Tuesday, June 12, 2012

Raise social expenditures in a targeted way

Viewing social expenditures as an investment rather than only as a cost is critical if we are to break out of the trap of low productivity and rising inequality.

CREATING 'iron rice bowl' welfare structures would entail higher taxes in the long run ('Contemplating Singapore's future as leading global city'; Sunday). However, increasing social expenditures in a targeted way so as to unlock human capital and raise productivity could ultimately pay for itself to a large extent.High property prices, rising inflation, widening income inequality and weak social safety nets pressure Singapore workers to maximise short-term financial gain. This translates to less entrepreneurship, high job turnover and low fertility rates.
Effectively targeted social expenditures could reduce these effects and thus raise productivity.
For example, investing to lower the student-teacher ratio and raise teaching quality in neighbourhood schools could unlock the potential among lower-income Singaporeans and late bloomers.
Lowering effective property prices for first-time home buyers and reducing high out-of-pocket medical expenses would decrease short-term financial pressures, which could lead to lower job turnover, better workplace training and higher productivity for the economy as a whole.
Entrepreneurship would probably benefit from both these moves.
Such effects would lift productivity-driven economic growth and help pay for social expenditures in the long term, even with the existing tax regime.
After all, productivity-driven growth leads to higher incomes and expenditures, and thus raises the tax base.
Growth driven by increasing low-cost foreign labour has the reverse effect - it does not increase taxes very much but requires higher infrastructure spending.
In the short term, increased expenditures can be supported by Singapore's Budget surpluses, which are consistently high by international standards.
This creates a strong case for sensibly re-investing much of those surpluses to raise productivity, while maintaining a prudent and well-articulated reserves policy to manage risk.
Leon Perera