THE SINGAPORE ECONOMY - LESSONS TO BE LEARNT?

Last week, as the Chancellor of the Exchequer was announcing his measures for getting the British economy back on track, one of the most productive and innovative smaller economies in the World was also starting to implement its own budget measures to restructure its economy over the next few years.

And unlike George Osborne, Tharman Shanmugaratnam – the Finance Minister for Singapore – decided that the restructuring of his nation’s economy over the next three years would be focused on supporting a dynamic small to medium sized enterprise (SME) sector. This would be achieved through developing a “Quality Growth Programme” to help businesses upgrade their facilities, create better jobs and raise wages. It would also focus specifically on improving productivity for individual companies and specific industries.

One of the measures introduced under this plan that will certainly raise eyebrows in Europe is the support that the Singaporean Government is giving small businesses to raise their employees’ wages.
This will be done through a so-called Wage Credit Scheme (WCS) that will co-fund any increase in wages given to an employee in any year between 2013 and 2015. For instance, if an employer increases the gross monthly wage of his employee by £200 in 2013, the Government will pay 40 per cent of the £200 wage increase, not just for 2013 but also the remaining two years.

The Singapore Government is also providing around £700m over the next three years towards a 30 per cent corporate tax rebate for bills up to £15,000 per annum to help small firms with cost pressures.

However, the key focus of the budget are measures which are focusing specifically on raising productivity and ensuring that Singapore retains its status as one of the most competitive economies in the World.

For example, the Collaborative Industry Projects scheme will encourage consortia of firms to develop solutions to industry-specific productivity challenges whilst a further initiative will foster SME collaborations with large enterprises so as to enable co-innovation, capability upgrading and sharing of best practices within the supply chain. There is also a specific focus on new growth industries with an appreciation that disruptive technologies such as robotics and 3D printing will be changing the future of advanced manufacturing.

Indeed, the Singapore Government will set aside £250m over the next five years to support a “Future of Manufacturing” plan which will work with key industry partners, universities and research institutes to test-bed new technologies and develop applications that can be commercialised by local firms.  There is also going to be a drive to develop new growth opportunities in the services sector, especially in new areas such as data analytics.

Certainly, these strategies should be examined carefully by those policymakers within the Welsh Government who are also focusing on developing both sectors as part of Wales’ economic approach.

But perhaps one of the most important recent developments is the Productivity And Innovation Credit (PIC), which was recently highlighted by James Dyson as the key reason for his company’s presence in Singapore.

In the UK, tax relief on research and development (R&D) expenditure is limited to 225 per cent for SMEs and the costs that qualify are strictly controlled. In contrast, all businesses in Singapore, not just SMEs, can claim back their qualifying expenditure on items such as research and development (including R&D projects conducted outside Singapore) at a rate of 400 per cent. And in the recent budget, further incentives were added, including a matching cash bonus, to encourage firms to take part in the scheme.

And in order to focus on developing a more productive and innovative economy, other important elements of company expenditure apart from R&D also qualify. These are registration of intellectual property rights, acquisition of intellectual property, acquisition or leasing of automation equipment, approved design projects and, most importantly of all, training of employees.

Indeed, at a time when our own economy needs to upskill its workforce and when we have British companies of all sizes crying out for better trained staff, why hasn’t the UK Treasury considered a similar tax measure for companies?

In fact, it is puzzling that there were almost no incentives to increase productivity within the UK economy in the last budget, which is extremely worrying given that the latest data out this week showed that output per hour worked fell 2.3 per cent in the final quarter of 2012 compared with a year earlier.

Certainly, if this is to improve, along with other aspects of the economy, the UK could do worse than look at how policymakers in Singapore and other competitive nations are developing their economies.

And given that the Singapore economy grew by 1.5 per cent between October and December 2012, as compared to shrinkage of 0.3 per cent in the UK, they must be doing something right.

THE 2013 BUDGET

Following last week’s Budget, it wasn’t going to be too hard to predict that, yet again, the opposition parties in Westminster would go on the airwaves demanding a u-turn from the Chancellor of the Exchequer on fiscal and economic policy.

