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Shrinking workforce a concern 

First published in The Business Times on 15 January 2013
The National Population and Talent Division of the Prime Minister’s Office projects that the pool of working-age Singapore citizens will start shrinking by 2020. This means that the number of Singaporeans exiting the workforce will outnumber those entering it.

Such a shrinking workforce translates into several potential problems for Singapore. For one, this workforce will have to bear heavier tax and economic burdens, which come from supporting a growing number of ageing citizens. Businesses could also suffer as a shrinking and ageing population could mean a smaller customer base and a shortage of manpower to staff operations.

In turn, multinational corporations may choose not to set up operations here and Singapore-based enterprises may resort to downsizing, relocating or even closing down. With slower business activities and fewer career options for Singaporeans, greater outflow of local talent to more attractive locations might occur.

Given the myriad of consequences which could affect Singapore as a result of a shrinking and ageing workforce, it is apposite for us to take a step back and evaluate the current workforce-related incentives available here.

Are our current options sufficient? Do they take into account constraints such as quotas imposed on foreign labour? Can these incentives form holistic and comprehensive solutions to issues stemming from the changing face of the Singapore workforce.

Entrenching the productivity culture

A shrinking and ageing workforce amplifies the need for upgrading of skills and re-training of employees. This is necessary for the workforce to remain productive and competitive but it also means an increase in business costs for employers.

To relieve employers of the added financial burden of sustaining productivity in such a challenging landscape, measures such as the Workfare Training Support scheme and the Productivity and Innovation Credit (PIC) scheme should perhaps be institutionalised and made into a permanent feature of Singapore’s productivity framework.

The former provides course fee subsidies and absentee payroll funding for businesses sending their low-wage workers for training while the PIC scheme provides, among other incentives, 400 percent tax deduction to businesses for up to $400,000 of qualifying training expenditure each year until the year of assessment 2015.

The support threshold for these productivity schemes could be raised to signal the Government’s push for a pervasive productivity culture. In addition, the Government might want to consider a higher expenditure cap to cover a combination of activities eligible for tax deductions under the PIC scheme.

This will accord businesses with the flexibility to invest in the types of productivity activities which will best suit their individual needs.

Return of the Jobs Credit scheme?

The Jobs Credit scheme – in the form of cash grants to employers – was introduced in 2009 for one year as one of the lynchpins of government measures to help preserve local jobs in the wake of the 2008 economic crisis. Most businesses had welcomed this move as a better option compared to a cut in the Central Provident Fund contributions.

With the global economic crisis lingering in 2013 and beyond, employers are still nervous about their business prospects. As they continuously find ways to cut business costs, it may be inevitable for them to consider trimming their workforce.

To make it more attractive to employ and retain locals, the Jobs Credit scheme can be reintroduced. Instead of giving the impression that the scheme is merely a wage subsidy, tweaks could be made such that businesses have to invest their cost savings into implementing productivity programmes such as training employees and buying automation equipment.

In that way, the Jobs Credit scheme can relieve the burden on businesses and also help to contribute to a strong productivity culture.

Narrowing the gap in hiring costs between local and foreign talent Hiring local workers who are Singaporeans and Permanent Residents (PRs) aged 50 years or younger will cost employers an additional 16 percent of the remuneration of each employee. This extra cost takes the form of the employer’s contributions to their employees’ Central Provident Fund (CPF).

On the other hand, hiring foreign talent provides employers with a reduction of their tax bill by way of a double tax deduction for qualifying recruitment and relocation costs.

To narrow the gap in hiring costs between local and foreign talent, existing schemes affecting such costs should be relooked with a view to level the playing field between Singaporeans and PRs looking for jobs.

For instance, a direct subsidy on part of the employer’s contribution to employees’ CPF could be given during periods of recession. Employers could also be given further tax deductions on their contribution to their employee’s CPF for local workers who have to be hired after the foreign worker quota limit has been met. Employers could also be given tax deductions on recruitment costs of hiring approved local talent.

Special tax treatment for special employment

The Special Employment Credit (SEC) was introduced in 2011 and further enhanced in 2012 to provide cash grants to employers who hire older low-wage Singaporean employees. This group comprises Singaporeans aged 50 and above and who are earning up to $4,000 a month. The SEC was also extended to employers who hire younger Singaporeans with disabilities.

With the tighter quota imposed on foreign labour, the SEC encourages employers to consider tapping on the resources of older workers and persons with disabilities to relieve their manpower needs.

However, one drawback diluting the effectiveness of the scheme is that SEC payouts are considered as revenue receipts. Employers receiving these grants can thus be taxed. To promote greater participation from employers, SEC payouts could be made tax-exempt in the hands of employers.

Lifting the cap on tax deduction on medical expenses

In light of Singapore’s ageing population, employers can expect to incur higher medical expenses as part of their healthcare benefits for their employees. Current tax laws allow employers to claim tax deduction on medical expenses, up to a cap of two percent of the total staff remuneration for the year, subject to certain conditions.

With a limited talent pool, employers need to offer competitive compensation packages – which naturally include attractive healthcare benefits – to employees. Full tax deductions on employees’ medical expenses borne by employers should be allowed as these are business costs. Otherwise, employers may be more inclined towards hiring younger employees since their medical expenses are unlikely to be as high as older workers.

Promoting work-life balance and family-friendly work environments

In order to mitigate the effects of a shrinking workforce and declining birth rates, Singapore may have to look beyond the usual factors influencing a couple’s decision to have children. In particular, factors such as the supporting infrastructure and the working environment of citizens should be considered.

Promoting work-life balance and allowing flexible working arrangements appeal to many employees. Such measures could prove useful in retaining employees even as they set up their own families, and may also indirectly promote marriage and parenthood.

To encourage new mothers to continue working and stay-at-home mums to re-join the workforce, employers should be encouraged to introduce flexible work arrangements such as work-from-home schemes and part-time work programmes. Developing such work practices, however, would most likely result in additional costs for employers.

To support this endeavour, the Government could consider granting double tax deduction to employers on the costs of introducing flexible work practices. Such costs could include, for example, consultancy and training costs to develop flexible work schemes.

The Government could also consider fine-tuning the Work-Life Works! (WoW) Fund, which provides a grant to employers of up to 80 percent of costs, subject to a maximum of $20,000. The threshold could be lifted for businesses of larger scale and which incur greater costs. Also, the fund can be tweaked to cover a wider spectrum of costs such as staff costs involved in running pilot flexible work schemes and costs of hiring temporary workers to cover for those on maternity leave.

Working mothers may require infant and childcare facilities to care for their children. Currently, there is a foreign maid levy relief to encourage married women to remain in the workforce and have more children. This tax relief could be extended to cover working mothers who use infant and childcare facilities to look after their children.

Conclusion

Population and talent issues are complex policy areas which require strategic planning and trade-offs. The impending release of the White Paper on Population by the Singapore Government should shed some light on its long-term view of population growth here.

It is our wish that the Minister for Finance could address the above-mentioned issues in the ensuing Budget 2013 to prepare for the changing face of the Singapore workforce. The measures we have proposed – enhancing productivity, encouraging employment of local workers and tapping on alternative labour pools – should also not be mutually exclusive as the needs of the changing Singapore workforce must be viewed as a complete whole.

In the long run, the successful implementation of comprehensive solutions to population and workforce issues will be dependent on a concerted tripartite effort on the part of the Government, the employers and the workforce.



The article is contributed by Chiu Wu Hong, Tax Partner , KPMG in Singapore, and Ho Kah Chuan, Senior Manager, Enterprise Incentive Advisory, KPMG in Singapore. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in Singapore.