SINGAPORE: The much-rumoured goods and services tax (GST) increase was confirmed by Finance Minister Heng Swee Keat during his Budget 2018 speech on Monday (Feb 19), and it will go up from 7 per cent currently to 9 per cent sometime in the period between 2021 and 2025.
The exact timing of when the GST increase will kick in depends on the “state of the economy, how much our expenditures grow and how buoyant our existing taxes are", said Mr Heng. "But I expect that we will need to do so earlier rather than later in the period," he stated.
That said, the minister added that the GST hike will be implemented in a “progressive manner”. This means the Government will continue to absorb GST on publicly subsidised education and healthcare, and enhance the permanent GST Voucher scheme when the hike kicks in. The enhanced GST Voucher scheme will provide more help to lower-income households and seniors, he added.
The Government will also implement an offset package for a period of time to help Singaporeans adjust to the GST increase, with lower- and middle-income households receiving more support, the minister said, with more details to come after the timing of the GST increase has been determined.
The GST was last raised in 2007, when it went up from 5 to 7 per cent. It was announced by then-Finance Minister Lee Hsien Loong during the Budget speech on Feb 15, 2007, and took effect a few months later on Jul 1.
PLANNING AHEAD, RESPONSIBLY
The decision to increase GST was made to help fund expenditure in areas like healthcare, security and other social spending, Mr Heng explained, who added the increases in these areas will be recurrent, benefit Singaporeans broadly and directly benefit current generations.
Healthcare expenditure, for example, has been increasing over the years, with the Government spending S$3.9 billion in Financial Year (FY) 2011 and this figure jumping to S$10.2 billion in FY18, the minister highlighted.
In the next decade, an ageing population and increasing chronic diseases will mean building new healthcare capacity to meet rising demand and investing in new medical technologies to improve care quality – and these will lead to spending that will leapfrog expenditure on education within the next decade, he said.
Today, the average annual Government healthcare subsidies received by an elderly person is more than six times that of a younger person, or about S$4,500 more. Additionally, by 2030, the number of elderly will increase by about 450,000 to 900,000, the minister said.
Some of the planned investments in this area include building six more general and community hospitals, four new polyclinics and more nursing homes and eldercare centres within the next five years, Mr Heng said.
“All in all, we expect our average annual healthcare spending to rise from 2.2 per cent of Gross Domestic Product (GDP) today to almost 3 per cent of GDP over the next decade. This is an increase of nearly 0.8 percentage point of GDP, or about S$3.6 billion in today’s dollars,” the Finance Minister said.
Similarly, Mr Heng said spending on infrastructure projects has grown from S$8.5 billion in FY11 to S$20 billion in FY18, and this will only grow.
In the next decade, he said the country will need to spend more to develop new infrastructure such as expanding the rail network by more than 100km, rejuvenate ageing infrastructure and build Changi Airport Terminal 5, Tuas Port and the Kuala Lumpur-Singapore High Speed Rail network.
He also painted similar scenarios for spending on security, including online attacks and radicalisation, and investing in education. The latter include spending an estimated S$12.8 billion in FY18, and on pre-school education, S$1.7 billion per year by 2022, he added.
With these in mind, Mr Heng said: “The responsible way to pay for them is through taxation so that every generation pays its share. We should not borrow for recurrent spending because this will put the burden of recurrent spending on future generations.”
WHY NOT USE RESERVES?
The Finance Minister also addressed a question people may ask: Why not tap on the country’s financial reserves?
To this, Mr Heng said the Government has been doing so via the Net Investment Returns framework, which was introduced in 2008. This started out with the reserves managed by GIC and the Monetary Authority of Singapore (MAS), and later Temasek in 2015.
Over the last 10 years since its implementation, the NIR contribution has more than doubled from S$7 billion in FY2009 to an estimated S$15.9 billion in FY2018, and it is now the largest contributor to Singapore’s revenues – more than any single tax, he said.
The minister said the country currently spends up to 50 per cent of expected net investment returns, and the remainder goes to the reserves.
“If instead, we used 100 per cent of the returns, the principal sum of the reserves will stagnate over time, and the NIRC as a share of GDP will consequently fall as our 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.”
If the Government spent more than the investment returns, it will eat into the country’s nest egg and, in time, the diminished reserves will generate a progressively smaller stream of income in the years that follow until eventually the reserves are exhausted, he cautioned.
“This is not the Singapore way,” Mr Heng said.
BORROWING FOR INFRASTRUCTURE
The finance minister also noted that for major infrastructure projects, hefty upfront investments are often needed.
To address this, the Government will do two things. Firstly, where possible it will save ahead in preparation for these investments. In 2015, the Changi Airport Development Fund was set up to start saving for the airport's 5th terminal.
In the same vein, the Government will set up a new Rail Infrastructure Fund to save for major rail lines. It will start with an injection of S$5 billion in FY2018, drawn from the surplus from the 2017 Budget.
Furthermore, the Government is looking at borrowing by statutory boards and Government-owned companies which build infrastructure, which will help spread the cost of certain larger investments over more years, Mr Heng noted.
"These infrastructure projects, once completed, will generate economic returns over many years. The borrowing arrangement for these projects will hence help distribute the share of funding more equitably across generations," he said.