Our PM delivered a speech recently that laid bare the choice facing Singapore in the years ahead. Do we want to be:
- A pro-growth society with low taxes and targeted welfare? Or
- A low-growth society with high taxes and comprehensive welfare?
The PM goes on to say that Singapore should go for Option 1. Because more growth means that the pie is bigger and there is more to share with the less fortunate. In fact, this argument is similar to what Margaret Thatcher said in her “Last Stand against Socialism” back in 1990:
Start watching at the 32 second mark.
Of course, Thatcher says it in much stronger language. There’s a reasons she’s called the Iron Lady.
My gut sense is that the PM is generally right to favor growth. Overly fast growth creates problems, but these problems are likely easier to solve than being stuck in slow/zero growth (like Japan is today). Social inequality could be addressed by taking a path of “low taxes and targeted welfare benefits” versus “high taxes on all and a comprehensive welfare state”.
If you disagree with me, please understand that not all Singaporeans think the same way. There will be Singaporeans who want to slow down, and there will be Singaporeans who want to test their limits in the global space. If we want to be an inclusive society, we must allow the dreams and aspirations of all groups of people to fluorish.
Nevertheless, PM’s two choices strike me as somewhat over-simplified. Is it possible to enjoy reasonably high growth, low taxes, and still have much more social protection than we have today?
Lessons from Scandinavia
In an excellent essay written by Donald Low on Facebook , the author described how Denmark and Sweden appear to have achieved this state of “utopia”.
“It is true that Denmark’s public spending is about 50% of GDP and that it has the world’s second highest tax rates (after Sweden). But the Danes and the Swedes… score well in the ratings constructed by pro-market and pro-business organizations. The World Economic Forum’s Global Competitiveness Index ranks Denmark fifth and Sweden fourth (just behind Switzerland, the United States and Singapore).
Both countries’ financial markets are stable and transparent, their barriers to imports minimal, their labor markets highly flexible despite the presence of strong labor unions, their multinational corporations dynamic and internationally competitive (particularly in new growth sectors like renewable energy and clean-tech), and their unemployment rates among the lowest in the OECD countries. They manage to achieve all this with one of the world’s most equal distributions of income and with minimal reliance on low-skill foreign labor. And although they pay high income taxes, the Danes and Swedes get not just universal health insurance, but also generous childcare and family leave arrangements (that must surely contribute to their relatively high fertility rates), good unemployment benefits (which somehow do not seem to breed high unemployment rates), free higher education, secure pensions in old age, and the world’s most extensive systems of worker retraining.”
(If you can’t access Donald Low’s original article, you can try asking permission to be on his friend’s list.)
Donald goes on to cite 3 reasons for the Scandinavian success: Higher productivity, higher environmental taxes and well-tailored policies.
“Increasing social protection that has to be financed by higher taxes in an economic environment of fierce competition from emerging economies is a contentious issue. Denmark and Sweden…. benefit from having highly educated and productive workforces. Over time, they have also developed globally competitive MNCs that are arguably more rooted to their home countries and which make their economies less reliant on investments from abroad. “
“Part of the answer lies in aggressive and extensive use of environmental taxes. About half of the electricity tariffs for Danish and Swedish households are made up of taxes. Denmark has the largest range of environmental taxes in Europe, accounting for about 10% of government revenues (or roughly 4-5% of GDP)….. The likely reaction of Singapore’s policymaker to environmental taxes is that they raise business costs and so undermine economic competitiveness. Yet in Denmark and Sweden, an elaborate system of environmental taxes, combined with lower rates for industry…. seems to have created the right incentives for the economy to shift to a more environmentally sustainable, less fossil-fuel dependent, and less energy-intensive path…. Environmental taxes help to shift the burden of taxation away from productive activities – such as work and enterprise – to environmentally damaging products and processes. “
“Incentives matter too – both countries have comprehensive deposit refund systems under which consumers pay an upfront deposit each time they purchase beverages in plastic bottles or metal cans. They can get back their deposits only by returning their bottles and cans to recycling machines (known as reverse vending machines) or to grocery stores. Behavioral economics tells us that such a system of deposit refund works better than a system that tries to encourage people to recycle by paying them because the former takes advantage of people’s loss aversion, which is stronger than their desire to pursue gains.”
Can these lessons be applied to Singapore? Our politicians are certainly pushing for more productivity. Making households and industries pay more for electricity is going to be contentious, although we have seen the PM sending a signal on installing a carbon tax. And adjusting government policy is something that we are constantly doing, judging by how housing and COE policy has shifted over the past months.
One point that was mentioned briefly (but not sufficiently emphasised) was the issue of geographical location. The Nordic states are squarely located in the mature European region where high costs of living, slower growth and low defense needs is generally accepted.
However, Singapore couldn’t have a more different location. Asia is booming economically, and many nearby countries have a much lower cost base. If you take the PAP’s word for it, Singapore also has to spend more on defense as our ethnic and wealth differences are very stark compared to our neighbors. In my line of work, I know that global MNCs want to be located closer to Asia, but Singapore is not a shoo-in because of (cost) pressures from competing Asian cities.
This fundamental difference in circumstances cannot be ignored. And it will probably play a big role in the choice between our current way and the Nordic way.
Time to learn the people’s preference?
PM’s choice for a pro-growth, low tax society sends a clear message: The PAP believes Singaporeans are not ready for a country with higher tax rates and social protections. “Singaporeans are not as homogeneous as Scandinavians” is the oft-cited response.
The cynic will say that this is the PM’s choice, not the people’s choice. There are many articles and postings on social media websites that constantly lament how Singapore’s high growth model is leaving too many citizens breathless, stressed up and left behind. So perhaps slowing down isn’t a bad idea?
It may be that more Singaporeans are willing to go for slower growth and higher taxes, but I think we need a public poll to determine this. Polling by “social media” is notoriously inaccurate because a few unhappy people are able to make a lot of noise, whereas the happy majority chooses to remain silent. A public street poll run will let us know whether the PM is right to say that majority of Singaporeans prefer lower taxes over higher social protection.
There will always be things that we can learn from these the Nordic states. We should be careful not to import entire concepts “lock-stock-and-barrel”, but we should also be careful not to simplify the issue as “my way or the highway”. There probably exists a spectrum of paths in between our current way and the Nordic way.
Politicians (both PAP and opposition) can and will spin this matter as a simple choice between two extreme possibilities. As astute citizens, we must be careful not to view this issue in lens of “black-and-white”. It is possible to take baby steps towards the Nordic approach, and we can choose to calibrate our position somewhere in the middle. We need not go all the way.
At this point, the preferences of Singaporeans are not clear to everyone. Do we take the PAP’s word that Singaporeans prefer low tax more than high social protection? Or do we believe that many Singaporeans perceive our existing situation as a rat race that must be stopped? These are two extremes that can’t be reconciled, so I really hope that a public poll will take place to settle this issue decisively. It will go a long way in helping us chart our future course.