Save jobs, give firms cash: How the novel scheme evolved
The $4.5 billion Jobs Credit scheme was the stunner in the slew of Budget measures unveiled last week. Sue-Ann Chia and Aaron Low find out how and why policymakers came up with the novel 'wage subsidy' plan that nobody expected
ON THE night before Budget day on Jan 22, harried Finance Ministry officials tucked into a supper of steaming porridge cooked by their colleagues.
It came with condiments on the side, from century eggs and ham to peanuts - comfort food that soothed their nerves as they rushed to put the finishing touches on the biggest-ever Budget bonanza.
One of the things they worked on late into the night was the Jobs Credit scheme, which was finalised only a week before the Budget.
Costing $4.5 billion, this is a major plank in the $20.5 billion stimulus package. It aims to save jobs by subsidising part of employers' wage bills.
It was also the most eye-popping measure, and caught analysts and businesses alike by surprise.
As Mr Poon Hong Yuen, the Ministry of Finance's (MOF) director of Budget 2009, puts it: 'They didn't think that the Singapore Government would do such a thing.'
The unlikely thing? That the Government would provide funds for companies to ride out the downturn.
What most had assumed it would provide were the usual reliefs, such as rental rebates and tax cuts. In the event, these were present, but nowhere near the scale of the Jobs Credit scheme.
The idea was so far-fetched that no one thought to ask for it in the many rounds of dialogue and feedback that the ministry held with employers, banks, economists and workers.
There were expectations of a cut in the Central Provident Fund (CPF) contribution rate, even the issuing of shopping vouchers - ideas that Mr Poon says were considered but canned.
NOT that there was a 'eureka moment' when the idea crystallised and everyone knew this was The One.
Describing when and how the idea surfaced, Mr Poon says it was more a gradual realisation that something had to be done - and fast - to help companies stay afloat as the economy began to sink in the second half of last year.
The only certainty in their minds: A fiscal injection was needed to stimulate the economy.
But they did not quite know exactly what form this should take and how to go about it.
The need for a bailout became evident to the team six months ago.
The Singapore economy was then slowing as the sub-prime crisis spread in the United States.
Worried, the MOF team started hatching plans to protect the economy. They considered all options, from a CPF cut to road tax reductions.
The solution that emerged was to give companies a shot in the arm.
'We thought we needed to put cash in the hands of companies - viable companies,' says Mr Poon. Apart from taking charge of Budget 2009, the 39-year-old is also MOF's director of economic programmes.
'But how do we do it?'
The answer, in a way, came in September last year when US banking giant Lehman Brothers collapsed, triggering a global crisis.
Singapore slid officially into recession, with two consecutive quarters of negative growth.
'It became clearer to us then that jobs were the No. 1 priority,' Mr Poon recalls.
'It also became clear to us that the economy was going to be worse than we had previously thought. So we started to focus a lot more (on) saving jobs.'
Given that the intention was to give companies money to save jobs, a CPF cut was seen as a possible option. It was discussed but dismissed.
'You want to send a cheque to the company. Mathematically, a CPF (cut) may achieve the same thing - you may free up cash for the company. But it's not the same as giving them a cheque to encourage them to keep jobs,' explains Mr Poon.
A cut to employers' CPF contribution rate is also not desirable as it erodes workers' retirement savings, adds Budget coordinator Alvin Moh, 28.
Nor did the situation warrant a cut.
'It's not as though Singapore's wages were uncompetitive globally. It's just a very temporal situation where the suddenness of the downturn hit businesses very hard,' says Mr Moh, deputy head of economics strategy at the ministry.
With this option out, the team members began looking at other approaches. Should funds be given to offset business costs such as rental, utilities, wages or a combination of all three, they wondered.
IT WAS a close tie between rental costs and wages. Utilities, which had been a consideration, was dropped pretty quickly because it did not amount to as significant a business cost as the other two items.
The team eventually decided to focus their firepower on wages.
'We zoomed into the wage component quite late in the day,' reveals Mr Poon.
'I can't say exactly when, but even a month or two before the Budget, we were still thinking of other components. In this crisis...things moved very fast and we had to get an accurate feel of what was happening on the ground.'
Focusing on wages seemed to make sense, since it is a major business cost and closely tied to jobs.