Yet it must have given George Osborne a considerable degree of comfort that the consensus from leading business organisations such as the CBI and the IOD is that reducing the deficit must be the overriding priority for the UK economy in the short to medium term.

Indeed, it was generally agreed by the business community that there was actually very little scope for any major decisions, within the current financial situation, to turn around an economy that seems now to be largely dependent on whether greater confidence can be generated within the business community and amongst consumers which, in turn, seems to be dependent on whether further euro-crises are avoided.

And ignoring the potential effect of Cypriot bank meltdowns, that is probably the thinking from the Treasury behind the announcement to increase capital spending plans by £3 billion a year from 2015-16, as well as the additional incentives for homebuyers.

In fact, this decision may finally be a grudging acceptance from those in charge of country’s finances that the capital expenditure was cut too far and too fast in the first two years of the Coalition Government when it was badly needed to boost the economy, especially the construction sector.

As a result of this decision, Wales will benefit from an additional £161million of capital spending power, which is great news for the economy although the Welsh Government did complain that this funding does not compensate for the loss in capital spending it has already endured since 2010.

Whether this is the case is clearly a debate for politicians to continue over the next few weeks but the one additional silver lining is the suggestion that there may be additional capital funding from the UK Government for two major infrastructure projects for Wales, namely the potential M4 relief road and the electrification of the North Wales railway line.

Of course, the devil is in the detail and negotiations between various Whitehall departments but the sooner a decision is made over these two projects, the better it will be for Welsh business. More importantly, it will certainly compensate for any reduction in capital spending, perceived or otherwise.

It is also worth looking in the small print for other details within the budget that may affect the Welsh economy and amongst the less publicised announcements was the decision by the UK Government to provide £1.6 billion of funding to support strategies in eleven key sectors as part of its industrial strategy. This sounds like great news for technology-based industries but it also has potentially serious implications for Wales, especially if the vast majority of this funding to support UK innovation continues, as it has in the past, to go to England.

This will mean that the Welsh Government, with its own focus on nine key sectors, will need to up its game substantially in ensuring that we compete effectively with other regions in attracting investment in key industries such as life sciences, advanced manufacturing and ICT. With initiatives such as the £100m Life Sciences Fund and the new creative industry hub in Cardiff Bay, there are certainly signs that this is beginning to happen.

And what about the small firm sector which makes up the vast majority of businesses in Wales? Well, many will welcome the introduction of an allowance of £2,000 per year which will be offset against employer’s national insurance contributions from 2014. This will result in 35,000 Welsh businesses benefiting by more than £50million, with 20,000 of these businesses taken out of national insurance contributions altogether.

Despite this boost, some have questioned whether more could be done to support small firms to grow.And whilst large firms will welcome the decision to reduce the main rate of corporation tax to 20 per cent in April 2015 to become most competitive amongst G20 nations, the small business rate of corporation tax has remained the same since 2011.

If, as our politicians keep saying, small firms are the backbone of the economy, then more must be done to ensure that they keep more of their profits to invest in their businesses and that it is not only larger corporations that are the beneficiaries of the Treasury’s fiscal largesse.

However, this may be part of a greater long term plan for the sector and perhaps this is something that George Osborne has up his sleeve to boost the economy in the 2014 or 2015 budgets?

Politics is all about timing and the Conservative Party will be hoping that the economy will begin to recover in 2014, giving the Chancellor further scope to boost business and consumer performance through reductions in corporate and personal taxation.

Certainly, he may be boosted by signs that the economic situation may be better than some doomsayers suggest - employment now stands at a record 29.73 million; the number of UK private-sector businesses is also at an all time high of 4.8 million; retail sales in February grew by 4.4 per cent, their strongest rate in almost two years; and manufacturers expect output to accelerate sharply in the next three months according to a CBI survey.

If true, then such a recovery, combined with more positive policies in the next two budgets may well ensure that, contrary to the pointers within current opinion polls and in the absence of any coherent policies from the other parties, the next General Election result may not be as foregone a conclusion as many think.

THE AUTUMN STATEMENT AND THE WELSH ECONOMY

Just over halfway through the current Coalition Government's term of office, there was a strange mix of anticipation and trepidation over the latest Autumn Statement from the Chancellor of the Exchequer, especially as the UK economy remains fragile.

