Raising New Revenues

Let me now turn to the issue of raising revenues to ensure long-term fiscal sustainability.

To meet our future expenditure needs and ensure that we remain competitive on direct taxes, we will raise additional revenues from two sources - income from our reserves, and GST.

Drawing More Income from the Reserves

First, the Government intends to amend the Constitution to revise the rule that allocates Net Investment Income (NII) from past reserves for spending. We are studying this carefully, and discussing with the President the proposed revisions to the NII formula. We expect to be able to increase the investment income available for spending by the Government, by taking in capital gains as part of this income. What we aim to do is work out a formula that strikes a fair balance between the claims of present and future generations, because the financial security and spending needs of tomorrow are no less important than those of today.

But we cannot rely on NII alone to cover everything that we need to spend on. Instead, we must use the additional income from our reserves to secure further improvements to our competitiveness and to make longer-term investments in infrastructure and R&D, and to top up the endowment funds that will bring value to Singaporeans for many years to come. This way, the NII will help to boost the growth of our economy over the long term. The increased expenditures that we will have to make on the social front over time should, therefore, be funded primarily by other new revenues.

Raising the Goods and Services Tax Rate

This is why the PM announced last year that we will raise the GST rate. Doing this will broaden our tax base, and enable the Government to implement Workfare and other initiatives to strengthen our social cohesion and grow our economy.

I have decided to raise the GST rate to 7% with effect from 1 July 2007. It is prudent to implement the GST increase now, in one step, while the economy is strong. This is expected to raise additional revenues of $750 million this year, and $1.5 billion per year going forward.

I have carefully considered the alternative of spreading out the increase over two steps, and decided against it. It is better to raise prices at one go, and compensate Singaporeans with a substantial offset package. By doing it in one step, it also means that no one can profiteer by raising prices in anticipation of a second step. For businesses, it also saves costs because they will not need to adjust their systems twice.

We will make it easier for smaller businesses to register for GST. SPRING will subsidise up to 50% of GST registration-related costs for Internet connection and IT consultancy and training for small enterprises. This support will be in place for two years starting from March 2007. SPRING and IRAS will also work with the industry chambers and associations to provide free automation software to businesses and help them administer the GST.