Singapore Budget 2013 and Business Operations

How will the budget 2013 affect businesses in Singapore

Business operations in Singapore will begin to feel the effects of the changes from the proposals in the Budget 2013.

Productivity and the Workforce

The primary aim of the Budget 2013 with regards to businesses is the concern that the productivity of the workforce has not increased largely because of the relentless flow of lower skilled workers. The Budget therefore proposes further measures to tighten this inflow. Some companies, already reeling from the shortage of workers, will eventually fold and many that are labour intensive will plan to move their operations overseas, where cost of operations are lower. This is inevitable. Those companies that do not take part in this endeavour to increase productivity or resist such measures will eventually fail or leave Singapore altogether.

The Budget is prepared for this eventuality. The proposal of The Land Productivity Grant is essentially the government giving a relocation compensation, for those companies that cannot or do not want to intensify the use of land or choose to relocate outside Singapore but retain their core functions here.

Foreign Worker Levy and Dependency Ratio Ceiling

Additional ammunition to reinforce the move is provided for by the increase in the foreign worker levies (FWLs) and the reduction of the dependency ratios ceilings (DRCs). FWLs are levies paid monthly to the government for employing a foreign worker. To get a perspective of the increases in the FWLs, in the manufacturing and service sectors, in the year 2011 the levy was $180-$450 per worker per month. This is set to increase from 1 July 2013 to $250-$600 per worker per month. DRCs is used to calculate the number of foreign workers a company can hire. In the service sector the ratio was 1 foreign worker for 3 locals. Now you need 4 local workers to hire 1 foreign worker. It is not clear if these measures will indeed result in higher productivity. There may be collateral damage in that some profitable companies may be forced to close as a result of the above measures. The timing of these measures is also questionable in a tight labour market which will see increased inflationary pressure.

Wage Credit Scheme

Another key feature of the Budget is the Wage Credit Scheme. This is a 3 year transition package intended to assist companies in the effort to raise the wages of the workers through restructuring. The government's intention is that the employer is encouraged to share their gains in productivity with the employees by way of a salary increase. Over the next 3 years the government will co-pay 40% of the pay increase for Singaporean employees earning up to $4000 per month gross salary. Assumptions that there will be productivity gains to be had and the assistance of the Co payment scheme may encourage the workers employed in one company to press for a wage increase. This pressure will be felt across the board and companies will be compelled to increase the wages even if there are no productivity gains or else be prepared to lose the workers to another employer. A point to take note is that the initial pressure to increase the wages of the workers in the next 3 years will be softened by the Co payment grant. It is in the 4th year when the Co payment grant is no longer available is when the real effects of the scheme on the survivability of a company be apparent.

Companies will inevitably assess this information and its effect on their survivability in terms of increased costs of operations and may well decide to increase the yearly bonus of their existing staff as a means of “controlling” the wage increase. This is actually provided for in the Wage Credit Scheme in that the calculation of the monthly wages of an employee for a year is inclusive of the bonus earned.

Rebate of Corporation Tax

The final feature of Budget 2013 is the rebate of 30% of corporation tax payable. This rebate is capped at S$30, 000 a year for the next three financial years. This will mean that for most companies, the effective corporate tax rate will be less than 10%. For those companies that are facing the labour crunch but have a good business model that is profitable may not be around to enjoy this benefit if they cannot survive the expected increase in labour cost.

The ultimate aim of the budget is to wean off the companies in Singapore from the reliance on cheap foreign labour that has increased the bottom line of many companies but at the same time has suppressed the real wages of the working population. Productivity of the average worker in Singapore has been steadily declining in recent years and the above measures instituted in the Budget 2013 is a bitter pill that needs to be administered to correct this worrying trend.


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