Bonuses To Cope With Coming Tax Hikes?

ALL 84,000 civil servants in Singapore’s 16 Ministries will get their biggest year-end bonus in four years, in line with a more optimistic economic outlook for 2017 compared to 2016. The Public Service Division (PSD) will be giving civil servants a year-end Annual Variable Component (AVC) of one month’s pay, which is double the 0.5 months bonus they received in 2016.

The PSD is the city-state’s largest employer, and with this planned bonus payment, it sets the tone for other employers in the country.

While this is a positive development for civil servants, many private companies might struggle to keep up. It is no secret that they have been struggling to find new sources of growth and earnings, and have tended to be more focused on cutting costs in the last 18 months. Workers continue to be laid off in 2017, though at lower levels than in 2016.

The Right Signal?

While it is the norm, an across-the-board payment of bonuses rewards all civil servants equally even when their relative performances may differ in quality. It sends the wrong signal. Civil servants are not incentivised to innovate, question procedures, and take risks. This sustains the stereotypical view that civil servants are just focused on maintaining their iron rice bowl and not prepared to stick their necks out. This is not a major issue in Singapore as government services are mostly efficient.

Meanwhile, the announcement of the bonus payment comes after news that Singapore’s gross domestic product (GDP) grew by 5.2% year on year in the third quarter of 2017, accelerating from a 2.9% expansion in the previous quarter.

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Singapore’s economy is now projected to grow by 3.0% to 3.5% in 2017, after growing by 1.8% in 2016. GDP growth in 2016 came amid a 0.5% contraction in the consumer price index (CPI). CPI is projected in the 0.5% to 1.5% band for 2017.

Obsessed With GDP Growth

It has been put forward that GDP growth does not necessarily reflect the economic well-being of Singaporeans, even though the city-state’s GDP per capita is among the highest in the world. Indeed, GDP is used to measure production rather than well-being.

As far back as 2009, renowned economist Joseph Stiglitz wrote: “In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.”

One wonders how long this obsession with GDP growth will persist in Singapore.

Reverence towards GDP growth has been the bulwark of Singapore’s progress since independence but the world is now changing. Technological developments like big data and artificial intelligence have made it possible to measure a metric like economic well-being with more precision.

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Alternative Methodology

Since it’s hard to capture everything in one metric (GDP), the New Economics Foundation (NEF) proposed five indicators — good jobs, well-being, environment, fairness and health — in an October 2015 report.

Have these headline measures caught on among governments around the world? The absence of monthly or quarterly updates on these metrics speaks volumes.

The limitations of GDP are also underscored by Singapore’s economy being fuelled by external demand this year, which even the Monetary Authority of Singapore has noted.

Domestic demand remains muted. How can civil servants in Singapore claim credit for external demand? Their bonus payments should instead be pegged to the domestic component of economic growth. However, this is not discussed often enough as the focus on the government, mainstream media and many economists seems to be on headline GDP data. If bonus payments were a function of the domestic component of GDP, that would be more meaningful to many Singaporeans, because benefits of growth would be more tangible for them.

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Finally, one reservation about the bonus payment announcement is that it has come soon after news that tax hikes are on the cards in Singapore. Reading between the lines, one could think that civil servants will be more amenable to any tax hikes if they are given relatively generous bonuses. The payments would help to mitigate any internal rumblings in the civil service about tax hikes.

The announcement of bonus payments also affirms that tax hikes are likely to come to Singapore sooner rather than later, perhaps as early as the next Budget announcement in the first quarter of 2018.

Image: Shutterstock

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  1. Yes civil servants worked hard and they deserve their bonuses. Look at the LTA! Surely we can see their hardwork and contributions? Lack of results or negative results is another matter. But their hard work contributed to GDP growth, I think.

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