Given this, George Osborne must have been relieved that, despite disputes about economic and fiscal policies on the front pages, there was a broad welcome from the business community for most of the main measures announced.

The £5.5 billion package to develop the UK's infrastructure was largely in response to pressure from business groups, with the Welsh Government receiving £227 million to spend on key capital projects via its Barnetised share of this funding. In addition, the decision to reduce the main rate of corporation tax to 21 per cent by 2014 is seen as not only supporting British businesses but also makes the UK a very attractive option for overseas investors.

And whilst unexpected, the ten fold increase in the Annual Investment Allowance for small to medium sized firms (SMEs) should act as a catalyst to get entrepreneurs investing their cash in developing their businesses over the next two years. However, whilst those were some of the headlines from the Autumn Statement, the more interesting new policies that have potential for the Welsh economy have to be found by reading carefully through the ninety three page document. For example, the UK Government has extended the temporary doubling of the Small Business Rate Relief, a move which has been automatically replicated by the Welsh Government in previous years.

Whilst politicians in Cardiff Bay could improve on such an offering, this is unlikely to happen until the business rates review is completed. It is great news for Newport that it has been chosen as one of only twelve cities to benefit from the second wave of the Government’s Urban Broadband Fund to help build one of the fastest and best connected communications networks in Europe. With Sir Terry Matthews' Alacrity Foundation also based in Wales' third city, this could give the local economy a massive kickstart after years of decline.

The announcement that Ebbw Vale and Haven Waterway Enterprise Zones in Wales will join Deeside in getting enhanced capital allowances will also help the development of key projects in both areas. A more controversial issue is that of shale gas, which is seen by some as the panacea to the growing energy problems of the UK economy.

Given the way that the USA is looking to become self sufficient through natural gas resources, it is not surprising that the UK Government is taking the first steps towards examining such potential through establishing an Office for Unconventional Gas to manage this relatively new industry. With South Wales having the potential to become one of the main areas for shale gas extraction, what seems like a minor policy change could have a big impact on both the local economy and the environment.

The recent thawing of relations between the Welsh Government and UKTI (the UK Government's trade body) is timely given the increased focus on exports and the announcement that UKTI's annual budget will be increased by £70 million to deliver more services to SMEs. Certainly, one would like to see Welsh firms take greater advantage of these exporting services in the near future. Indeed, the closer co-operation that has been established with UK Export Finance should ensure that Welsh firms are in a strong position to tale advantage of the new scheme to provide up to £1.5 billion of loans for the purchase of UK exports.

In supporting science and innovation, the UK Government announced that it will be investing £600 million in research infrastructure and facilities for applied R&D. If this was fairly distributed, Wales would be getting around £30m to support the development of innovative technologies. However, with Wales having access to additional money via European Structural Funding, then both the Welsh Government and the Wales Office should be making the case that the UK could get more bang for its bucks if facilities to support high quality research were built in Wales.

An announcement was also made that the Prime Minister will soon be setting out the next steps to support the UK Life Sciences sector. Again, with the Welsh Government showing the way to other regions through its £100m life sciences fund, we cannot be left behind other favoured regions, such as Aberdeen, Cambridge, Dundee, London and Oxford, as this vital high technology industry is developed further.

Another policy development that should be of relevance to Welsh firms the decision to provide £120 million for two additional rounds of the Advanced Manufacturing Supply Chain Initiative. This will support R&D, skills training and capital investment to help UK supply chains achieve world-class standards and encourage major new suppliers to locate in the UK. With Wales remaining one of the major manufacturing regions of the UK, I hope that our best companies, such as Airbus, Ford, Toyota and Tata, are linked into this programme. I would also expect that this initiative can be used to support new developments, such as the nuclear programme at Wylfa, to ensure that local firms take full advantage of major projects.

Therefore, as with every statement from the Chancellor of the Exchequer, there are policy changes that could have positive impact on Welsh business. The challenge now is to ensure that the Welsh Government work alongside their counterparts in Westminster to ensure that the economy of Wales takes full advantage of such opportunities over the next twelve months.

