. Provide Singaporeans with an offset package for the GST increase.