Efficient Policy May Be Neither Equal Nor Fair
Introduction
In 2024, Singapore’s per capita income breached $100,000. This is among the highest in the world, and greater than most advanced, industrialized economies. That we were able to attain this standard of living in the relatively brief span of 60 years since our independence is a testament to how far we have come, in terms of income and wealth.
Yet in spite of these undeniably impressive achievements, many Singaporeans still express a sense of frustration at their lot, hold perceptions that their world-beating incomes remain inadequate, and argue that they are struggling to make ends meet. What gives?
We can choose to believe that Singaporeans are simply, too sheltered, too pampered, too ungrateful to recognize the good thing they have going on. But, as policymakers, we must surely take such feedback in good faith, and seek to understand what so many households feel, but somehow have been unable to adequately express.
In this speech, I will expound on why I think many Singaporeans feel this way. My explanation has to do with the different notions of what it means to live, survive, and thrive in a society where policymaking is still decided largely on the basis of efficiency. This stands in contrast to other notions of justice that many hold dear, such as whether something is equitable, or if it is fair.
Divvying up a cake
Imagine, if you will, that we had to cut a cake. If it helps, you can think of my daughter’s favorite: black forest. For those of us unfamiliar with the cake, it has parts that are composed of chocolate, cream, and cherries. It is also rather delicious.
Say I’m interested in splitting the cake between my daughter—who loves chocolate but won’t typically touch cherries or cream—and my wife, who prefers cherries and cream more.
You could say that an efficient splitting of this cake involves carving out the chocolate bits for my kid, while leaving the parts with cherries and cream for my better half. Its efficient because we gave each one what they value more (and as wisdom tells us, happy wife, happy life). But it is clearly unequal.
Now, this may not be a big deal; after all, both my wife and daughter are happier than they would be, than if I were to propose a swap. There isn’t any envy. If we were deciding on public policy along these lines, one could make a compelling argument that this is a very fair division.
However, if I were splitting the cake between my daughter and myself, things would be rather different. See, I happen to like chocolate, too. So, even if you gave me more cherries and cream, I would still find this split unfair. For me, then, it would be better to cut the cake exactly in half, say, so that we have equal shares of the chocolate that we both like. This equitable distribution would, perhaps, be another sound principle for public policy. But it wouldn’t strike my daughter as very fair.
Setting aside how, in reality, I’d probably end up giving my share of the cake to my daughter, anyway, this simple thought experiment illustrates how we can’t simply think about public policy in terms of just one idealized principle. The government may value efficiency, for instance, but society may actually prefer an outcome that is more equitable, or perhaps one that most would perceive as fairer.
Public policy that more will perceive as just
Let me offer some examples of how efficient public policy may inadvertently turn out to be unequal or unfair.
Making education fairer by making it less equal
I am an educator, so let me begin with schools. Presently, the Ministry of Education channels around $4.6 billion toward salaries for teachers and other education professionals, and another $3.8 billion in capital injections for educational institutions. Taken together, this spending on labor and capital for schools amounts to around three-fifths of the total education budget. Excluding appropriations to certain specialized programs—such as the independent schools program, special assistance plan (SAP), or the special education schools program—these are, typically, distributed according to the general principle of equality: each school receives resources proportional to their needs.
To be clear, this does not mean that schools receive exactly equal budgets. If a school enrolls more students—or offers additional programs that require special resources (such as language elective programs)—it will naturally receive funding that exceeds the baseline. Still, the approach is to slice the educational pie in a manner that treats each student as, essentially, equal.
Is this fair, however? Allocating a proportional amount to each school fails to account for how, in reality, students in different schools have access to different amounts of resources. Our so-called “neighborhood schools” are predominantly comprised of students from their nearby public housing estates, and are mostly middle-class. In contrast, many who attend a “brand name” school hail from the wealthiest tier of households. Furthermore, schools in the latter category—by dint of their longer history and more successful alumni base—can easily raise additional funds with donation drives. The de facto resources that each student in Raffles or ACS or St Nick’s has is clearly more than that available to students in Compassvale or Outram or North Vista.
Here, what is equal does not seem fair. If we genuinely wish to have true equality, we would disproportionately support the weaker schools. This could be simply by sending relatively more funding their way, while reducing what the top schools receive. Or we could ensure that the best graduates in each teaching cohort spend significant time in such schools, and tie their career advancement to how well they’ve raised standards there.
