GST hike necessary to safeguard Govt’s longer-term fiscal health: Experts
SINGAPORE — While the Government’s record overall surplus expected for this financial year made the headlines following the Budget statement, its primary and basic deficits have deepened, with the Republic on course to post its largest primary deficit in more than two decades in the next financial year.
With this in mind, some experts noted that the impending 2 percentage point hike in the goods and services tax (GST) will go some way in ensuring longer-term fiscal sustainability.
Based on the Budget delivered by Finance Minister Heng Swee Keat on Monday (February 19), the Government is expected to incur in FY2018 a primary deficit of S$7.3 billion and a basic deficit — which takes into account special transfers excluding top-ups to endowment and trust funds — of S$9.2 billion. “These would be the deepest shortfall since 2005... Persistent deficit in the longer term is certainly not sustainable. This explains the need to bite the fiscal bullet and to rebalance the fiscal position in the longer term,” said DBS economist Irvin Seah.
Nevertheless, the deficit is expected to be largely narrowed by net investment returns contribution (NIRC) (S$15.9 billion), leaving the country with an overall shortfall of S$600 million in FY2018, or 0.1 per cent of Gross Domestic Product (GDP).
Singapore has registered a deficit in its primary balance for two out of the three most recent financial years. Come FY2018, the Government is expected to run into deficit again.
In FY2015, it incurred a primary deficit of S$2.6 billion, and a basic deficit of about S$7 billion. The following financial year, the Republic posted an overall surplus of S$6.1 billion despite a primary deficit of S$2.1 billion and a basic deficit of S$4.9 billion, thanks to a bigger NIRC following the inclusion of state investment firm Temasek Holdings into the NIR framework.
For this financial year ending March 31, it is expecting a record S$9.6 billion overall budget surplus — with a primary surplus of S$1.2 billion — owing mainly to “exceptional statutory board contributions” and higher-than-expected collections from stamp duties which the Government and economists have described as “one off” factors.
The robust NIRC will continue to help balance the books, but experts have previously pointed out that it may not be tenable for the Government to be heavily dependent on this source of revenue.
Reiterating that NIRC could be adversely affected by bad business cycles, Mr Seah said policymakers must continue to adopt a “prudent and forward-looking approach in planning for the future”.
He added: “While tax adjustments are unpopular, they are essential to safeguarding the sustainability of Singapore’s longer-term fiscal health.”
Singapore University of Social Sciences (SUSS) economist Randolph Tan noted that the estimated primary deficit for FY2018 would “exceed all others in current dollar terms and be the largest primary deficit since 1997”.
“Without the NIRC, (the overall fiscal position) would have been quite a different situation, and the spending plans would have been a lot more constrained,” said Associate Professor Tan, who is also a Nominated Member of Parliament.
“(While a GST hike is not ideal), the question is whether spending will continue to grow by so much that increases beyond that will have to be contemplated in time to come,” he said.
UOB economist Francis Tan said he would not consider a deficit position a cause for concern, as long as the Republic’s GDP continues to grow.
“Just like how you and I might spend more as our income increases, as a country’s GDP grow, expenditure will tend to increase… It is fairer to compare overall balances in terms of GDP,” said Mr Tan.
Moreover, a bulk of the expenditure would go into infrastructure projects, which also go towards boosting GDP, he added.
Agreeing, CIMB economist Song Seng Wun said governments “should not run surpluses just because”. “The Government is not supposed to be a business which earns money for goods and services. Surpluses are expected to be recycled and put to good use to enhance Singapore’s economy and the quality of life for Singaporeans,” said Mr Song. “Measures like the impending GST hike are meant to future-proof Singapore without breaking the bank, while the reserves are continually being built up as well.”
The GST will be raised from 7 to 9 per cent some time between 2021 and 2025, with the exact timing of the hike depending on several factors including the state of the economy and how much the country’s expenditures go up by.
Writing on Facebook, Law and Home Affairs Minister K Shanmugam noted an analyst saying on international broadcaster BBC World Service that the Republic was “possibly unique in announcing a tax four years ahead”, given the high political costs.
The analyst had pointed out that this was something which countries such as the United States and the United Kingdom would never be able to do. Mr Shanmugam said: “My own view – be upfront. People know that our healthcare costs are going to increase sharply. It has to be paid for. Explain that, and be honest. Do what is right, rather than try and be populist.”
He added: “There are snake oil salesmen around – who suggest that everyone can have everything they want, without saying how it will be paid for. Singaporeans won’t trust them.”
On the timing of the GST hike, former People’s Action Party (PAP) Member of Parliament Inderjit Singh noted that during the 2011 General Election, the PAP leaders had “gone on record to state that the government has no need to increase the GST for at least a decade”. “So the earliest the government can increase now is in 2021. Otherwise people will start doubting the PAP. PAP has always delivered their election promises and they cannot change now,” he said.
