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Commentary: Addressing Singapore’s long-term challenges - where will the money come from?

The upcoming Budget 2023 on Feb 14 - Singapore's first post-pandemic Budget - will bring longer-term challenges into sharper focus. Recent moves like the GST hike will help close the funding gap, but they may not be enough, say Coface economists Bernard Aw and Eve Barre.

Commentary: Addressing Singapore’s long-term challenges - where will the money come from?

People wearing protective face masks at a traffic crossing across Ang Mo Kio MRT in Singapore on Mar 29, 2022. (Photo: CNA/Marcus Mark Ramos)

SINGAPORE: Longer-term challenges have come back into sharper focus and will shape Singapore's upcoming Budget - the first post-COVID-19 Budget to be delivered on Feb 14 - even as near-term needs continue to dominate people’s attention.

The Ministry of Finance said on Wednesday (Feb 8) that government spending could exceed 20 per cent of gross domestic product by 2030, with most of the increase driven by healthcare expenditure.

These structural trends aren’t new - an ageing population, technology-induced work disruption and climate change - but they have become more pronounced globally, from China’s shrinking population to the threat of advanced artificial intelligence to jobs and more frequent severe weather incidents.

In Singapore, the share of population aged 65 and above is expected to reach 23.8 per cent by 2030. Then, we will join Japan and Italy as “super-aged” societies.

It will be a double whammy: On one hand, our healthcare and social needs will rise sharply as will spending accordingly. On the other, the workforce shrinks and the country has to find ways of maintaining economic dynamism.


The cost of addressing these structural needs is growing rapidly.

Healthcare expenditure already tripled to S$11.3 billion from 2010 to 2019 and the Government has estimated that it will spend about S$27 billion by 2030. This will be over a fifth of government operating revenue if Singapore maintains a similar rate of revenue growth over this decade.

Listen: What do Singaporeans want from Budget 2023?

Deputy Prime Minister and Finance Minister Lawrence Wong said at the Institute of Policy Studies Perspectives conference in January that there is a “need to redouble investments in skills and human capital”. Government spending on education, including programmes like SkillsFuture, increased from S$9.9 billion in 2010 to S$12.3 billion in 2019, though as a share of government operating revenue, it shrank from 21.4 per cent to 17.1 per cent.

Climate change also poses an existential challenge to a low-lying island like Singapore. Prime Minister Lee Hsien Loong had previously said the Government could spend S$100 billion over the next 50 to 100 years to protect Singapore from rising sea levels.

As evidence of the effects of climate change grow by the day, Singapore may have to lean more and faster into its climate adaptation strategy by bringing forward the expenditure on defensive structures. In 2020, the Government set up a new coastal and flood protection fund, with an initial outlay of S$5 billion.


But at the same time, expanding the Government’s revenue is getting more difficult. How will Singapore ensure we have the fiscal resources required?

Since 2015, Singapore reported an annual primary deficit in each year except in 2017 - this means the Government’s operating revenue did not fully meet its total expenditure, without including special transfers such as the Jobs Support Scheme and Care and Support Package cash payout.

Operating revenue, as a share of GDP, has been stable at 15 per cent over the past decade. If spending is expected to reach 20 per cent, a primary deficit of 5 per cent of GDP implies a funding gap of about S$27 billion (based on FY2021 GDP figures).

Part of the Budget shortfall has been covered by the Net Investment Returns Contribution (NIRC), which provided revenue that averaged S$17 billion annually (or 3.5 per cent of GDP) for the past five years. NIRC consists of a portion of the gains from investing our reserves.

But investment returns are inherently volatile and amid the debate on whether the percentage fed into the Budget should change, this volatility should be considered in how much Singapore can reliably count on NIRC to close the funding gap. The Government enhanced this framework in 2008 by adding the Net Investment Returns (NIR) component to the Net Investment Income (NII) component to smooth out some of the volatility in revenue contribution.


Two recent moves help, but may not fully close the funding gap.

First, conserving operating revenue for other spending needs by separately financing major, long-term infrastructure projects through bonds under the Significant Infrastructure Government Loan Act (SINGA). Introduced in 2021, it allows the Government to borrow up to S$90 billion to finance projects, such as new MRT lines, major highways and coastal protection infrastructure, spreading the cost of large development expenditure over multiple years.

Two elderly men in Singapore. (File photo: Gaya Chandramohan)

Then, there are the latest tax adjustments that were announced in Budget 2022, such as Goods and Services Tax (GST) rate increase and wealth taxes in the form of higher personal income tax for top earners and property taxes, that will also contribute additional revenues of about S$4 billion annually.

But the need to maintain Singapore’s competitiveness means that there is also a limit to which we can raise both personal and corporate income taxes. Our current top marginal personal income tax of 22 per cent is already higher than Hong Kong’s 17 per cent, and will be even higher at 24 per cent from the year of assessment in 2024.


Where else could revenue come from? Instead of only searching for new tax sources or increasing current taxes, two local economists, in a 2018 Straits Times opinion piece, mooted the idea of removing tax relief on contributions to the Supplementary Retirement Scheme (SRS) and even the Central Provident Fund (CPF). They estimated the latter alone could recover more than S$1 billion in foregone tax revenue.

While this suggestion may seem to contradict the Government’s focus on retirement adequacy, their argument is sound from an economist’s perspective. Tax relief arguably benefits the higher-income relatively more, as they are likely to have more spare cash for SRS or voluntary CPF top-ups and would have had to pay more personal income tax at the higher marginal rates.

For example, making a S$16,000 CPF top-up (the maximum amount eligible for tax relief) would reduce income taxes by S$1,120 for an individual earning the median monthly income of S$5,070 (or S$60,840 per annum). Compare this with S$3,520 for top earners paying the highest marginal rate of 22 per cent. Furthermore, research suggests that the influence of such tax incentives on increasing retirement savings is unclear.

Though there are already tax relief caps in place, this may be worth exploring in conjunction with other policies to enhance retirement adequacy and ensure this would not overload the tax burden on individuals.

Closing the funding gap will be a key challenge for Singapore over the coming years. And things may lie ahead that require us to spend beyond the current projections.

Budget 2023 will stress the need to maintain a sound and sustainable fiscal system to juggle both longer-term challenges and support for near-term cost-of-living pressures.

Bernard Aw is Chief Economist for Asia Pacific, and Eve Barré is ASEAN economist at Coface.

Source: CNA/ch


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