I am happy to be here with you today for the NTUC May Day Rally 2002.
When I joined you at last year's May Day Rally, our economy had been hit by the downturn in the US and had slowed down. We were bracing ourselves for a tough year ahead. Beyond the immediate challenges of the economic slowdown, we were also grappling with longer term issues, particularly competition from countries in the region like China and Vietnam, where people are hungry for development and growth.
We rallied together to face the recession. Because of our prudent fiscal policies in the past, the Government was able to quickly implement two off-budget packages in July and October last year, to help Singaporeans tide over the downturn. Union leaders could see what was coming, and worked hard to explain the situation to workers. The workers understood that it was better to accept lower or no wage increases, than to risk more retrenchments and job losses.
Fortunately, there are encouraging signs that the economy is now pulling out from the trough. Jobs are coming on-stream again and prospects for the year are not as dark as they were a few months ago.
But we must not become complacent or overly optimistic. Our external environment has become much more difficult. Many uncertainties remain. The Middle East is in a volatile state, with the Israeli-Palestinian conflict showing no signs of a peaceful solution. The Taleban and Al Qaeda may have been routed in Afghanistan, but the global war against terrorism is far from over. If the US takes military action against Iraq, the situation will become even more complicated. In South East Asia, terrorist activities by extremist groups continue, including groups with links to Al Qaeda, like Abu Sayyaf in the Philippines and Laskar Jihad in Indonesia.
Economically, we continue to face fiercer competition, especially from countries in Asia. New players are emerging in the world economy. As they strengthen their capabilities, attract more investments, and export more sophisticated products, they will increasingly compete with Singapore.
One key emerging new player that is grabbing world attention is, of course, China. Good quality but cheaper Chinese products are flooding world markets. China's low costs, abundant talent, and huge domestic market are attracting MNCs to relocate plants to China. As the chairman of a top European MNC told EDB, "our Asian strategy equals China strategy".
Our difficult external environment is not a secret. Analysts and investors are fully aware of it. The Political and Economic Risk Consultancy (PERC), in its latest report, surveyed the vulnerability of countries to external threats, both political and economic. Singapore was ranked 7th, after Vietnam, China, Malaysia, Hong Kong, Australia and the US. This means that we face a greater danger of being adversely hit by negative external developments, compared to countries like Hong Kong, Malaysia, China and even Vietnam.
We have lost a few projects and companies to competition in the region. Evergreen has moved to Tanjung Pelepas, following the footsteps of Maersk two years ago. Some investment banks are also cutting back in Singapore, and consolidating their operations in Hong Kong. They see more business opportunities in China, and less in Southeast Asia.
EDB and MAS are also finding it harder to attract new investments and business activities to Singapore. The companies are keen to know what we have to offer, and what we are doing. But they weigh this against the attractions of emerging new players, as well as the political uncertainty in South East Asia, which continues to cast a long shadow over the entire region.
But at the same time, the analysts and investors recognise that we have been doing the right things, and that Singapore offers a unique pro-growth, pro-business environment that is not easily replicated elsewhere. We have pursued prudent fiscal and monetary policies. We have a strong, stable tripartite system, with unions, employers and government working harmoniously together, committed to quality and efficiency. We enjoy political stability. Our system is transparent. The Government is predictable, red tape is kept to a minimum, and there are no arbitrary rules and regulations. The rule of law prevails. Intellectual property is respected. We do not have "Yamehas" or "Suzakis", Chinese versions of Yamaha and Suzuki. Our whole system works, whether it is financial services, telecommunications, logistics, the trade unions, or the government.
I had lunch recently with the Managing Director of Delphi Automotive Systems Singapore. They make electronic components for autos. He proudly told me that the Singapore plant was the company's most efficient. Although they have almost 200 manufacturing plants around the world, few can match the Singapore plant in terms of efficiency and quality assurance. A Thai customer of his, in fact, is urging him to fill his orders from the Singapore plant rather than from alternative locations, because we deliver high quality, zero-defect output.
We are, therefore, still attracting large, quality investments to Singapore, creating many well-paying jobs for Singaporeans. UMCi, for example, is investing US$3.6 billion in a wafer fab plant in Pasir Ris. Procter & Gamble (P&G) has also expanded its regional headquarters here, making Singapore one of its global business hubs, with a team of 700 regional management and functional support staff.
Philips made the news recently, when it decided to shift its regional headquarters to Hong Kong. But Philips still employs more than 3,000 people in Singapore, including a large R&D campus in Toa Payoh. It has just announced that it is locating its global development centre for LCD TV in Singapore. Singapore will have full responsibility of the LCD TV business, ranging from product creation and development, to production preparation, product testing and marketing.
But do not believe that in R&D, we will not face any competition. China produces many graduates and researchers, and MNCs are beginning to locate R&D and product design outfits in China. Increasingly it will not just be Singapore workers facing competition from Chinese workers, but Singapore engineers and scientists facing competition from Chinese engineers and scientists.
Our success in getting good projects here owe a large part to our workers, who have worked hard and done well to ensure that we continually improve our productivity and quality standards. But our workers must also adapt to the new, changing environment, learning new skills, and accepting new work conditions including less convenient work locations, and working shifts in bunny suits. Otherwise, even as new jobs are created and older, lower value-added ones phased out, they will face difficulty finding employment.
