Budget 2013 Point 2 - Wage Credit & Productivity

I was waiting for the Parliamentary Debate on the Budget (they call it "Committee of Supply") to end before writing this point 2 because I don't want to be seen as "snatching" topics from the opposition MPs in parliament.

Unfortunately, none of the opposition MPs in parliament has raised this issue about Wage Credit and Productivity. Other opposition parties like SDP didn't touch on Wage Credit as well. I was pretty disappointed.

I got to know about NSP post-debate forum in which they released their paper on budget. I decided to wait for them to have a say on the budget.

I attended NSP forum and I was pleasantly surprised that they have proposed to do away with the Wage Credit scheme. Although their reasoning is quite different from mine but at the very least, they dare to pin point at the "populist" move of extending the Wage Credit scheme beyond necessity.

Wage Credit scheme came about after 2008 financial crisis. Just one day before the release of Budget Statement for 2009, I wrote an article on Budget for Crisis of Confidence. In this article, I explain that we need wage subsidy during that crisis period to cushion the impact of the financial crisis. Indeed, for the Budget 2009, PAP came up with the similar idea Wage Credit (subsidy seems to be a dirty word to them!). However, Wage Credit or Subsidy, is supposedly meant to be a Crisis Management Fiscal Tool. It is not meant to be a long term fiscal policy as this would create undesirable distortions to the wage pricing mechanism for the labour market.

We are not facing any imminent crisis now and there are absolutely no reasons for the government to continue to use Wage Credit in its fiscal plans. This may have long term repercussions when the system sunk into over-reliance on such measures. If there is going to be another financial or economic crisis, Wage Credit's effect may just diminish when we really need it as the pricing mechanism for labour has been overly distorted for a long period of time.

It is just like taking anti-biotic. If you abuse anti-biotic for unnecessary usage, you may find it ineffective after a while and you will be in deep trouble later on!

On the other hand, providing Wage Credit to increase wages for workers to increase producivity WILL NOT WORK at all! Such move is based on totally flawed and overly simplistic premise that when wage increase, productivity will increase automatically!

Productivity don't just increase when you give your workers more salary. You may increase your employees' salaries AFTER productivity increase i.e. company make more money. Or that, when you feel the pinch of higher wages due to market forces, you will try to increase the productivity of your employees by changing work flows or investing in more capital goods and machinery. But Wage Credit DISTORTS the wage mechanism and the business owners WON'T feel the full pinch of wage increase, thus, why would they invest in more capital goods to increase productivity?

On the contrary, if the Wage Credit is scrapped, business owners will face an increase of wage expenditures and thus, will think of ways to increase productivity and thus maintain or increase profitability!

What the government could do is to scrap the Wage Credit but at the same time, enhance soft loans or even more substantial subsidies for firms who want to engage consultants or invest in capital goods to increase their productivity. By doing so, we would provide both the push and pull factors to entice SMEs to reinvent themselves, invest in more capital goods and change work flows to increase productivity.

The continuation of Wage Credit by PAP is just a ploy to be "Populist" at best. The humiliating defeats in Punggol East has created an over-reaction from PAP to just throw out every goodies they could think of without really thinking through carefully the logic and implications of their policies.

Such moves are really undesirable for Singapore's reconstruct of our economic model. Unfortunately, those opposition MPs in parliament had also go along the tides without critically examining the negative implications of such populist moves made by PAP. Well, politically, they are also populist in thinking. This is the reason why I am totally disappointed with both PAP and opposition MPs' performance for this Budget debate.

Well, the only consolation I have is to know that NSP actually dares to address the issue of Wage Credit and propose to scrap it altogether! We may still have hope after all.

Goh Meng Seng