Another consideration was the ease of implementation.
'We don't have data on rentals, unlike for wage components, (where) we have very detailed data from CPF accounts. We know how much each person is paid,' Mr Poon explains.
The team does not view the Jobs Credit scheme as a wage subsidy as the money disbursed is not meant to prop up wages.
Wages were used simply as a base to calculate how much each company should get from the Government.
If the intention was to provide a wage subsidy, it would have been more logical to give it directly to workers, he explains.
So why not give the money to workers? As reactions to the Budget showed, many people think that the measures seem more pro-business than pro-worker.
Mr Poon says the idea of disbursing money directly to employees was considered. But it was discarded as such a move was not in sync with the objective of saving jobs.
'You can give it directly to workers, but how would that factor into an employer's decision on whether to retrench or not?' he says.
If such an approach had been taken, employers would not have an incentive to retain workers, as the cost savings from the offset package would not be returned to them or have an impact on their overall wage bill.
'We're not doing this because we favour employers. We're trying to save jobs for the employees, and we're trying to do it in a way that we think will be more effective,' he says.
The team even toyed with the idea of giving citizens shopping vouchers, but decided against it. Mr Poon says: 'We felt that cash that goes to employers will have a multiplier effect on the economy because they will also spend on the economy.'
The next headache was then in deciding how much to give companies.
CHARTS, tables and matrices were drawn up using various permutations, to show how much each would cost the Government.
Says Mr Poon: 'It wasn't Jobs Credit in isolation. If we give more for Jobs Credit, we have to cut somewhere else. There's no bottomless pit.'
They presented their calculations to Finance Minister Tharman Shanmugaratnam 'countless' times.
Nearer the Budget - which was brought forward from February to last Thursday - they were having full-day meetings with him almost every other day.
He gave 'valuable inputs', says Mr Poon, who describes Mr Tharman as a good listener who hears out even the most junior staff member.
'He gave us directions on what to focus on. We give him options and recommendations, but he decides,' he adds.
They settled on $4.5 billion, which covers 12 per cent of a worker's monthly salary of up to $2,500.
The sum is 'quite high', says Mr Poon. He declines to reveal the higher amounts considered.
'Of course, there were higher amounts, but those were not realistic figures. We know we could not really afford those,' he adds.
'But I think we were quite generous.'
He also explains why they decided on 12 per cent.
'We need a number that's impactful. We don't want a number that companies look at and say, 'It's a waste of my time. It won't make a bit of difference in my retrenchment or hiring decision,'' he says.
'When we did our charts and graphs, 12 per cent was almost as high as we could go in terms of affordability.'
It was capped at $2,500 of monthly wages as that is the median salary in Singapore. Half of workers here earn below that and half earn above that.
'We wanted to skew the assistance in terms of keeping jobs for the lower- and middle-income because we felt that these would be especially vulnerable,' he says.
THE billion-dollar question is: How many jobs will the one-year scheme save? Nobody seems to have the answer, even though $4.5 billion is being spent on this measure.
The Government is even dipping into past reserves to fund it.
'It's quite difficult to work out. Going forward, we're quite clear there will still be retrenchments.
'But will it have been worse without Jobs Credit? I think the answer is yes,' says Mr Poon.
'We think it will provide some relief and therefore will make some difference, but we've to be realistic that for companies that do not have orders on hand, whose business model is no longer relevant or whose products are no longer relevant, this will not help them.'
But he adds: 'If just because of this they rethink (retrenchments), then I think it's already quite an achievement.'
One thing that is clear to policymakers: the need to act fast and pre-emptively.
Mr Poon says: 'We can wait until the 60,000 or whatever number retrenchments come about, and then do something. But would that be too late?
'By that time, the momentum would have set in and the situation would have got even worse.'
More will be done if the need arises. Policymakers are not ruling out anything - even CPF cuts.
On whether Jobs Credit signals a shift in public policy towards more 'welfare-type' spending, given the move towards the Workfare Income Supplement two years ago and, more recently, giving jobless Singaporeans training allowances, Mr Poon says: 'It's really an extraordinary measure for an extraordinary downturn.
'I don't think we would do this every year or even every downturn, for that matter.'