ST Microelectronics tells me that in early March, they tried to recruit 400 wafer fab specialists and NTC-2 technicians. The terms were good: starting pay of $1,150 for wafer fab specialists and $1,500 for NTC-2 technicians, excluding overtime, working 15 days a month. However, only 87 Singaporeans turned up for interviews. 23 walked off immediately when they heard that the job involved working shifts in a clean room. Of those who stayed for interviews, 35 were offered jobs. But only 20 turned up for work on the first day, and within a few days one had quit. So after spending $50,000 for three days of advertising and interviews, the company ended up with only 19 Singaporean workers. The company therefore turned to their Malaysian recruitment contractor, who promptly produced a pool of 360 candidates from which the company hired 151.
That is why we need foreign workers in Singapore. If ST Microelectronics could not hire the 151 Malaysians, they may well have had to shelve plans to expand their output. The loss to Singapore would not only have been the 19 Singaporeans who eventually found jobs with the company. We would also have lost all the other activities that a wafer fab plant here generates - the supporting industries, the financial services, the air-freight and logistics business.
During economic downturns, Singaporeans clamour for the Government to close the doors to foreign workers, and save the jobs for Singaporeans. But we must ask ourselves: are there enough Singaporeans to fill the job vacancies? Are Singaporeans willing to take up the good jobs that are available?
Singaporeans must adjust their mindsets. We must understand and accept that many of the old jobs lost will never come back, and that we have to adapt to the requirements of new jobs. Then we can continue to thrive in the new situation, and use foreign workers to help grow our economy and create more opportunities for Singaporeans.
The Government, too, must re-examine our policies and adapt them to meet the new, more challenging environment. One key area is our taxation policy. The Economic Review Committee (ERC) has recommended cutting personal and corporate incomes tax rates to 20% in 3 years. This is a big but essential step. Other countries have been bringing down their tax rates drastically over the years and continue to do so. We have to remain competitive with them.
At the same time, we cannot just cut corporate and personal income taxes. We have to balance the budget. Otherwise we would run a budget deficit, the Singapore dollar would go down and inflation would go up. Then, the value of your hard-earned CPF savings would be eroded, and you would no longer find it so cheap to cross over to JB to shop.
So we have to raise the GST. The ERC has recommended increasing the GST rate from the current 3% to 5%. The Government is seriously considering the ERC's recommendations, and will announce its decision in the Budget for 2002 on 3 May.
In the 3 weeks since the ERC recommendations were released, we have been busy talking to unions and grassroots organisations to explain the proposals, and understand their views and concerns. Singaporeans are understandably worried about the prospects of an increase in the GST.
Some of the requests stem from lack of understanding of the GST. For example, many people have suggested that we exempt essentials from GST to help lower income Singaporeans. But this is actually not a good way to help to poorer Singaporeans because higher-income households spend more on essential items than lower-income households. It will also lead to a messy GST framework, because we would have to then define what is essential and what is not, which is a complicated exercise. For example, rice is obviously an essential food item. Uncooked fish from the market can also be considered an essential food. But if you put a slice of raw fish on top of a blob of rice, it becomes sushi. Do we then exempt this Japanese cuisine from GST? So better for us to help lower income households directly, rather than exempt essentials from GST.
Some of the concerns, however, are legitimate. Singaporeans question if the timing for this GST increase is right, given that we are just seeing signs of economic recovery. They are also concerned if an increase in GST will lead to inflation, and whether things like healthcare and education will be priced beyond their reach.
The Government recognises these concerns. But the problem is if we postpone these tax changes and our economy stagnates, we would have fewer jobs and higher unemployment. Singaporeans would be worse off. So what we need to do is to find ways to address these concerns, so that we can proceed and not hold back our economic restructuring.
We will make sure that there are adequate measures to help Singaporeans tide over these tax changes. The GST was introduced in 1994 smoothly and with relatively little pain because we implemented a comprehensive off-set package to make sure that most households, especially lower income households, were not worse off during the transition. This included rebates for HDB S&C charges, rental rebates for HDB flats, and additional subsidies for heathcare and education. Any lower-income household which found the offset package insufficient because of their special circumstances could get further help through the CCC Assistance Scheme.
We will continue to look after Singaporeans. In 1994, the package we introduced was enough to offset the 3% GST for more than 5 years for lower income Singaporeans. I promise you that this time round, if we decide to increase the GST to 5%, we will definitely also implement a comprehensive offset package. The package will ensure that most Singaporean households will not be worse off with the higher GST. In fact we can go further. We can promise that for all lower income households - meaning the lower half in terms of household income - the package will definitely be enough to cover the extra tax they have to pay for at least 5 years. So you do not need to worry.
I know that many of you are eagerly waiting for the details of the off-set package. But unfortunately I cannot tell you what they are yet. All will be made known on 3 May.
To be sure, the competitiveness of Singapore does not depend on our taxes alone. The ERC is looking at other areas including our CPF and land pricing policies, promoting entrepreneurship, upgrading domestic enterprises, growing service industries, and developing our human capital to meet the new demands of the economy. The ERC is also looking at how we can help Singaporeans cope with the economic restructuring necessary for us to maintain our economic competitiveness. The recommendations will be released in a few months' time.
Throughout our history, each time we are hit by external shocks, we have fought and bounced back. Whether it was the recession in the mid-eighties, the Asian financial crisis in 1998, or the recent economic recession, we have worked together and overcome the challenges again and again. I am sure that if we stay united as a nation, with determination and confidence, we will succeed in remaking Singapore to meet the new challenges ahead.
