9% GST, inflation aid and retrenchment support: Here's what experts expect from Budget 2023

SINGAPORE: As concerns about the cost of living persist, Singapore is expected to boost its support for those most vulnerable to rising inflation when it unveils Budget 2023 next Tuesday (Feb 14).

It might also dish out assistance to retrenched workers, alongside measures to help businesses cope with costs and slower growth ahead, experts said.

However, the scheduled increase in the Goods and Services Tax (GST) by another 1 percentage point to 9 per cent next year is unlikely to be deferred.

One economist said the GST hike, as authorities have explained on several occasions, must be seen in the broader context of ensuring Singapore's fiscal sustainability amid rising government spending, especially in healthcare.

With limited room to tweak corporate and personal income tax rates – the country’s top two biggest sources of tax revenues – moving with the consumption tax is “inevitable and necessary”, said DBS senior economist Irvin Seah.

Maybank economists Chua Hak Bin and Lee Ju Ye also reckon that with the economy “holding up”, the GST hike will go ahead.

While a global slowdown will weigh on sectors like manufacturing, the recovery of others such as hospitality and aviation will support overall growth, said the economists, who are forecasting a 1.7 per cent GDP increase for Singapore this year.

China's reopening will also help to cushion the impact of a slowdown in the US and Europe, reducing the odds of a recession, they added.

TARGETED SUPPORT

But experts believe the Government will do more to alleviate cost of living concerns, with top-ups to the Assurance Package being “one of the most straightforward measures”.

A sum of S$6 billion was initially set aside when the package was first announced in 2020. Since then, the package – comprising cash payouts, grants and utilities rebates – has been upsized to S$8 billion, with details of the latest S$1.4 billion addition to come in this year’s Budget.

UOB economists expect the Assurance Package to be increased further by S$500 million to S$1 billion, given the additional GST expenses for households.

Lower-income groups and seniors may receive higher cash payouts. Other measures could include GST vouchers, U-Save rebates, MediSave top-ups, additional tranches of Community Development Council (CDC) vouchers and even education-related subsidies for children.

RHB senior economist Barnabas Gan also reckons that help will be geared towards the vulnerable and lower-income groups. This could be in the form of enhancements to the Workfare Income Supplement scheme which supports lower-wage workers.

Budget 2023 could also include unemployment support for those who have been retrenched.

However, this should be done with specific criteria, such as a minimum period of full-time work before retrenchment. It should also apply to the less well-off, with property ownership below a certain value as a pre-requisite, said Mr Gan.

Dr Chua and Ms Lee said such support should be aimed at retrenched workers, not the unemployed in general. It could be modelled after the COVID-19 Recovery Grant, which provided temporary cash support to those whose livelihoods were affected by the pandemic.

The support could come in the form of cash payouts that decline over six months. Another possibility is training subsidies to help the workers pivot into sectors that need more manpower.

Not forgetting the sandwiched middle-income group, Deloitte Singapore tax expert Sabrina Sia said there should be an increase to the quantum for earned income relief to better reflect inflationary cost pressures.

BALANCING ACT

This targeted approach will be necessary given the need for a “balanced budget” over the Government’s five-year term, economists said.

The current administration began its term in 2020 with record deficits and an unprecedented drawdown on national reserves. So, it is likely that policymakers will be prudent with spending.

The Government will also be looking to strike a balance between tackling short- and long-term needs.

For one, while help to cope with rising costs is essential, having “too much” cash handouts may induce additional spending and stoke demand-pull inflation, DBS’ Mr Seah said.

It is also time to refocus on Singapore’s longer-term priorities, the economist said, noting that Budget 2023 is expected to be more similar to pre-COVID Budgets in this aspect.

To help businesses stay relevant, more support could come in areas like technology adoption, innovation and raising productivity.

There will also be an emphasis on getting local firms to venture abroad, especially with the reopening of borders. Extending and enhancing initiatives such as the Market Readiness Assessment Grant will be useful as the costs of doing business overseas have gone up, said Mr Seah.

Another long-term challenge pertains to changes in global tax rules, which may require Singapore to re-evaluate its tax incentives for businesses and consider new ways to attract foreign direct investment.

This has to do with the Base Erosion and Profit Shifting (BEPS 2.0) initiative, led by the Organisation for Economic Co-operation and Development and aimed at fighting profit shifting by multinational companies to lower-tax jurisdictions.

There are two main pillars under BEPS 2.0 – firstly, to ensure businesses pay taxes in countries where they earn their profits, regardless of whether they have a physical presence; secondly, to set a minimum corporate tax rate of 15 per cent for multinational enterprises.

Singapore has said in Budget 2022 that it will explore a “top-up” tax – called the Minimum Effective Tax Rate (METR) – for multinational enterprises in response to these changes.

Deloitte Singapore, in a report detailing its recommendations for the upcoming Budget, said it understands “there is no desire to introduce the METR as a matter of urgency” and that it supports this approach.

“It would not be in Singapore’s best interest to be the first mover in enacting the rules (of the second pillar) domestically,” it said, adding that it would be more prudent to wait until international consensus on domestic implementation options are formed.

In the meantime, the country should study the impact and design of the new rules so that it is able to quickly enact them when required.

Deloitte added that Singapore currently provides many tax incentives as one of its key policy tools to attract foreign investments, but these tax incentives may no longer be as effective in light of the global minimum corporate tax rate.

“Singapore may need to shift away from traditional tax incentives and consider other measures in order to promote investments,” it said.