C.1. Achieving 2% to 3% productivity growth per year for a whole decade will be a major challenge. While we achieved 5% productivity growth in the 1980s, and about 3% in the 1990s, we were starting from a lower level then. In 1980, we were only 20% as productive as the countries which were global leaders. We had great scope to catch up by importing existing technologies, automating low-value manual activities in factories, and by evolving from a workforce where few workers had completed a post-secondary education to one in which most younger people do. Today, levels of productivity in our larger sectors are about 60% that of the leaders. The scope to improve is clearly there, but the easy gains in productivity are over.
C.2. Making the next leap in productivity will require a multi-faceted effort. It will involve transformations at three levels.
C.3. First, we have to restructure our overall economy towards higher-value activities and exit from less efficient ones. This broad economic restructuring is how major improvements in productivity have been achieved in many of the advanced economies. But the Government cannot decide which enterprises should succeed or phase out, or say exactly what the corporate landscape should look like 10 years from now. We must rely on the market to achieve this restructuring. 3% to 5% growth each year does not mean every industry or business growing by 3% to 5%. More competitive and innovative players must be allowed to grow much faster, by bidding for the talent, manpower, land and other resources that they need.
C.4. The second level of productivity improvement will come from upgrading individual industries and enterprises. The Budget will extend strong support for them to do so, in every sector. We will give significant tax benefits to businesses that invest in skills and innovation, thereby lowering their effective tax rates. We will also provide grants for customised, industry-based initiatives. Indeed, in industries like construction, individual firms can only improve if the industry as a whole upgrades its norms and practices.
C.5. The third level of productivity improvement comes from raising the skills and creative potential of every worker. We will progressively build up a first-class system for Continuing Education and Training (CET) over the next decade. This will be a major investment in our people, up and down the skills ladder. However, we can only make our next leap in productivity and incomes if every individual takes the initiative to develop his skills and expertise, and accomplish more in his job and career. Our employers must also empower their people to find new ways to add value, and help unlock every worker’s potential. The best companies already do this; we must spread this enabling culture across all our businesses.
C.6. Achieving our goal of 2% to 3% productivity growth per year, for a leap of one-third over the next ten years, will therefore require everyone to play their part – businesses and industry associations, workers and unions and the Government – and to work closely together. The Government will commit $1.1 billion a year over the next five years in the form of tax benefits, grants and training subsidies to support this combined, national effort to raise productivity.
Managing our dependence on foreign workers
C.7. To complement investments in productivity, we must also manage the supply of foreign workers. If we make low cost foreign workers too readily available, employers will not have sufficient incentive to upgrade their operations and upskill their workers. But if we cut back too sharply on the supply of foreign workers, then despite companies’ best efforts to raise productivity, they may not be able to compete with other Asian players, and in many industries they will not find enough local workers to grow.
C.8. Reducing our dependence on foreign workers will pay off in higher productivity over the long term, but there are real trade-offs in growth and incomes over the shorter term. We must therefore move forward in a balanced manner.
How we grew incomes in the last decade
C.9. Indeed we faced similar trade-offs in the past decade. Much of our growth in the last 10 years took place from 2004 to 2007, 4 years, when our GDP grew an average of 8% per year. We were able to achieve this because companies could obtain the workers they needed to seize opportunities to expand while the environment was favourable. Foreign labour also allowed the construction sector to grow quickly, and eased supply bottlenecks in the property sector. Our workforce grew rapidly over those four years, by 5% per year, with foreigners accounting for about half of the growth.
C.10. By going for growth when the conditions allowed, we offset the downturns we had experienced earlier in the decade – first, when the global dot-com bubble burst in 2000, then with 9/11, and again when SARS hit us in 2003. The upshot is that by allowing in foreign workers so that we could go for growth in the good years, we reduced unemployment, and raised wages for Singaporeans after the standstill in the first part of the decade. As Chart 1 shows, it enabled the median income per household member1 to rise significantly from 2005 to 2008 – in fact contributing virtually all income growth that occurred over the 10 years. Median income over the decade grew by 20%, adjusted for inflation and virtually all of it occurred over the four years. This was therefore not a strategy of “growth at all costs”, but of growing our economy to raise Singaporeans’ incomes.
