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As Singapore’s population ages, can the Lion City continue to roar?

Most see a hike in the goods and services tax – the first in over a decade – as a necessary move, but some think it is a sign the city state has no long-term answers for its ‘demographic time bomb’

PUBLISHED : Sunday, 25 February, 2018, 12:23pm
UPDATED : Monday, 26 February, 2018, 3:49am

The Chinese believe that during Lunar New Year, rice jars should not be left empty, lest this should lead to barren and starving days ahead.

Singapore seems to be following this notion, at least in regards to its government coffers. The country’s Finance Minister Heng Swee Keat made it clear during the annual budget that he has no intention of allowing funds to run out any time soon.

On the fourth day of the Lunar New Year, he gave advance notice that the goods and services tax (GST) will most likely rise from 7 per cent to 9 per cent from 2021 onwards. This is the first time in more a decade that the GST will be raised, and also the first time that the hike was announced so early.

In defending the need to raise taxes in a time of surplus, Heng rattled off a list of things that Singapore has to spend more on, from security to education, and particularly on health care and infrastructure.

He also told Singapore’s Straits Times that the government had looked at all other options before concluding that there was no choice but to raise the consumption tax. “Revenue will not be enough,” he put it bluntly.

So far, criticism of the tax hike has been muted, while economists, tax experts and even business leaders have supported it.

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Singaporeans have voiced complaints online, but the tax has not sparked an outcry like that seen in Hong Kong in 2006, when thousands took to the streets in protest when the government proposed introducing the GST.

On the surface, this seems to be a political win for Heng, who is tipped as a front-runner to be the next prime minister. But a deeper analysis of the issue shows that the GST decision is linked to a series of challenges that could undermine Singapore in the long-term.

With a rapidly ageing population and a slowing economy facing technological disruption on multiple fronts, Singapore is entering a period of deep uncertainty.

The latest moves to tackle the country’s demographic and economic challenges has left former Singapore MP Inderjit Singh worried. Singapore, he said, risks falling into mediocrity if it relies on traditional policymaking.

“I fear we are sliding to normalisation as the government is slow to change. If we don’t do things differently from the past, we will not achieve the exceptional growths we saw in the past,” he said.

Deeper worries

United Overseas Bank (UOB) economist Francis Tan believes that this year is going to be a milestone for Singapore. For the first time, the number of people aged 65 and above will be equal to the number aged 15 and younger. In 2016, the number of citizens over 65 stood at 500,000. By 2030, that number is expected to almost double to 900,000. He called this Singapore’s “demographic time bomb”.

“Imagine the implications that this will bring for policymakers, educators, health care providers, investment advisers and a whole slew of other stakeholders,” he wrote in a report late last year. “Will we demand more adult diapers than children diapers?”

The silvering of the city state poses a stern challenge to Singapore. It has one of the lowest birth rates in the world, a trend which has shown few signs of reversing.

Health care costs have also started to soar. Over the past seven years, health care expenditures have nearly tripled to S$10.8 billion from S$3.9 billion in 2011.

With fewer people joining the workforce, growth will be affected. This, in turn, is shrinking the tax base.

Last year, Singapore grew by a surprisingly strong 3.6 per cent, up from 2.4 per cent in 2016. But the pace of growth is likely to moderate closer to a long-term rate between 1 per cent and 3 per cent. This rate, while consistent with a mature economy, is much weaker than the 5.9 per cent annual average between 2001 and 2010.

At the same time, like other economies, Singapore is facing the threat of disruption. New technologies are reshaping whole industries, posing grave threats to brands such as telecommunications giant SingTel, transport operator Comfort Delgro and thousands of small companies yet to embrace the digital future.

Is Singapore still exceptional?

Singapore’s leaders have long hailed the country’s exceptionalism, arguing that the tiny island state is nothing short of a miracle.

It went from being booted out of Malaysia to becoming one of the world’s richest countries. And when confronted with the existential threat of not having enough water, it turned to technology to produce drinkable water from recycled water and the sea. But Singapore policymakers are finding it difficult to overcome the latest set of challenges. 

Take innovation, a key component in the Lion City’s economic blueprint for the past decade. Singapore is ranked among the most innovative countries in the world, according to Bloomberg. But apart from a nascent start-up sector, the bulk of Singapore’s local enterprises remain rooted in traditional ways of doing business.

A Singapore Chinese Chamber of Commerce and Industry survey conducted in 2016 showed that only 35 per cent of local enterprises had invested in innovation activities over the previous two years. The main reason? Uncertain investment returns.

Acutely aware of the situation, Heng said that Singapore needs to up its game when it comes to fostering innovation and introduced new tax measures to entice companies to go digital.

To cope with the ageing population, and to face technological challenges, the government needs funds. That’s where the GST hike comes in.

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But finding the funds is just one part of the problem. The government also needs fresh ideas.

“It does seem that we don’t have a clear vision and don’t have a good understanding of what needs to be done to become exceptional again,” said Inderjit.

UOB’s Tan also said that the budget did not provide full solutions to the demographic challenge. He cautioned not to read too much into one speech. “The ageing issue is a complex one and it requires government agencies, private sector companies and even families to work together. You can’t get a complete solution in a two-hour speech,” he said.

Still, Singapore Management University professor Eugene Tan remains optimistic that the Lion City can continue forward trajectory.

“We cannot ignore the fact that we have the track record and the capital to continue to go beyond our previous best,” he said.

Such optimism is not unwarranted. With a full rice jar, Singapore is better placed than many other countries that face similar problems but are struggling with a lack of resources.

And as the Chinese believe, every New Year is a fresh start. Maybe it’s time to stop worrying about filling the rice jar and focus on fortifying it instead.