Singapore’s economy: the path not yet taken

Singapore's fiscal probity is legendary. Often, final budget numbers turn deficits into surpluses and surpluses into larger than expected surpluses. Arguably, Singaporeans are overtaxed due to Singapore's fiscal conservatism. Undoubtedly, the Goods and Services Tax rate of 7% can be lower.

Singapore 2010 is not Singapore 1990 and neither should it be. Cities change, populations grow and adapt as progress marches onwards. Yet, the recent recession has generated discussions about social safety nets in the Republic.

Singapore's blogosphere highlighted the plight of homeless Singaporeans and 'cardboard ladies' (old women who eke out a living collecting and selling cardboard disposed by supermarkets). Clearly, for a wealthy, compact city state such as Singapore the existence of poverty and homelessness is an embarrassment.

However, the solution to pressing social issues is not simply to increase government spending. It's easy for the government to establish homeless shelters, provide more subsidized health care and so on. The government has enough cash, at least for the next few decades.

Larger social safety nets change behaviour. Already, many Singaporeans are demanding distinctions in pay between citizens and foreigners. In principle, such distinctions are fine. However, anyone who has worked in the Gulf can testify that over time the privileged position of the 'locals' leads to noticeably lower productivity and higher operating costs.

Is a Singaporean bus captain doing anything differently from a Chinese bus captain to deserve his higher pay? If he is, then the higher pay is merit based and not passport based. If not, then travellers on Singapore's buses must be prepared for higher bus fares.

Higher pay and better privileges cannot be created out of thin air. Even Lee Kuan Yew (LKY) and the People's Action Party (PAP) are not magicians. Ultimately, Singaporeans themselves have to pay the bill for the enhanced benefits. Someone always pays the bill.

The increased costs may include higher personal taxes, GST, corporate taxes but will most certainly result in higher operating costs for businesses (or fewer services for the same cost). Higher operating costs do not necessarily equate to reduced competitiveness and, hence, fewer jobs. However, Singapore does not operate in a vacuum. The region includes lower cost markets such as China, Indonesia and Malaysia.  

Come May, when Singapore Post stops delivering mail on Saturday's we should understand that the service reduction is part of the bill Singaporeans pay for demanding a better life.

Singaporeans must decide the extent of the trade-off they are willing to make. There is a long and slippery slope which Singapore must avoid; a path sugar coated by hubris and arrogance.

Don't take my word for it. Charles Munger, the long time partner and right hand man of legendary investor Warren Buffett, describes the rise and fall of a fictional superpower in "Basically, It's Over: a parable about how one nation came to financial ruin."

We will be wise to remember Singapore is not a superpower but a Little Red Dot.  

Singapore's transformation from Third World to First was not a freak accident. The nation's progress benefited from an enabling policy environment but its basic building blocks were values such as thrift, hard work and family support. Relying on social security or winning a lottery is not a sound financial plan, even for citizens of First World nations.