Singapore: Budget 2012: Building a more productive economy & a better future

Last Updated: 1 March 2012

By Susan Rawlings

On February 23, 2012, in Doing Business in Singapore, General News, Singapore Taxes,

Weighed down by factors such as sluggish economic growth in the US and an impending Euro zone debt crisis Singapore's Ministry of Trade and Industry has forecast a cautiously optimistic economic growth of 1-3% for 2012. Business sentiment also remains dampened with SMEs exhibiting a weak business outlook for the first half of the year. Given this challenging economic and business environment, the expectations were high from this year's Budget; especially among Singapore's business community. SMEs were hoping for measures that would address their growing concerns – rising operational costs and a tight labor market.

While this year's budget did address these concerns there were no blockbuster measures such as further cuts in Singapore taxes or immediate short-term reliefs. Instead, the budget was more attuned to the long-term goal of building a more productive and strengthened economy. Best described as a "budget for the future", Budget 2012 focuses on older workers, those with disability and lower-income earners. It's a compassionate budget. As far as the enterprise sector is concerned, the mantra is – heighten the innovation and productivity drive and reduce foreign worker dependency. It is a bitter pill alright, but the silver lining is that it is sweetened by various measures. Here's a quick look at the budget measures for businesses:

Reducing foreign worker dependency

While Finance Minister, Tharman Shanmugaratnam acknowledged the invaluable role played by foreign workers he was also quick to point out that an over-dependency on foreign labor is likely to have negative effects in the long term and is not a sustainable solution. As a result, the government has decided to introduce two additional measures that would serve to curb foreign worker inflow into the country:

  • Reduction in Dependency Ratio Ceilings (DRC); and
  • Reduction in Man Year Entitlement (MYE) Quota.

Dependency Ratio Ceiling (DRC) refers to the maximum permitted ratio of foreign workers to the total workforce that a company in the stipulated sector is allowed to hire. According to Budget 2012, there will be a calibrated reduction in Dependency Ratio Ceilings (DRCs) in the manufacturing and services sectors.

The Man Year Entitlement (MYE) Quota reflects the total number of Work Permit holders a main contractor is entitled to employ based on the value of projects/contracts awarded by developers/owners; and is allocated in the form of the number of "man-years" required to complete a project (1 man-year = 1-year employment under a Work Permit). According to the recent budget, the MYE quota for new projects in the construction sector will be further reduced by 5% in July 2012. Furthermore, foreign worker levies for basic skilled workers hired outside these MYE quotas will be raised.

Although, the move to reduce foreign labor dependency might prove to be beneficial in the long term, there is no denying that businesses are going to have to brace themselves for an even greater challenge ahead. Switching from manual labor to automation is no doubt productive and a sensible solution but it isn't as simple as replacing one by the other. The shift will take time and is one that requires significant capital. Not all firms are in a position to make this switch right now. As far as employing older workers is concerned; it is feasible but only to a certain extent. Older workers do have their limitations and not every job (especially in the construction sector) can be executed by them. It's going to be interesting to see how the construction and services sectors respond to this move, given the labor shortage that they are already buckling under.

Helping SMEs restructure their businesses

Now for the good news.

  • Any upfront cash that aids investment is welcome by businesses. So, the one-time SME Cash grant for YA 2012, which amounts to 5% of a company's revenue, pegged @ S$5,000 gives businesses some reason to cheer.
  • A 200% tax allowance (to be written down in 1 year) on up to S$100,000 of the transaction costs (e.g. legal fees and tax advisory fees) incurred on mergers and acquisitions is definitely viewed as a welcome move.
  • Other measures include:
    • Enhancements to the Productivity and Innovation Credit Scheme;
    • More training support for SMEs and the self-employed;
    • Grants for SMEs that wish to upgrade and increase productivity; and
    • A special employment credit for employing older workers.

The above measures will definitely help businesses adjust to the tight labor market and aid them in enhancing the skills of their existing employees.

Creating opportunities for growth

The Singapore government is known for introducing hard-hitting measures but it is also known for its prudence and foresight. The government may have increased the labor woes of companies, but is has also opened up avenues for companies to grow. One of the interesting features of Budget 2012 is that it included several positive measures aimed at helping companies internationalize. These measures include:

  • Establishing a project finance company that will aid in financing cross-border projects;
  • Expansion of existing trade financing schemes to support cross-border trade and help with the cost of political risk insurance; and
  • Granting automatic double tax deduction for qualifying overseas expansion activities without the need for approval.

Other Measures

This year's budget also saw some significant measures such as:

  • Providing greater tax certainty to companies on how they will or will not be taxed on their gains from disposal of equity investments; and
  • Providing Singapore GST exemption on the supply of investment-grade gold and other precious metals from 1 October 2012.

The final verdict

All in all, the budget offers no immediate relief for businesses. Budget 2012 is clearly a budget for the long-term. The goal is to ensure that Singapore's economy is driven by higher skills, productivity and innovation. To sum it up in Mr. Shanmugaratnam's words, "The principal focus of this year's Budget is therefore not on providing a counter-cyclical boost to the economy, but on addressing Singapore's longer-term challenges and building a better future for our people. It is a Budget for the future."

View the budget highlights here:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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