Complementing productivity incentives with higher foreign worker levies
C.11. We now need to take calibrated steps to manage our dependence on foreign workers. They already comprise almost a third of the total workforce, and there are social and physical limits to how many more we can absorb. As the ESC has recommended, we should moderate the growth of the foreign workforce, and avoid a continuous increase in its proportion to the total workforce.
C.12. The best way to do this is through the price mechanism, that is, by raising foreign worker levies rather than by imposing numerical limits. This allows the foreign workforce to fluctuate across the economic cycle, and also enables employers who are doing well and need more foreign workers to continue to hire them rather than be constrained by fixed quotas. We will phase in higher levies gradually over the next three years, so that companies know well in advance what will happen and have time to adjust.
C.13. The increase in levies will be complemented by the strong financial support from the Government, through tax benefits and grants to help businesses that invest to raise their employees’ skills, to improve efficiency or to create more value. In fact, over the next five years, the government financial support that the business sector will receive for productivity upgrading will be significantly larger than the additional payment they have to make in foreign worker levies.
C.14. This will therefore be our basic approach. The Government will provide enterprises and workers with full support to upskill, innovate and develop the capabilities to create more value with the same amount of work. We will facilitate economic restructuring to help dynamic and entrepreneurial players to grow faster. And we will complement this by raising the cost of employing foreign workers, especially those with lower skills, so as to incentivise companies to increase productivity.
C.15. Our efforts, taken together, with everyone playing their part, will transform Singapore into an advanced economy: with superior skills, quality jobs and higher incomes for our people.
C.16. I will now elaborate on each of the main initiatives to boost skills, innovation and economic restructuring.
C.17. First, we will establish a high-level National Productivity and Continuing Education Council. The Council will include members from the Government, business community and labour movement.
C.18. DPM Teo Chee Hean will chair this Council. The Council will galvanise the major national effort required to boost skills and enterprise productivity, and develop a comprehensive system for continuing education and training. The Council will oversee the work of the different government agencies and promote close collaboration amongst the business sector, workers and unions, and the public sector.
C.19. More details on the composition of the Council and how it will approach its work will be announced later by DPM Teo.
C.20. Continuing Education and Training (CET) will be our next major wave of investment in our people. We will build up an outstanding CET system for adults, to complement a first-rate education system for our young. In total, we will spend $2.5 billion over the next 5 years to develop this CET system.
C.21. Singaporeans’ adaptability has always been one of our key strengths. That is how we have progressed from one phase of development to another since the 1960s. Even without much formal education, our workers have been able to adapt to new needs on the job. However, the next phase of gains in productivity will require us to develop competence in more complex tasks, mastery of skills and depth of expertise in every trade and profession. It will require both a comprehensive and customised approach, including the development of centres of excellence that are focused on specific industries and clusters of enterprises.
C.22. We will also develop a continuous ladder of skills and qualifications that anyone can acquire at different stages of their lives. We will continue to strengthen the links between the Workforce Skills Qualifications (WSQ) and what individuals acquire through the post-secondary and tertiary education system, so that workers can build on skills obtained through either pathway.
C.23. This need for a comprehensive CET system becomes more important as our workforce gets older. The Government will help employers to invest in their workers, so that they can keep building on their knowhow and maximise their value in the workplace.
An additional boost for older, low-wage workers
C.24. We will place additional emphasis on our older, low-wage workers, by providing them the needed support to enhance their skills and continue to be valued in the workplace.
C.25. Currently, we have the Workfare Income Supplement, or WIS, to encourage older low-wage workers to stay in the workforce. We will undertake two further enhancements to help this group, following the recommendations of the ESC.
Introduction of Workfare Training Scheme (WTS)
C.26. We will give further incentive for employers and low-wage workers to commit to training. We will introduce a 3-year Workfare Training Scheme or WTS to complement the WIS. The WTS will be aimed at helping older workers, but will also be open to younger WIS recipients (aged 35 years and above). In other words, it will be open to all WIS recipients. The WTS will help them overcome barriers to training and capitalise on opportunities to advance through the CET system. The WTS will firstly provide their employers with 90% to 95% of funding for absentee payroll and course fee outlays. Secondly, to recognise the efforts of the workers who go for this skills upgrading, we will provide them with cash grants when they complete their training. The grants will be capped at $400 per year. WTS will also include a structured training programme for those with very low skills, including those who may be out of a job. So that is the first initiative to help low wage workers.
