Tackling inequality​: Charting own path

Dear Ms Sim Ann,

I refer to your 22 Dec 2011 Straits Times article.

You compared the Swedish government spending nearly 50% of GDP to the Singapore government spending 17% of GDP. There are two adjustments you can make so that the comparison is fairer.

First, almost 18% of Swedish government expenditure comes from social contributions by the Swedish people. Strictly speaking, this component doesn’t represent government spending on people but people contributing to its own welfare. If we take that out, the Swedish government spends only 41.1% of GDP.

Also, expressing government expenditure as a percentage of GDP may not be as meaningful as expressing it as a percentage of GNI. To illustrate, consider a household with a combined salary of $4,000 and a total monthly expenditure of $2,000. Suppose the household also rents out a room at $1,000 a month to a foreigner who earns $5,000 a month. The household expenditure as a percentage of total household income is $2,000 / $5,000 = 40%. But the household expenditure as a percentage of all incomes in the house is $2,000 / $10,000 = 20%. So the percentage household expenditure can be vastly different depending on whether it is compared to household income or income in the house. While it makes sense to express household expenditure as a percentage of household income, it doesn’t make sense to express household expenditure as a percentage of income in the house. The former tells us how well controlled household expenses are while the latter muddies the picture by including foreigner income.

Government expenditure, GNI and GDP are the equivalent to household expenditure, household income and income in the house respectively. Government expenditure should be expressed as a percentage of GNI which is the income of nationals, not GDP which is the income of the land. Unfortunately for both Sweden and Singapore, GNI doesn’t represent income of nationals but income of the land plus income of nationals residing overseas.

Luckily for Singapore, we have this statistic called ‘indigenous GDP’ which is the GDP of citizens and PRs. The Singapore government expenditure expressed as a percentage of indigenous GDP is 28.8%. This figure is much higher than the 17% you quoted because Singapore has a sizeable foreigner population that is 25.7% of our total population. There is no Swedish equivalent for indigenous GDP but since Sweden’s foreigner population is only 6.1% of total population, the diference between GDP and indigenous GDP would not be too great.

This approach of comparing government expenditure to indigenous GDP instead of GDP is important because the government can very easily boost foreigner numbers to boost GDP without boosting indigenous GDP or government expenditure by much. In the end, the cost of foreigner influx is not born primarily by the government but by the people in the form of increased prices.

Making these two adjustments, we find the Singapore government expenditure of 28.8% of indigneous GDP not that far from the Swedish government expenditure of 41.1% of GDP.

You also compared Sweden’s up to 57% tax rate with Singapore’s less than 20% tax rate. What this comparison doesn’t convey is the fact that even though Swedish taxes are higher, Swedish salaries are also higher so that after tax income is on par. The following table shows that the Swedish after tax employee compensation is 36.9% of GDP, comparable to Singapore’s 39.9%.

Sweden Singapore
Swedish Kroner % GDP SGD % GDP
GDP 3,204,320 100% 267,952 100%
Compensation of employees 1,724,586 53.8% 113,247 42.3%
Income tax 541,012 16.9% 6,288 2.3%
Compensation less income tax 1,183,574 36.9% 106,959 39.9%

Other international surveys show Swedish after tax income to be higher than Singapore’s.

Finally, spending more doesn’t necessarily mean being more wasteful. A large part of Swedish government expenditure goes directly back to the people to improve their lives. Sweden is more aged than Singapore and necessarily spends more on healthcare and old age pensions. We too would spend more on healthcare when we become as aged as Sweden. We don’t spend as much on our old so they go around picking up cardboard boxes to sell or clean toilets or tables at hawker centres.

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