(Adds details, economists' comments)
By Kevin Lim
SINGAPORE, Feb 25 (Reuters) - Singapore unveiled a budget heavy on social spending on Monday and imposed new curbs on companies hiring foreign workers as the city-state tries to reduce its dependence on overseas labour and address a widening income gap.
Singapore, the Asian base for many Western multinationals and banks, has been trying to restructure its economy by getting restaurants and other services firms to boost productivity and curb their reliance on low-skilled foreign workers.
The government is also trying to narrow an income gap that is one of the largest among developed countries, and the latest budget included increased subsidies for pre-school education as well as cash transfers to Singaporeans earning less than S$1,900 ($1,500) a month.
"We need to intensify this economic restructuring and skills upgrading so as to achieve quality growth... If we do not do better in raising productivity, we will be caught in a situation where businesses lose competitiveness and wages eventually stagnate," Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said in his budget speech.
Singapore's labour productivity fell 2.6 percent last year, reversing from growth of 1.3 percent in 2011.
The long-ruling People's Action Party (PAP) is facing increased pressure from an electorate angry about a surge in immigration that critics say has resulted in overcrowding, rising prices and competition for jobs and housing.
Tharman's budget for the fiscal year beginning April 1, 2013 included an increase in the levy that employers in Singapore must pay to hire low-cost foreign workers that will take effect in July 2014 and July 2015.
"The increases will be most significant in sectors where productivity growth is weak and the growth of the foreign workforce is significant," he said, citing the construction and marine sectors as among those industries that will be affected.
He also said the ratio of low-cost foreign workers that companies in services industries can hire will be reduced to 40 percent of the workforce, down from 45 percent currently.
The government also will help companies cope with the tighter labour market by offering S$5.9 billion ($4.8 billion) in various schemes to help firms upgrade.
Tharman signalled the government will also become tougher on companies hiring professionals and managers from abroad.
"MOM (the Ministry of Manpower) will put in place a framework to ensure that firms give fair consideration to Singaporeans in their hiring practices," he said.
Jobs are plentiful in Singapore and unemployment is below 2 percent, but salaries tend to be low relative to the cost of living, especially for menial workers such as cleaners who make around S$1,000 a month due to competition from foreigners.
The government's efforts to curb the number of foreign workers have already raised the ire of employers, with the American and other chambers of commerce complaining of labour shortages and the Restaurant Association of Singapore saying eateries may be forced to shut down or move abroad.
Irvin Seah, an economist at DBS, Singapore's largest bank, said the island's ongoing restructuring has already started to hurt the economy, with some multinational firms looking to move to other regional locations because of rising costs.
"The restructuring has resulted in the deterioration in Singapore's overall competitiveness from many perspectives, be it from cost competitiveness or attractiveness to foreign direct investments," he said.
MORE PROGRESSIVE INCOME TAX
Singapore's budget for fiscal year 2013/14 also included tax changes that will hit richer residents as part of a move to make the system more progressive. The government will, for example, raise property taxes on owners of luxury residences by as much as 69 percent.
Owners of mid-range and luxury cars such as Audis and BMWs will also be hit by higher registration fees that will not apply to basic family sedans such as a Mazda 3.
Parliament recently approved a white paper that envisions the population of the small island-nation growing by as much as 30 percent to 6.9 million by 2030. Foreigners will make up much of the rise, even if the pace of immigration is slowed.
The white paper sparked a rare public protest in the regimented state, just weeks after the PAP lost a seat in parliament in a by-election.
Tharman acknowledged Singapore faced "pressing challenges" in housing and transport and said the government will spare no effort to resolve these problems.
Unlike his counterparts in the West, Tharman will have no problems paying for the increase in social spending, given country's large budget surpluses and reserves.
Singapore expects an overall budget surplus of S$2.4 billion ($1.94 billion) for fiscal 2013/14, equivalent to 0.7 percent of gross domestic product. For the fiscal year 2012/13, the overall budget surplus is likely to hit S$3.86 billion.
The surplus does not include the billions of dollars from land sales, which are booked directly into state reserves. ($1 = 1.2376 Singapore dollars) (Additional reporting by John O'Callaghan, Eveline Danubrata, Teo Jion Chun and Mohaini Ibrahim; Editing by Kim Coghill)