Enhancement of Workfare Income Supplement (WIS)
C.27. Next, we will enhance the WIS itself. Starting from 2010, maximum payouts for the WIS will be increased by between $150 and $4002, with more going to older workers to encourage them to remain in the workforce. For example, a 60-year-old worker will get an annual WIS payment of up to $2,800, this is an increase of $400, up from $2,400 currently. Secondly, we have also decided to extend WIS to workers earning up to $1,700 a month – up from the current limit of $1,500. This will ensure that as low-wage workers upgrade their skills and begin to earn more, their WIS benefits will not decrease too quickly.
C.28. The enhanced WIS will cost an additional $100 million annually and will benefit about 400,000 low-wage workers.
C.29. Further details of the enhancements to both aspects of the workfare scheme WIS and WTS, will be announced by the Minister for Manpower in his Committee of Supply speech.
C.30. Our second major area of investment is aimed at catalysing improvements in enterprises themselves. We will support businesses that are re-engineering their work processes and re-designing jobs so as to help their employees create more value. Equally important, we will support their efforts to innovate – to gain competitiveness, come up with new products and services and generate new or additional revenue streams.
C.31. We will provide tax incentives for businesses in all sectors to invest in upgrading their operations and creating new value. We will also extend substantial grants to specific industries, clusters and even enterprises. These grants will be of greatest benefit to the SME sector. In fact, both the tax incentives and grants will be of greatest benefit to the SME sector.
Productivity and Innovation Credit
C.32. First, we will introduce a ‘Productivity and Innovation Credit’. The Credit will provide significant tax deductions, for investments in a broad range of activities along the innovation value chain. Specifically, it would cover spending on the following activities along this innovation value chain
- Research & Development;
- Registration of intellectual property – including patents, trademarks, and designs;
- Acquisition of intellectual property – for example, when a company buys a patent or copyright for use in its business;
- Design activities;
- Automation through technology or software; and
- Training of employees.
C.33. These are 6 activities that will be covered under the PIC. All businesses will be eligible for the Credit, based on the amount they invest in any of the activities covered by the Credit. They can deduct 250% of their expenditures on each of these activities from their taxable income. I have capped the enhanced tax deductions at $300,000 of expenditures for each activity so as to focus the benefits on our SMEs.
C.34. It may be helpful to illustrate this. For example, if a company spends $300,000 on automation, it can deduct not just the usual 100% of the expenditure but an additional 150% under this scheme. This works out to an additional $450,000 of deductions, which will give the company tax savings of about $76,500. If the company also spends $150,000 to design a new product, it will save a further $38,300. The company will then enjoy total tax savings of $114,800 on an investment that had cost a total of $450,0003. In other words, the company gets a quarter of its investment back in additional tax benefits from the Government. The company can undertake any number of activities under the scheme in a year.
C.35. The Productivity and Innovation Credit is a major enhancement on what businesses can currently receive. Currently, only R&D qualifies for higher tax deductions, of up to 150% of expenditures. The new Credit will spur a much broader range of innovative activities as well as provide an unprecedented level of tax deductions, at 250% of expenditures on each activity. Further, businesses who are investing in the training of their employees can now enjoy the tax benefits under the Credit on top of the various WDA subsidies – including the new WTS that I just spoke about. The Productivity and Innovation Credit will be available for five years, (from Years of Assessment 2011 to 2015).
C.36. To support small but growing businesses which are cash-constrained, I will also allow businesses the option to convert up to $300,000 of their Productivity and Innovation Credit a year into a cash grant of up to $21,0004. This will help businesses that are starting off with low taxable income, but want to grow by investing in technology or upgrading their operations.
C.37. Businesses in all sectors can take advantage of this scheme. Not just manufacturing companies that are investing in automation. For example, a Japanese food outlet at Iluma Mall called Ebisboshi Shotengai invested $160,000 to implement a wireless self-ordering system, apparently the latest technology from Japan, which allows customers to simply tap on the menu using a wireless stylus pen, to send their orders to both the kitchen and the cashier’s desk. It is a “talking” pen which repeats customers’ orders aloud. Not only has it reduced customers’ waiting time, it has translated into faster turnover. The restaurant has also been able to employ only two-thirds the number of staff it would normally have required, and expects to fully recover its investment in the self-ordering system in two years. So, not only is it in a business’s interest to invest, but it will also obtain support from government incentives.
C.38. The Productivity and Innovation Credit scheme will cost us $480 million a year.
