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Ethos Issue 6, Jul 2009
Extraordinary Times,
Fundamental Principles:
The 2009 Budget and the Ministry of Finance’s
Approach to Countercyclical Economic Strategy
Jonathan Pflug
ACT WITH IMPACT: UNPRECEDENTED CIRCUMSTANCES REQUIRE RESPONSES OF UNPRECEDENTED SCALE
The impact of the ongoing crisis is
unprecedented in its swiftness and
scale. The global financial system
acted as a transmission mechanism for
the psychological panic that followed
the collapse of Lehman Brothers in
September 2008, which then rapidly
affected business operations in the
real economy. At the same time, all the
major regions of the world experienced
economic decline simultaneously—making this the first truly global
recession in the post-war period.
In view of these unique challenges,
the scale of the new Budget measures
had to be correspondingly bold. In
formulating the Jobs Credit scheme and
the SRI, the Government has decided
to err on the side of impact instead of
caution.
The 12% wage offset provided by
the Jobs Credit scheme is generally
equivalent to a 9-percentage point Central
Provident Fund (CPF) contribution rate
cut.3 When compared against the 14.5%
prevailing employer contribution rate
for most workers, this translates into a
62% reduction in the employer’s share of
CPF contributions.4 However, unlike CPF
cuts, the Jobs Credit scheme does not
undermine workers’ retirement savings
or their ability to service their mortgage
payments through CPF. Never in the
past has the Singapore Government
stepped in to replenish employees’ CPF
contributions in conjunction with a
CPF cut to lower business costs. Since its
introduction, the Jobs Credit scheme has
generally been welcomed as a vital cashflow
boost.5
The SRI schemes also represent an
unprecedented level of risk-sharing
in terms of Government credit
measures. With 80% risk-share on
unsecured working capital loans of
up to S$5 million, the new Bridging
Loan Programme under Budget 20096 is the most generous Government loan
scheme available that does not require
any collateral. At the time, MOF also felt
that 80% risk-sharing was as high as we
could accommodate for a broad-based
scheme while still aligning the banks’
interests and objectives with ours.
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TWO EXTRAORDINARY MEASURES
The Jobs Credit scheme provides
businesses with a cash grant based on
the wages of Singapore and Permanent
Resident (PR) employees, set at 12% on
up to the first S$2,500 of wages per
month. Structured as four quarterly
payments, the payments are based on
the preceding three months’ wage bill
but only for workers employed at the
end of the period. Calculated using CPF
contribution data, the scheme requires
no additional application and paperwork
on the recipient firms’ part.
The Special Risk-Sharing Initiative (SRI) has two major components: a
working capital scheme called the
Bridging Loan Programme (BLP), where
the Government shares 80% of the
default risk on loans of up to S$5 million;
and a trade finance module, in which
the Government shares 75% of the
risk on trade financing across two
programmes. In order to leverage on
banks’ relationships with businesses
and their credit assessment expertise,
the SRI operates in partnership with
participating financial institutions. |
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ACT WITH A LONG-TERM VIEW: ACHIEVE BALANCE BETWEEN SHORT-TERM NEEDS AND LONG-TERM GOALS
Economic crises lead to a reshuffling
of the deck that creates an opening for
Singapore and Singaporean companies
to improve our competitive positioning.
In such an environment, the survival
instinct prompts resilient businesses
to review business models, improve
products and explore new markets.
However, anti-recessionary business
measures can be a double-edged
sword. By intervening in the
marketplace to limit the impact
of any downturn, governments
may also blunt necessary
market adjustments.
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