Decision To Withhold Civil Servants Year-End Bonuses Shows PAP Government Doesn’t Understand Economics
On November 27 the Public Service Division (PSD) announced that Singapore’s 85,000 civil servants will not receive any year-end bonus this year . This followed the cancellation of the mid-year bonus which was blamed on the economic fallout from the Coronavirus pandemic.
This may sound like common sense to many Singaporeans but to an economist this makes no sense. The economy has suffered a massive exogenous shock to demand as tourism has dwindled to zero and global trade has fallen sharply, though it is now starting to recover. It is true the Government has provided a lot of support to the corporate sector (of which it owns a majority share) and rather less to the average Singaporean.
I pointed out back in June (Fake News Alert!: Why Both Kate Spade Influencer Tin Pei Ling and Her Boss Heng Swee Keat Are Talking Cock) that when Ms Tin Pei Ling claimed that the Government had spent $93 billion supporting Singaporeans this was false. I worked out that it was more like $44 billion and that a majority of this was probably passed passed from one pocket to another as it was paid out to Government-owned entities or property tax rebates benefiting the Government as the biggest landlord. Rather less has been provided to the ordinary Singaporean. In fact I calculated there that Government direct support to Singaporeans amounted to about $2.5 billion which when divided among 4 million residents (citizens and PRs) amounted to about $620. It has been increased since then and now the Government estimates that its Care and Support Package will cost $4.6 billion in total. But that is still only slightly more than $1,000 per resident.
Cutting back on cash payments to individuals (of which 25% comes back to the Government through CPF) when demand has fallen off a cliff does not make sense to anyone who knows anything about Economics. The challenge is to stop businesses going bust and laying off more workers which will cut demand even further and send the economy into a death spiral. Singapore has no pre-existing income stabilisers in the form of unemployment insurance or income support measures unlike most Western economies, including the US. There are three reasons why the Government has done this:
(1) It does not understand Economics. This certainly seems true of Heng Swee Keat who studied Economics with me at Cambridge though he only got a second class degree. He has talked about raising taxes once Covid is over to rebuild the Government’s stock of foreign assets. This would likely be disastrous in the absence of a recovery in global trade and tourism.
(2) It is still wedded to the mercantilist view that domestic consumption is bad and that only investment and exports are good. Subsidising wages is equivalent to an export subsidy (it allows exporters to sell their goods more cheaply) as well as being bad for productivity and likely running foul of attempts by the US to curb export subsidies.
(3) The Government does not want to be seen being generous to civil servants when so many Singaporeans have lost their jobs and the incomes of the self-employed like private hire and taxi drivers have declined so much.
Both (1) and (2) are examples of bad economics, or what has been called Zombie Economics. (3) is like cutting off your nose to spite your face. Instead of stopping the bonus payment to civil servants the Government should instead be making similar payments to all Singaporeans, just as Heng did with the $300 payments under the Care and Support Package and the US Government did with its more substantial Economic Impact Payment of US$2,400 per couple and $500 per child.
The Government is not a mama shop. Instead of cutting back to save money it needs to spend more, even more than it is doing now. Longer term we should be thinking about paying the Net Investment Returns Contributions directly to citizens as a form of Guaranteed Minimum Income rather than the shell games that Heng and Tharman before him play at Budget time, moving money from one silo to another so that it is saved and not spent.