C.39. We will complement this broad-based tax reduction for all companies which invest in innovation, with funding for initiatives customised to specific industries, clusters, and enterprises.
C.40. For this second pillar of support for enterprise productivity, we will create a National Productivity Fund. We target to put $2 billion into this new Fund. To start, we will inject $1 billion into the Fund in 2010, which we expect to be able to support initiatives over the next 5 years. This is a major commitment. In setting aside funds now, we make clear the Government’s long-term support for productivity improvements, irrespective of the state of the economic cycle.
C.41. The National Productivity and Continuing Education Council will establish the priorities and programmes of this new Fund, and tie together the efforts of all stakeholders – government agencies, industry associations, unions and enterprises.
C.42. The National Productivity Fund will provide grants to help enterprises in all sectors, with special emphasis initially on sectors where there is potential for large gains in productivity. The Fund can also be used to develop centres of expertise for a range of industries, which will grow a knowledge base for enterprises to tap on to develop productivity solutions.
Construction sector initiatives
C.43. Construction is a key sector which needs to improve. Its productivity levels are estimated to be about half of that in Australia and one-third of that in Japan. Around $250 million of the first $1 billion of funding in the NPF will be dedicated to raising productivity in the construction sector. This will include initiatives to help our local contractors develop capabilities in areas such as complex civil engineering and building projects, to invest in new technologies, and upgrade to a higher quality workforce. The Minister for National Development will announce more details during Committee of Supply.
C.44. Our challenge is to make innovation and productivity improvements second nature to both companies and employees in every sector. Some Singapore companies have already gained strong competitive advantage by doing so. Keppel Offshore & Marine, for example, has made major changes to how oil rigs are constructed by using new manufacturing concepts, detailed production planning and most importantly, by sharing the responsibility for innovation and continual improvements with employees, with everyone taking responsibility.
C.45. Productivity is now a way of life across its yard – from crane signalmen using air pressure in a “Miracle Trolley” to lift heavy weights and thereby halve the number of man-hours required; to machinists applying new methods to minimise vibration and hence double productivity; to electricians using an in-house innovation comprising Teflon rollers to ease the task of laying cables within restricted spaces; to pipefitters using another in-house innovation to shorten the time they need to dispense pipes by 40%. None of this is rocket science, but it means improvements year after year and in a record year like Keppel O&M had in 2009, it means a productivity bonus of nine months across the board.
C.46. We will complement our support for enterprise innovation and upgrading by raising foreign worker levies. The increase will be calibrated and carefully phased in, so as to give companies a clear incentive to upgrade while providing them time to develop plans to re-gear and grow through productivity improvements.
C.47. We will gradually raise the foreign worker levies, and tighten the levy tiers that are based on the proportion of foreign workers in a company’s workforce. The changes will start with a modest increase in levies in 2010, and will involve further increases over the next two years. The overall dependency ratio for all categories of foreign workers (Work Permit as well as S Pass holders) will remain unchanged.
C.48. As a first step, levy rates will be raised by between $10 and $30 for most Work Permit holders on 1 July 2010. We will phase in further adjustments in levy rates and tiers in 2011 and 2012. Taking the three years together, there will be a total increase of about $100 in average levies per worker in manufacturing and services. The construction sector, where there is much scope for productivity improvements, will see a larger increase, larger than $100.
C.49. We will also make changes for S Pass workers. There will now be two levy tiers. The rates for the first and second tiers will be $100 and $120 in July 2010, up from a single rate of $50 currently. Further adjustments will then be phased in until the rates reach $150 and $250, for the two tiers, by July 2012.
C.50. MOM and MND will release more details of the changes to the Foreign Worker Levies later this week.
C.51. The changes in foreign worker levies will provide clear incentives for businesses to restructure and upgrade their operations so as to rely less on lower skilled foreign workers. Businesses will receive significant financial support from the Government to do so through the schemes I highlighted earlier – the Productivity and Innovation Credit, the National Productivity Fund and training subsidies. These schemes will help them to invest in productivity and to develop higher-skilled workers, especially Singaporeans. Their investments can be in many forms – automating processes, training up their employees, using pre-fabrication in construction or spending on design to create higher value – but the resulting productivity gains will benefit both businesses and workers.
C.52. Our final strategy for achieving higher productivity is to support the progressive restructuring of our overall economy, towards higher-value and more innovative players. This is as important as the upgrading within each industry or enterprise, which is also what we will promote.