A BUDGET FOR JOBS AND GROWTH? ONLY IF THE WELSH GOVERNMENT WANT IT TO BE

When I began my academic career in 1992 at Durham University Business School, I worked on a project that, on every Budget Day, would look specifically at the Chancellor’s financial proposals and their implications for the small firm sector.

In an age where tweeting was the noise made by a canary in a Warner Brothers cartoon and the fax machine was god, we spent time huddled around televisions trying to work out exactly what the implications were for the entrepreneurial community as the Chancellor spoke from the House of Commons.

Our analysis would then be written up by teams of academics and edited into one report. This would then be printed off overnight in the North East of England before being flown down to London first thing in the morning where TSB, the sponsor, would distribute to their clients at a morning press conference.

How different the response to the Chancellor’s budget has been this year, with both politicians and pundits racing each other to be the first out with a tweet on the results of the budget without even any careful and measured contemplation of the details.

In fact, barely had the Chancellor taken his seat that the Welsh Government had rushed out a statement stating that “This is a disappointing budget for Wales. It's not a budget for jobs and growth”.

Given that they had less than two hours to digest the detailed statements from the Treasury, one would have imagined that this behaviour was a hostage to fortune, especially given that, as in all budgets, the devil is always in the detail.

More relevantly, I have always considered that any new programme or initiative announced by the Chancellor is a chance for Welsh business to ensure, with the support of Welsh Government, that it takes full advantage of any new opportunities.

For example, the further reduction in corporation tax will mean that the UK will, by 2014, have the most competitive rate in the whole of the G7. Given this, the task for the Welsh Government is to link its own offering to this national indicator and ensure that the ‘brand’ for Wales attracts more businesses to this region rather than any other.

But it is not only in areas such as corporation tax in which Wales can sell itself. The interventionist approach by the UK government to various parts of the economic system could also reap real dividends for the Welsh economy if only we take full advantage of them. Let’s take finance for small firms.

The Government has provided up to £20 billion to support business under the National Loan Guarantee Scheme (NLGS). It has also announced £1.2 billion for the Business Finance Partnership (BFP) to develop new forms of non-bank finance. Surely, as one of the only regions with its own government owned bank in the form of Finance Wales, ministers could put forward a coherent strategy so that these funds, along with the money already held by Finance Wales, could create a far bigger source of funding for Welsh firms?

The UK Government also announced an ambition to more than double annual UK exports to £1 trillion by 2020, expanding not only the role of UK Export Finance but doubling the support to UKTI. Given that Wales has enormous potential through its manufacturing industry for international trading, but one of the lowest proportion of active exporters of any region, this presents a real opportunity for Cardiff Bay to work with Whitehall to get more Welsh firms to trade overseas.

But there is also support for specific Welsh industries. Take, for example, the 100 per cent per cent capital allowances for plant and machinery at the Deeside enterprise zone. This could, if supported by other programmes in training and skills development from the Welsh Government, make North East Wales the engine room of advanced manufacturing once more, certainly in comparison to other competing parts of the UK and after years of decline.

Indeed, there is now a massive opportunity for Broughton to bid for the £60 million UK Centre for Aerodynamics that will support innovation in aerospace technology but only if the Welsh Government works closely with the Wales Office to come up with the best plan possible to secure this within our borders.

The new corporation tax reliefs for industries such as the video game, animation and high-end television could potentially help the further development of these sectors in Wale, especially if serious attention is paid to ICT and the creative industries in the same way that the Minister for Business has recently courted the biosciences industry.

Indeed, that sector should be boosted by the introduction of a reduced 10 per cent rate of corporation tax for profits attributed to patents and similar types of intellectual property. Now all it needs is for the Welsh Government to announce a specific enterprise zone for this industry in Swansea that is centred on the Institute for Life Sciences.

Therefore, apart from political brinkmanship, can the Welsh Government really say that this was not a budget for jobs and growth? Certainly, it could be a self-fulfilling prophecy if it refused to take full advantage of the opportunities for boosting Welsh industry at a time when we need to punch above our weight as a nation to not only attract companies to invest here, but to grow and develop those businesses with real potential for job creation.