Jan 31, 2009
Jobs Credit scheme: Killing 3 birds with one stone
By Aaron Low
IN GIVING money to companies to help them cope with the downturn, the Government is in effect killing three birds with one stone, economists and analysts tell Insight.
First, The Jobs Credit, amounting to a 12 per cent subsidy on the first $2,500 of an employee's wage, delivers cash into the hands of companies.
This is more effective than giving cash to individuals, for two reasons:
- More people are saving in anticipation that this will be a protracted recession, says Dr Randolph Tan of Nanyang Technological University (NTU). Hence, money that is given out to individuals may not have much of a multiplier effect, in the sense of generating more value in the economy. It will simply be stashed away in the individual's bank account, or under the mattress.
- The aim is to help businesses manage cash flow and hopefully forestall downsizing, business closures and retrenchments. Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy says that this will have 'the indirect effect of sustaining the consumption demand of workers who are able to keep their jobs'.
'Giving cash grants to individuals who would otherwise face a higher chance of losing their jobs could result in a higher probability of contraction of consumption demand,' he says.
'In this regard, giving money to companies would be more effective in sustaining aggregate demand.'
Second, on top of saving jobs, the scheme also puts pressure on employers to save jobs specifically for locals.
The issue of foreign talent and workers in Singapore's midst has been a touchy subject with some Singaporeans wanting the Government to do more to provide jobs for Singaporeans.
Latest figures show that the workforce has 1.057 million foreigners, or about one in three of the workforce here.
This scheme may tilt the balance towards local workers as it is skewed towards the lower-paid and local workers, says PricewaterhouseCoopers tax partner David Sandison.
He notes that a firm gets to save proportionally more by employing lower-paid workers as the subsidy is capped at $300.
There are no such savings for foreign employees. In fact, companies have to pay an additional foreign worker levy, which ranges between $50 and $450 a month, depending on how many foreigners a firm employs.
Hence, the difference in cost, after taking into account the Jobs Credit, 'may skew the decision-making towards firing of more foreigners', says Prof Hui.
Third, the scheme avoids cutting employers' Central Provident Fund (CPF) contribution rate, which some companies had been calling for.
This scheme is a 'unique' instrument that is equivalent to a 9-percentage-point cut in employers' CPF contributions, but without the pain, says NTU's Dr Tan.
Cutting CPF contribution rates would have been painful for workers because the national savings plan is not only tied to retirement financing but also medical, educational and housing needs. Many Singaporeans rely on their CPF savings to pay for their homes and medical treatment.
Dr Tan notes that before the Jan 22 Budget statement, 'it seemed that a CPF cut was the only instrument available'.
'By showing it can achieve the aim of reducing wages without actually shifting the burden to workers, the Government is putting its money where its mouth is,' he says.
Still, despite the strengths of the scheme, economists point out that it is not perfect.
NTU economics professor Tan Khee Giap says the scheme can afford to be a lot more targeted in its approach.
He argues that smaller companies should be given higher subsidies as their wage bills form a higher percentage of their total costs, as compared to larger multinational companies.
'Instead of a 12 per cent subsidy across the board, maybe it should be 15 per cent for small firms and 5 per cent for larger firms,' he says.
'If the objective is to save jobs, the scheme should target small and medium enterprises since they employ 65 per cent of the workforce.'
Indeed, Mr Poon Hong Yuen of the Ministry of Finance, who was in the thick of helping to design the system, acknowledges that the scheme could have taken a more targeted approach, except that it would have been difficult to implement.
Perhaps the biggest criticism of the $4.5 billion scheme is that when companies face the crunch, the decision to hire or fire will not be decided by savings of 12 per cent.
National University of Singapore professor Shandre Thangavelu expects the scheme to have only a 'short-run' impact on the retrenchment behaviour of employers. After a while, the layoffs will still hit.
Citigroup's head of Singapore research Chua Hak Bin says the cost of the package seems disproportionate to the benefits it would possibly yield.
'Suppose the scheme succeeds in saving 50,000 jobs, that's a cost of about $90,000 a job. That's double the median annual wage,' he says.
'The scheme looks disproportionately generous towards saving jobs versus helping those who are jobless, who get close to nothing in the Budget.'
The scheme is a 'unique' instrument that is equivalent to a 9-percentage-point cut in employers' CPF contributions, but without the pain, says NTU's Dr Tan.