Singapore will hike its goods and services tax by two percentage points, the finance minister said on Monday, the first such move in a decade as the cash-rich government cited the need to pre-emptively increase revenue amid surging health care, security and infrastructure spending.
The decision to raise the GST to 9 per cent was widely expected, but the curveball announcement that the change would be stayed until “sometime” between 2021 and 2025 drew praise from observers for being politically astute.
The window falls beyond the current government’s term, which ends in January 2021.
“The exact timing will depend on the state of the economy, how much our expenditures grow, and how buoyant our existing taxes are,” Finance Minister Heng Swee Keat told parliament as he announced the 2018 budget.
“But I expect that we will need to do so earlier than later in the period,” he said. He said calls for the government to dip into national reserves to fund increased spending instead of raising the sales tax would “eat into our nest egg”.
Heng also announced a surplus of Sg$9.6 billion (US$7.8 billion) for the 2017 financial year, but warned it was one-off and not structural.
Part of the surplus was to be distributed to adult citizens in the form of cash transfers.
Song Seng Wun, a Singapore-based economist with CIMB Private Banking, said the grace period for the implementation of the tax of was something “only this stable government can do”.
“No politician wants to hike taxes … but by explaining why it needs to be done over the next few years, the blow will be cushioned when GST is finally raised,” Song said.
Political commentator Eugene Tan said the early announcement of the tax hike was a “novel approach” by Prime Minister Lee Hsien Loong’s government to “make a political virtue out of its approach to public financing”. Tan said the government was aware any tax hike would be an “election issue” and hence had opted to “handle the matter with sensitivity”.
In 2017, the GST accounted for some Sg$11.2 billion, or 19 per cent of total tax revenue.
Lee’s ruling People’s Action Party (PAP), in power since 1959, must call elections soon after January 2021. Lee, 66, has said he will hand over power to a yet-to-be-named successor soon after the next polls. Heng is seen as among the three front runners to succeed Lee.
During his speech, the 56-year-old former central bank chief said that while the government was currently on “sound fiscal footing”, there would be a revenue shortfall in the next decade if fresh measures were not enacted.
Average annual health care costs in the Lion City are expected to rise to about three per cent of gross domestic product by 2030, from 2.2 per cent currently, mainly because of its ageing population.
The 2018 health care budget was Sg$10.2 billion, more than double the 2011 bill of Sg$3.9 billion.
Infrastructure spending, including the construction of a massive new airport terminal to be opened in the mid 2020s, anti-terrorism measures, as well as education were the other major areas that would benefit from the boost in government coffers, Heng said.
WHY NOT DIP INTO RESERVES?
The finance tsar also addressed a top question among Singaporeans: why is the government raising taxes when it could dip into the city state’s vast cash reserves to meet rising expenditure?
Heng said investment returns from the national reserves would account for some Sg$15.9 billion of revenue in 2018, making it the single largest source of government income.
“We are able to supplement our revenues with the [investment returns] today because our predecessors judiciously set aside the savings from the strong growth during Singapore’s earlier stage of economic development,” Heng said.
“Currently, we spend up to 50 per cent of expected net investment returns, and keep the remainder in our reserves. This allows our reserves to grow with our economy.”
He added: “If instead, we used 100 per cent of the returns, the principal sum of reserves will stagnate over time, and the [investment returns] as a share of GDP will consequently fall as our economy grows. The impact of this will not be trivial given that our budget now relies on the [investment returns] as our largest source of revenue.”
Heng also announced a cash transfer to all adult citizens, ranging from Sg$100 to Sg$300.
The measure, the first since 2011, would be funded by an “exceptional surplus” of Sg$9.6 billion in the 2017 financial year because of one-off revenue boosts including a pick up in revenue from property stamp duty.
Apart from the cash transfer, the surplus would be used to offset social spending and be put into a fund that would be tapped for the construction of new metro lines.
Song said the one-off “hong bao” (Singaporean term for lai see) was yet another show of a “very pragmatic budget”.