C.53. We must encourage a continuous flow of start-ups and new entrants into the economy, and allow the most efficient and competitive players the room to grow and scale up, either through organic growth or through mergers and acquisitions (M&A). The less competitive businesses, large or small, have to be encouraged to upgrade themselves. Those unable to do so will over time lose out in the marketplace.
C.54. This restructuring is especially important in creating a dynamic and viable SME sector. More SMEs are now developing capabilities for innovation, and creating a competitive edge for themselves. We must help them grow, and acquire the scale required to attract talent, invest in technologies and compete effectively in overseas markets.
Facilitating economic restructuring through M&A
C.55. The economic recovery – both locally and abroad – provides a window of opportunity for growth through acquisitions. We will facilitate mergers and acquisitions, but companies must decide for themselves whether it makes more business sense to grow organically or through M&A.
C.56. Last year I introduced the corporate amalgamation framework. Under this tax framework, the tax benefits of the amalgamating companies can be transferred to the amalgamated entity.
C.57. This year, we will take a further step. M&A can be a costly and resource intensive exercise, particularly for acquiring companies which are not large players. I will therefore introduce, for five years, a one-off tax allowance scheme to help defray a portion of acquisition costs.
C.58. The allowance will be equal to 5% of the value of the acquisition. The acquisition of a $50 million company, for example, will give the acquiring company a tax allowance of $2.5 million. It will be able to deduct $2.5 million against its taxable income over 5 years, resulting in total tax savings of $425,0005. I will cap the allowance granted at $5 million in a single Year of Assessment6 . This is to focus on the SME sector to help it develop vibrance and dynamism.
C.59. The new allowance is designed for simplicity. Previously, interest expenses incurred in acquisitions could be deducted against taxable dividend income. This is no longer possible, as dividend income is no longer taxable. The new allowance will help the acquiring firm offset part of its costs, but without seeking to distinguish between interest costs and other costs. It is therefore neutral between debt and equity in financing transactions.
C.60. As a further measure to reduce the cost of M&A, I will also waive stamp duty on the transfer of unlisted shares for such deals. This will apply to such deals which are worth up to $100 million in any one year. Listed shares are already exempt from stamp duty currently. This one-off concession for unlisted shares will also be available for five years.
C.61. The two incentives together will cost about $100 million a year.
C.62. Besides raising labour productivity, we have to move progressively to make better use of land, given the limits to how much additional land we can reclaim. As the ESC has recommended, we should promote the intensification of industrial land use, towards more land-efficient and higher value-added activities.
C.63. The Industrial Building Allowance (IBA) was introduced in the 1940s to encourage industrialisation. This allowance, the IBA has met its objective but is no longer adequate or relevant to meet our current priorities. It does not distinguish between efficient and inefficient uses of land. I will therefore phase out the IBA. Existing IBA claimants can continue to claim their remaining IBA on qualifying buildings until their allowances are written down.
C.64. I will however introduce a more targeted scheme to support enhanced land productivity amongst industrial users. The new Land Intensification Allowance or LIA will apply to nine sectors which have been identified as those with large land take (details at Annex 1 ( 142kb)). It will give businesses in these sectors tax allowances on their building costs if they meet or exceed the Gross Plot Ratio (GPR) benchmarks that are set for each sector. To encourage land intensification, these benchmarks will be set at around the 75th percentile of actual GPRs for each of these sectors. Businesses that meet this benchmark will receive more generous allowances than are currently offered under the IBA7.
1 Data refers to non-retiree Singaporean households. It excludes households consisting solely of non-working persons over 60.
2 On average, workers currently receiving a full year’s worth of WIS will see an additional $208 in annual WIS payouts.
3 Assuming a marginal tax rate of 17%.
4 Businesses can convert up to $300,000 of the tax deductions and allowances credited to them into cash, up to a maximum of $21,000 in cash each year. We will review this cash conversion component of the Productivity and Innovation Credit after 3 years.
5 Assuming a marginal corporate income tax rate of 17%.
6 This $5 million cap will in effect allow for acquisitions of up to $100 million in any year, and provide a maximum tax benefit of about $850,000 for all deals during the year.
7 Businesses will be able to claim an initial allowance of 25% and an annual allowance of 5% and will be able to fully claim the qualifying costs in 15 years, instead of an annual allowance of 3% and full claim over 25 years as under IBA.