A widely-expected increase in the Goods and Services Tax (GST) will not take effect this year, but Budget 2018 laid the foundations for a hike sometime between 2021 and 2025.
This comes as the Singapore government positions its coffers to cope with the country’s rising spending needs – a major theme in this year’s Budget.
Finance Minister Heng Swee Keat delivered a wide-ranging Budget speech which sought to address short-term business concerns, as well as longer-term challenges in the face of seismic shifts in the global economy and Singapore’s ageing population.
The economy turned in a stronger-than-expected performance last year on the back of a global upturn, resulting in a budget surplus of S$9.6 billion for the financial year ending March 31 – much higher than earlier estimates of S$1.9 billion and Singapore’s biggest in some 30 years.
Thanks to this robust showing, Mr Heng found room in the Budget for a one-off “hongbao” of S$300, S$200 or S$100 – depending on income – for all Singaporeans aged 21 and above.
This “SG Bonus” will cost the government S$700 million and will be paid out to 2.7 million recipients by the end of this year.
But Mr Heng made clear that last year’s strong economic performance – and the associated surge in government revenue – will be a tough act to follow.
“We cannot base our long-term fiscal planning on the basis of exceptional factors being positive, year after year,” he noted.
This is why some of this year’s surplus will be set aside for future spending – including S$5 billion for a new Rail Infrastructure Fund to pay for new rail lines.
The Budget also tackled perennial issues – supporting the elderly, building a more vibrant and innovative economy, and helping businesses transform to take advantage of new technologies and opportunities.
To boost the take-up of new solutions among companies, existing government grants supporting off-the-shelf technologies will be streamlined into a single Productivity Solutions Grant.
An Open Innovation Platform – where companies can list the challenges they are facing and be matched with other firms and research institutes to co-develop digital solutions – will also be piloted this year.
In a surprise announcement, Mr Heng said the top marginal Buyer’s Stamp Duty (BSD) will go up from 3 per cent to 4 per cent. The new top marginal rate will apply to the portion of residential property value which is in excess of S$1 million.
The change will apply to all residential properties acquired from Tuesday, he added.
Mr Heng said Singapore is on sound fiscal footing until 2020 “because we planned ahead early, and made the necessary moves well before the decade began”.
These moves include raising the GST rate from 5 per cent to 7 per cent in 2007, and introducing the net investment returns framework in 2008.
But as spending on healthcare, infrastructure and security continue climbing over the next decade from 2021 to 2030, Singapore will not have enough revenue to meet its needs without taking measures to strengthen its fiscal position – both on the revenue and spending fronts.
Mr Heng announced a further moderation to the pace of government ministries’ budget growth – from 0.4 times of economic growth, to 0.3 times from the 2019 financial year.
He also announced a GST hike – though it will come later than most economists and tax experts expected. The GST will go up by two percentage points – from 7 per cent to 9 per cent – “sometime in the period from 2021 to 2025”.
“The exact timing will depend on the state of the economy, how much our expenditures grow, and how buoyant our existing taxes are. But I expect that we will need to do so earlier rather than later in the period,” Mr Heng added.
The hike is expected to yield government revenue of almost 0.7 per cent of gross domestic product (GDP) per year. The minister said the GST increase will be implemented in a progressive manner to minimise the impact on lower-income households.
“We were surprised by the three-year grace period for the GST increase,” said CIMB Private Bank economist Song Seng Wun.
When it actually comes, the blow will be significantly lessened by the long lead time. This is something which only Singapore can do because of its very stable government.
“It’s a very pragmatic and confident move. The important message is that unlike many politicians and governments, this one doesn’t go for populist policies,” Mr Song added.
OCBC economist Selena Ling said Mr Heng sent a “nuanced message” about the need for a GST hike.
“We don’t need the money yet, but in 10 to 12 years, we will,” she noted.
“The picture on the fiscal side is not as sanguine as what the 2017 budget surplus suggests. The situation looks quite bleak especially given the challenges of an ageing population.
“The healthy fiscal surplus last year will likely not repeat itself in a sustainable way. This means having to take a really hard look at all possible revenue sources,” added Ms Ling.
Budget 2018 marked a return to the limelight for sin taxes, with a 10 per cent increase in tobacco excise duties implemented with immediate effect.
Mr Heng also laid the foundations for a broader GST tax base. From Jan 1, 2020, consumers and businesses who buy imported services from suppliers based overseas which have no establishments in Singapore will have to pay GST.
GST will be levied on business-to-business services, such as marketing, accounting services and IT services; as well as business-to-consumer services, including video and music streaming services, apps and online subscription fees.
“Overall this is a ‘give and take’ budget, with some goodies for most, coupled with a few near- and longer-term costs,” said DBS senior economist Irvin Seah.
Mr Heng also sought to counter calls for the government to dip into Singapore’s reserves to fund increased spending instead of raising taxes.
The net investment returns (NIR) framework allows the government to spend up to half of the long-term expected real returns from the assets managed by the Monetary Authority of Singapore (MAS), GIC and Temasek Holdings.
If 100 per cent of the returns are used, the principal sum of reserves will stagnate over time and the net investments returns contribution (NIRC) as a share of Singapore’s GDP will fall as the economy grows, Mr Heng said.
“The impact of this will not be trivial given that our budget now relies on the NIRC as our largest source of revenue,” he noted.
“In a more extreme scenario, if we spent more than our investment returns, we will eat into our nest egg.”
Even as the Finance Minister navigates the tricky tightrope of balancing Singapore’s present and future needs, DBS’ Mr Seah noted that cost management – especially when it comes to healthcare – is also key to keeping the country in good fiscal health.
“There is a need to review the current cost structure and streamline the administrative processes of Singapore’s healthcare system. Ultimately, no matter how much we increase healthcare subsidies, it will never be enough if costs are not kept in check, particularly given the ageing demographic profile,” Mr Seah added.