Making transportation fairer for those with greater needs
A similar choice exists in transport policy. Singapore allocates its private vehicle quotas using a certificate of entitlement (COE) system, which is expected to bring in $6.6 billion this fiscal year. I have spoken more about this in the Adjournment Motion that I delivered on Monday, but for now, I will return to my argument on whether the principles behind the system are fair.
The COE—like most auctions—purports to be neutral. So, rather than inferring whether one household or another might deserve a car, quota auctions ask those interested in owning a car to bid for their right to own one. The COE system takes this a step further, by seeking efficiency in this outcome for both buyers and sellers, while ensuring that it raises a comparable amount of revenue for the government.
What is absent from this scenario, however, is whether this efficient allocation is also fair, in the sense that those who own cars are those who need them the most. It is tempting to say that there is no way to know for sure who the ones most in need of private transport are. Hence, bidding allows market prices to determine who these might be. After all, those who need a car more, are likely to bid more.
This implicitly assumes that those who bid less do so because their needs are lesser. Simple introspection will reveal that this is a flawed understanding of human behavior. After all, we will only bid as much as we can afford. Bidding less doesn’t mean that we need something less; it just means that that we don’t have enough money. We may well bid more, if budget weren’t a constraint.
By abrogating the allocation decision to the market, we aren’t truly neutral. Rather, we are implicitly accepting how allocations based on market prices—efficient though they may be—are also fair. Again, a little introspection will reveal how this claim is, at best, incomplete. Accepting the COE system effectively acquiesces to an unequal outcome: that those who have more resources are able to buy more cars.
Yet we already recognize that some groups—the elderly, those with many children, the disabled—do have greater needs that are deserving of more support from society. Not only would this resonate with Asian values, they are groups that already explicitly receive support in various public policy programs. Most of us can easily buy the argument that the needs of these groups for a car are, all else equal, larger than that of a wealthy household purchasing a third car for weekends. A fairer system should make private transportation more affordable for them.
Making our economy more equitable by accepting less efficiency
When it comes to the economy, the most common pair of tradeoffs—something I teach my students in their first principles of economics class—is that, often, one needs to balance efficiency against equity. I will illustrate with three cases.
First, consider our existing corporate tax regime. The common refrain we hear in response to calls for us to raise our taxation on companies is that this will discourage investment. Increasing the corporate tax rate would not only be inefficient—since higher investment would typically be accompanied by faster growth—but it may even be counterproductive, since the diminished profits may mean that companies choose to relocate elsewhere, where taxes are lower.
Let’s set aside the claim that investment need be materially affected by the prevailing tax rate—a matter on which I had spoken about before, and concluded that the evidence suggests “not much”. There is still a separate issue, of whether the tax burden on companies versus households is even equitable.
It is not possible to perfectly compare the two. Few companies pay the headline corporate tax rate, of 17 percent, due to exemptions, loss carry, and rebates. But, on average, firms are effectively ftaxed something in the order of between 2 and 4 percent. In contrast, personal income taxes are imposed at the margin, and progressively increase according to one’s tax bracket. Calculations suggest that, on average, households pay about a fifth of their income in taxes. Even allowing for errors in these estimates, the tax rate faced by businesses and households are, evidently, unequal.
Admittedly, increases in the corporate tax rate could result in a loss of economic efficiency and performance. But it will be much more equitable, since we are evening out the burden that capital bears, relative to labor.
Second, let’s look at our goods and services taxes (GST). Like all sales taxes, the system is regressive, since the burden of a 9 percent tax is, prima facie, greater for a lower-income household than a higher-income one. The government has sought to make it more progressive, by rebating part of the tax in the form of GST vouchers (GST-V).
Despite this concession, a GST is likely to remain regressive—albeit less so than in the absence of vouchers altogether—and especially if poorer households have a greater propensity to spend rather than save their incomes. But say we believe that even greater progressivity is preferred, relative to this GST-cum-GST-V arrangement. Then we may wish to rely instead on changes to the marginal tax rate on qfhigher income brackets, because this would be yet more progressive, and fairer. Or, perhaps, we believe that every individual, rich or poor, should have an equal right to essentials, such as rice, oil, and water. In this case, exemptions for a list of such staples becomes justifiable.
