Recession-hit Singapore may delay unpopular increase in sales tax

PUBLISHED : Tuesday, 26 November, 2002, 12:00am
UPDATED : Tuesday, 26 November, 2002, 12:00am

Faced with a deteriorating economic outlook, the Singapore government says it is reconsidering an unpopular plan to boost consumption tax from next year.

The suggestion that the rise in the goods and services tax (GST) to five per cent from three per cent could be delayed is a rare blow for Deputy Prime Minister Lee Hsien Loong, who has thrown his personal authority behind the policy.

Just two weeks ago Mr Lee, who is also finance minister, insisted 'there's no reason to postpone it because next year the outlook looks clouded'.

It is also rare for the People's Action Party government to amend a public policy once it has been announced.

But Prime Minister Goh Chok Tong conceded at the weekend that the timing of the rise in the GST was being re-examined as economic prospects had darkened in recent months.

'I am not in favour of a full deferment. Phasing it in would be much better,' he said.

'For example, it could be four per cent for one year and five per cent thereafter.

'But no decision has been taken yet.'

The deputy prime minister announced the plan to boost the GST in the Budget in May. It forms part of a wider overhaul of the government's fiscal base meant to place greater emphasis on indirect taxation.

In the Budget, Mr Lee said direct personal and corporate tax rates would be cut in stages over the coming two years to 20 per cent.

The planned rise in the GST - which would have raised an extra S$1.3 billion (HK$5.69 billion) for state coffers - was intended to partially offset the cuts in income from lower direct taxes.

Until Mr Goh's climbdown, ministers had argued that delaying the rise was impossible since it would increase the risk that the government would run a deficit.

The prospect of a sharp rise in the GST just as the economy appears to be headed for a double-dip recession alarmed many ordinary Singaporeans and opposition politicians, who claimed it was unfair.

They said as most Singaporeans did not pay income tax they would not benefit from the planned cuts, whereas everyone pays GST.

Some economists also noted that the planned January 1 jump in the tax could undermine an already slowing economy.

Even some of Singapore's state-linked media, which typically supports government policy, questioned the timing of the GST rise.

Under the heading 'GST relook is in order', an editorial in the Straits Times this month said that as the economic outlook had worsened, 'it calls for a reassessment of policy tools that could prove contractionary when a stimulus is required'.

The prime minister said a final decision on the GST would be taken within two weeks.