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Commentary: Greater social spending and redistribution rest on economic growth and government prudence

Keeping the Singapore economy vibrant, evolving the tax system and finding new ways to optimise government spending, will be needed as redistribution comes into sharper focus, says the Lee Kuan Yew School of Public Policy’s Terence Ho.

Commentary: Greater social spending and redistribution rest on economic growth and government prudence

An elderly woman with her caregiver. (File Photo: CNA/Calvin Oh)

SINGAPORE: The Singapore Government’s Budget 2022 was as much an articulation of shared values as it was of the policy directions and details which the Government has set out.

“We want every Singaporean to know and feel that he or she has a stake in our society … We want to uphold that sense of obligation to each other, and strengthen the assurance that, whatever the challenges we face, we will always have each other’s back,” Finance Minister Lawrence Wong said on Friday (Feb 18), speaking in Parliament.

What came across unequivocally in Mr Wong’s speech was the vision of an inclusive society with a strong social compact.

In many countries, the gap between the haves and the have-nots in recent years has fuelled tensions and populism, dividing societies. For Singaporeans looking to see how the Government will keep inequality in check and help the most vulnerable, it was useful that the Budget underscored the importance and urgency of keeping ours a society where all can aspire to a better life.

Singapore is fortunate to be able to tap on the Government’s Past Reserves to fund a significant portion of its COVID-19 support measures over the past two years – to help workers hold on to jobs and keep households afloat.

However, the country’s rapidly growing social expenditure needs over the long term, in healthcare as well as in social support and redistribution, still require recurrent revenue streams that are robust and resilient.

GROWTH IS NEEDED TO SUPPORT THOSE WHO HAVE LESS IN SOCIETY

Can we find the money to do all this? Much depends on the health of our economy.

Economic vibrancy is vital to generate needed revenues for this social spending and redistribution. A 2009 study by the Ministry of Finance found a strong correlation (0.92) between tax revenues and GDP over the period from 1998 to 2007.

Besides macroeconomic stability and a conducive business environment, continued investment in infrastructure, skills and capabilities is needed to grow the economy. So Mr Wong’s announced funding to upgrade Singapore’s digital capabilities, strengthen local enterprises and invest in training will be critical to generate corporate and personal income, on which tax revenues depend.

Finance Minister Lawrence Wong delivers the Budget 2022 statement in Parliament on Feb 18, 2022. (Photo: CNA)

Notwithstanding these efforts, the economic pie is unlikely to expand as fast as in previous decades. Now that Singapore is a high-income economy that is closer to the frontier of technology and productivity, the scope for catch-up growth is lower.

When Singapore was a young nation, a rising tide lifted all boats. Today, as a maturing society with wealth and socioeconomic advantages accumulated over several generations, fiscal redistribution will play a larger part in tempering inequality and sustaining social mobility through education and other social investments.  

HOW THE TAX SYSTEM IS EVOLVING TO SUPPORT REDISTRIBUTION

Some ask if our tax system can be reviewed to give more to those in need. Indeed, Singapore’s tax system has evolved over the years to support redistribution while keeping the overall tax burden low. Everyone contributes something in taxes, with the better-off contributing more.

The latest tax changes are part of this evolution. Though Budget 2022 stands out as one that has made a further, significant shift towards greater progressivity in both income and asset taxes, past Budgets – particularly those in 2010, 2013 and 2015 – have seen moves to enhance progressivity in income and asset taxes and tax reliefs.

With GST set to increase, there was much pre-Budget speculation on what new forms of wealth taxes might be on the cards and whether estate duty, abolished in 2008, would return.

The Government opted instead to work within the existing framework of taxes on residential properties and luxury cars, given the practical difficulty of fairly assessing a person’s net wealth, as well as the mobility of other forms of wealth across borders.

It also raised the top marginal personal income tax rate for those earning over S$500,000. This increase in personal income taxes for the top 1.2 per cent of wage earners is expected to raise about S$170 million in additional revenues each year. This builds on the personal income tax hike announced in Budget 2015, which affected the top 5 per cent of wage earners with a projected gain of S$400 million.

The residential property tax revisions at Budget 2022 meanwhile have a broader catchment, and are estimated to net S$380 million more a year, with the top 7 per cent of owner-occupied properties and all non-owner occupied properties affected.

By contrast, the last revision to property taxes announced in Budget 2013 saw the top 1 per cent of owner-occupied properties and top one-third of non-owner-occupied properties incur higher taxes, while the 0 per cent property tax band for owner-occupied properties was increased to cover more homes, netting an estimated revenue gain of S$53 million to the Government.

AUGMENTING SOCIAL SUPPORT

Over the past decade, increasing social transfers have seen a trend decline in Singapore’s Gini coefficient, a measure of income inequality. After accounting for taxes and transfers, the Gini coefficient based on household income per household member in 2021 was the lowest on record apart from 2020 when there was exceptional pandemic-related social support. 

Budget 2022 takes a further step in this direction by augmenting existing pillars of social support. Lower-wage workers stand to benefit from the expansion of progressive wages and the enhancement of the Workfare Income Supplement.

A new Progressive Wage Credit Scheme (PWCS) to co-fund the wage increases of lower-wage workers between 2022 and 2026 will require about S$1.8 billion a year.

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Together with the enhanced Workfare, this will cost S$9 billion over the next five years, compared with current expenditure on Workfare of around $850 million a year, excluding special payments.

The permanent GST Voucher Scheme will also be enhanced to provide continuing offsets for GST expenses for lower- to middle-income households, and most retiree households.

However, the aim is not just to bolster social support via public spending, but also to encourage community giving. To this end, the Budget has included matching grants for charitable giving, as well as support for charities to build capabilities.

Social support must be complemented by social investment in order to sustain social mobility. Since the nation’s independence, Singapore’s social policy has been underpinned by substantial investment in education and housing. This was reaffirmed in this year’s Budget, which announced the scaling-up of the KidSTART and UPLIFT programmes to give a further leg-up to children from lower-income households during their formative years.

Primary school students in Singapore. (Photo: Facebook/Chan Chun Sing)

REVIEWING GOVERNMENT SPENDING

Still, the “defining challenges of our time” identified in the Budget speech – including climate change and the rapidly ageing population – will generate fiscal pressures that cannot be addressed by higher taxes alone. This is why the Finance Minister alluded to fundamental changes to the healthcare system that will be needed to keep healthcare spending sustainable.

Recognising the scope to review the delivery of public services beyond healthcare, the announced additional 1 per cent cut to the budgets of Ministries and Organs of State from next financial year will encourage discipline in public spending.

By leveraging technology and behavioural insights, and reviewing organisation and processes, the public sector can raise efficiency in service delivery further still and contribute significantly towards keeping state finances on an even keel even as demands on the public purse expand.

The exhortation to “stand together” – to “keep faith with one another” – is the common thread that runs through Budget 2022. It underpins the continued investment in people, the effort to create opportunities for all and adjustments to the tax system for greater equity.

While the Budget is an important statement of intent, much depends on whether the values articulated resonate with citizens and stakeholders.

Do they agree Singapore must remain competitive and do what it takes to restructure the economy? Are companies prepared to pay higher wages, and the affluent higher taxes?

Ultimately, their response to the Budget will matter most.    

Terence Ho is Associate Professor in Practice at the Lee Kuan Yew School of Public Policy. He is the author of Refreshing the Singapore System: Recalibrating Socio-Economic Policy for the 21st Century (World Scientific, 2021).

Source: CNA/sl
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