Thus, when seen from solely the lens of efficiency, a GST may seem like the only credible form of taxes on consumers. But once we concede that values like equality and fairness are just as important, other more inefficient forms of household taxes suddenly become palatable, too.
Third, think about our carbon tax regime. Like any tax, it introduces inefficiencies. But as anyone who has taken even an introductory class in economics will be aware, this is only the case if we disregard additional costs—external to private actors but whose consequences are borne by everyone—due to climate change. For true equity, such externalities must be accounted for by those that generate carbon, which is why we have a carbon tax.
But that’s not all. Climate change also brings to bear whether we are doing enough to ensure intergenerational equity. That’s because our children, and their descendants, cannot yet choose the sort of policies that would result in the world they will eventually inherit. Again, we have a situation where what’ efficient isn’t automatically equitable.
Some may argue that there are more efficient ways to have countries bear the costs of their carbon footprint: through a quota system, accompanied by tradable emissions permits. In theory, this is likely to be more efficient than even a carbon tax, since it will allow those who are best able to mitigate emissions to absorb the costs of doing so.
But in practice, this means that richer countries would likely be able to purchase permits from poorer countries, to allow them to emit more. Again, this is efficient. But think about what this implies: it suggests that it is right for rich countries to effectively dump their pollution onto poor ones, in the name of efficiency. This cannot be remotely fair.
Fair public policy should assure equality of opportunity and leave no one behind
As these examples show, what’s efficient, what’s equal, and what’s fair differs not just in principle, but also in reality. I could offer further instances of how what is perceived as fair and just continues to elude many in Singapore, ranging from residual discrimination in the workplace due to age or sexual orientation, to how our system of fines and penalties is felt more acutely by the lower income than higher income households, or how the rich are able to access healthcare services more quickly than the poor.
But why should we concern itself with such distinctions? The hard truth is that if we want public policy that society can embrace as fair, efficiency alone simply won’t do. We need to also assure our citizens that everyone has an equal chance to succeed in life, and that no one is left behind.
Most would regard fair equality of opportunity as more appealing and attainable than a singleminded focus on equality of outcomes. Yet redistribution must still play a role. Despite recent progress, our income inequality remains higher than all but a handful of countries in the OECD, and the gap in terms of wealth is even more yawning. Redistribution is also needed as a counterweight to blunt luck, since success owes as much to good fortune as it does to pure merit. Indeed, the two concepts are closely tied: parents’ outcomes, after all, are their children’s opportunities. Equality of opportunity should be a means to advance our goals of social justice, rather than an end, per se.
Moreover, if it isn’t already amply clear, ensuring equal opportunities isn’t solely about pushing for equal outcomes. This is not only because of the impossibility of sustaining blunt equality of this nature, or the corrosive effects that such crude redistribution has on individual incentives to work. It is also because redistribution alone does not address the concentration of power in the economy, or offer individuals agency, dignity, meaning, and recognition through work.
Hence, even with equal opportunities, we also need to remember that we are as good as the least among us. This means that terms like “shared prosperity” must be anchored in a very concrete way: that we cannot be satisfied with our economic success, our vaunted world-beating incomes, until the least advantaged among us have a fair shot of living a life of dignity.
This means that we should be horrified that there are uncles and aunties in our midst, approaching the 9th decade of their lives, who still feel compelled to work to make ends meet. That there are those who are disabled or terminally ill, yet feel that they are being left behind by a government that still prioritizes self-reliance. That we accept as completely normal for a couple to share a CPF BRS payout of $930 a month, even though this falls below what we officially use as a threshold to evaluate poverty according to Comcare.
Conclusion
In his address to Parliament, President Tharman stressed the importance of chasing “not just growth, but inclusive growth… [where] every Singaporean has the confidence that tomorrow will bring brighter opportunities and a better life”. And what would such inclusive growth look like? He later elaborated that we need to “ensure fairer outcomes,” and that we must judge success “by how we support the vulnerable, and how we enable every Singaporean… to live with dignity.”
I agree with the President. In my speech, I have explained why, despite our material success, many still feel that government policies remain unfair, still view that their opportunities are inequitable, and still search for justice as the most vulnerable. In this term of Parliament, I hope that we will continue to make progress in helping every Singaporean live dignified lives. It is what so many of the voters in Sengkang—whose confidence returned us to this House—yearn for, and one that we, as their elected voices, will continue to fight for.
I support the motion.
