Cash surplus not a reason to hold off GST hike as land sales proceeds do not generate revenue: Indranee Rajah
SINGAPORE: Proceeds from land sales, which make up the bulk of the Government’s cash surpluses, are not considered as part of the Government’s revenue and cannot be used for spending, said Second Minister for Finance Indranee Rajah in Parliament on Monday (Apr 5).
As such, the amount of cash surpluses is not a valid reason to hold off an increase in the Goods and Services Tax (GST), she said, noting that “incorrect conclusions” have been drawn about the Government’s fiscal position based on its published cash surpluses and in turn, the need for a GST hike.
She pointed to a recent social media post by the Workers’ Party (WP) which claimed that “there was no need to raise GST because of the cash surplus”.
“This claim is inaccurate and misleading”, said Ms Indranee.
In a Facebook post on Mar 13, the WP said that the Government’s expectation for a budget deficit of S$11 billion in 2021 “needs to be understood in the unique context of Singapore’s budgetary policy, where the Government has generated significant cash surpluses”.
It also said that based on the total estimated receipts of S$103.7 billion excluding total expenditure of S$107.2 billion, “the deficit should only be –S$3.5 billion or 0.7 per cent of GDP (gross domestic product)”.
In another Facebook post on Mar 19, the WP said it opposed the GST and petrol duty hikes. It pointed to the GST as a "regressive tax" and said the Government's "reported deficit figures do not account for our significant cash surpluses".
Without specifying which social media post she was referring to, Ms Indranee said the claim suggested that the Government did not set out the correct fiscal position.
“The Government has set out the correct fiscal position,” she told the House, adding that one “cannot look just at the cash surpluses to understand the (Government’s) fiscal position” and has to also consider if all of that constitutes as revenue under Singapore’s budgeting rules.
“It is not correct to suggest that because we had a certain amount of cash surpluses … that our fiscal position is better than what we have stated, or that we do not need to raise GST,” she said.
CASH RECEIPTS VS REVENUE FOR SPENDING
In her parliamentary reply, Ms Indranee, who is also Second Minister for National Development, started out by explaining the difference between cash receipts and revenue that is available for spending.
“Cash receipts reflect all the cash that comes in. Every year, the Department of Statistics reports our cash receipts and indicates whether we have a cash surplus or cash deficit. But not all our cash receipts constitute revenue available for spending,” she said.
The largest difference between cash receipts and revenue comes from the sale of state land, she added.
Proceeds from land sales do not generate fresh revenue as they are “simply a transformation of one asset to another”. “When land is sold, the asset is converted to cash,” Ms Indranee said.
State land that are not due for immediate development are typically leased out for interim use, and this yields revenue for the Government as well in the form of rental income.
“So selling land does not increase the Government’s revenue, and if we were to spend all the proceeds from land, it would deplete our store of wealth,” she said, citing an example of a family with a house.
“So long as the family owns the house, it can rent out some of the empty rooms to generate income. But if the family sells the house and uses the proceeds for day-to-day expenditure, it will soon have nothing left.
“However, if it invests the proceeds of sale wisely, it will still have the original sale proceeds, plus a constant stream of income from those proceeds. This income can then be used partially for expenditure and partially reinvested to help sustain both present and future members of the family,” she said.
Likewise, the Government does not consider land sales proceeds as part of its revenue and cannot be directly used for expenditure.
Instead, these proceeds are invested and part of the investment income is used to support the spending needs of Singaporeans via the Net Investment Returns Contribution (NIRC), she said.
The NIRC is now the largest single source of Government revenue, supporting about one-fifth of its spending needs.
“This is only possible because of the prudent and disciplined approach we have taken to building and protecting both our land and financial reserves,” said Ms Indranee.
A RELOOK AT THE NIRC FRAMEWORK?
MP Louis Chua (WP-Sengkang) asked if a GST hike is the best option to raise revenue given the ongoing pandemic-induced downturn, and whether there are other options that can be explored such as relooking at the NIRC framework.
Ms Indranee replied that the Government has been “badly constrained” by the COVID-19 pandemic. Not only is the Government dipping into past reserves, it is also being squeezed on the corporate tax front. With the economic situation, personal income tax will also likely be affected, she added.
GST is one of the options available but given how it impacts the low-income and vulnerable segments of the society, the Government has taken steps to deal with that by announcing a S$6 billion Assurance Package.
This will effectively buffer the majority of Singaporeans against the impact of the GST hike for at least five years. For the lower income group, the offset will be even longer - for 10 years - she said.
On that, Mr Chua pressed on by saying while the new package could offset the impact for a number of years, the GST hike “is going to stick with (Singaporeans) … for the rest of their lives”.
With the pandemic impacting many Singaporeans and businesses, a regressive tax such as the GST should all the more be reconsidered, he added.
Mr Chua also noted that rules have been amended in the past when it comes to safeguarding the country’s reserves, such as how the Government in 2008 amended the rules governing the use of the reserves to create the NIRC framework and in 2015, the rules were amended again to add Temasek to the framework.
“Given the impact of COVID-19 and all on the livelihoods of Singaporeans … can we not look at the NIRC framework again as perhaps another measure?” he asked.
In response, Ms Indranee said: “I cannot say whether 50 or 100 years from now, we (will) change that but what we should not do is every year or every two years when something looks like … we'll need a bit more expenditure, we just change the framework so easily.
“The framework took a long time to come to and was very carefully considered and thought through, tried and tested many steps. And once you have a framework in place, it should not easily change.”
She stressed that the Government acknowledges the impact of a potential GST hike on lower- and middle-income households.
Apart from the Assurance Package, the Government has also said that it will enhance the permanent GST Voucher scheme when the GST rate is raised.
“This will provide a permanent cushion for lower and middle-income households, even after the temporary support ends,” she said, while adding that there is also time for incomes to rise over the next five to 10 years.
“So it's been thought through very carefully, understanding that there is an impact on middle-income and lower-income, but we have taken the steps to ameliorate that, to buffer that to make sure that they are okay.”
READ: WP’s Pritam Singh calls for transparency on projections so Singaporeans can judge need for GST hike
MP Liang Eng Hwa (PAP-Bukit Panjang) also asked if the requirement to balance the Budget has led to the Government being more conservative during the start of a new term. He also asked about the Government’s approach when it comes to distributing accumulated surpluses.
To that, Ms Indranee said the Government generally avoids running deficits early on, as part of its aim to run a balanced Budget over its term in office.
“This is not only to avoid a draw on past reserves, which should be reserved for exceptional situations. It also helps the Government to preserve fiscal headroom to deal with unexpected spending needs during its term of Government,” she said.
However in the event of a major crisis, the Government “is prepared to run the deficit and seek a draw on past reserves, regardless of which part of the term it happens to be in”.
This is what the Government has done this year as the country continues to grapple with the COVID-19 crisis, said Ms Indranee.
On surpluses, the Government has used them in three ways.
These include sharing the surpluses with Singaporeans in form of a SG bonus in 2018, saving them for anticipated future needs such as by setting up the Railway Infrastructure Fund, as well as transferring them into past reserves to be invested and support the country’s future spending needs, said Ms Indranee.