Singapore studying how to expand wealth tax system as it relooks fiscal strategies: Lawrence Wong
SINGAPORE: Singapore continues to study how it can expand its wealth tax system as the country re-examines its fiscal strategies in the face of key challenges such as inequality and climate change, said Finance Minister Lawrence Wong on Friday (Oct 15).
Speaking at the 35th Singapore Economic Roundtable organised by the Institute of Policy Studies, Mr Wong said Singapore has succeeded so far in running a prudent and effective fiscal policy.
He said the task at hand will only become harder with three key challenges - inequality, a rapidly ageing population and climate change - that will determine the trajectory of the country’s fiscal strategies.
These challenges, or "curves", as Mr Wong put it, are interlinked and will need to be tackled comprehensively, Mr Wong said.
“For example, an ageing population can exacerbate inequality, while inequality can make the lower-income more susceptible to the effects of climate change,” he said in a speech delivered at the start of the event.
To arrive at a fairer, greener and more inclusive society, Singapore “must re-examine its fiscal strategies” so that it has the tools to meet the task at hand, he added.
PROGRESSIVE TAX SYSTEM
There are three key priorities behind the country’s fiscal moves, he said, with one of them being to uphold a fair and progressive tax system even as it considers different ways to raise more revenues.
One element of progressivity, according to Mr Wong, is to consider not just a person’s income but his wealth. Those who are more affluent should pay their fair share of taxes, the minister added.
Already, Singapore is taxing wealth in various forms such as property tax and stamp duties on residential properties, as well as additional registration fees on motor vehicles.
The country has also been able to mitigate some of the divergence in wealth seen in other places through its home ownership policy.
For instance, “heavy” public housing subsidies have allowed a whole spectrum of home owners to gain from the appreciation in home prices and equity, he noted.
Mr Wong said Singapore’s policies “should continue to promote broad-based wealth accumulation amongst Singaporeans”.
“But just as we have tempered income inequality over the years, we also need to guard against rising wealth inequality,” he added.
“That is why we continue to study options to expand our system of wealth taxes – in ways that are effective and add to our revenue resilience without undermining our overall competitiveness.”
MITIGATING IMPACT OF TAX HIKE
Singapore also has a progressive taxes and transfers system, the minister said, pointing to how the country has always maintained a “high level of transfers” to the lowest-income households.
Households in the bottom 20 per cent income bracket receive about S$4 in benefits for every dollar of tax paid, he pointed out in his speech.
The ratio is around 1:2 for middle-income households, while households in the top 20 per cent of income receive S$0.30 in benefits for every dollar of tax paid.
“Our taxes and transfers system today is progressive, and we will keep it that way,” said Mr Wong.
“For the middle-income, we maintain a low tax burden so that they can enjoy the rewards of their hard work and have the freedom of choice in their expenditures.”
Mr Wong added that unlike many European countries that impose hefty income taxes to support their welfare systems, Singapore has kept its “public expenditure lean yet effective”.
That is why half of the country’s working population do not have to pay personal income taxes, while the Goods and Services Tax (GST) rates “are where they are today”, he said.
"Going forward, we will need to raise revenue to fund our additional expenditure. But we will also move forward carefully to make sure that overall public spending remains effective, and that taxes remain as low as possible for the middle class,” the minister said.
The Government first announced plans to raise the GST rate from 7 per cent to 9 per cent in Budget 2018. Earlier this year in Budget 2021, Deputy Prime Minister Heng Swee Keat said the hike will take place between next year and 2025, and “sooner rather than later” depending on the economic outlook.
Delving into why the Government is looking to increase the GST, Mr Wong cited how Singapore’s healthcare needs alone will demand an additional 3 per cent of gross domestic product in spending over the next 10 years.
Including the need to invest in reducing emissions, providing quality education and maintaining security, the country’s needs “are significant and growing”.
“Some of these can be borne through income taxes. But with rapid ageing, it will not be sustainable and will make it hard for our working population,” said Mr Wong, adding that raising tax revenue is the “sustainable and responsible way” to fund recurrent expenditures.
“(The GST) is a tax on final consumption, and it helps to smoothen the burden of taxation across the entire population young and old, and including tourists and foreigners when they spend money here.”
Mr Wong added that Singapore is not alone, with many other jurisdictions having much higher GST or Value-added Tax (VAT) rates than Singapore.
Asked how the flare-up in inflation globally will influence the timing of the GST hike, the minister replied that the Government will “consider the overall economic outlook, including the outlook on inflation”, when it makes its decision.
But he stressed that the planned GST hike “shouldn't be looked (at) in isolation”, given that the Government had previously announced the roll-out of a S$6 billion Assurance Package.
“We have already set aside monies for this Assurance Package. Money is there so when GST is introduced, it will come along with the Assurance Package which will effectively delay the GST increase by about five years for majority of Singaporeans,” the minister said during a dialogue session moderated by The Straits Times associate editor Vikram Khanna.
“And for the lower-income Singaporeans, it will delay the GST increase effectively by 10 years.”
Adding that the permanent GST Voucher scheme will also be enhanced, Mr Wong said: “So look at it holistically, GST in Singapore is quite unique compared to almost all other countries.”
THE THREE “CURVES”
Singapore’s goal is “to build a society that is even more fair and just”, the minister said in his speech.
“We want to sustain a Singapore where every child can achieve his or her dreams, where every worker can stand tall, and where every person can be accepted, regardless of social background or age, regardless of race or religion.”
Achieving these goals will require the country to deal squarely with three “curves” or challenges.
First on inequality, Mr Wong noted how Singapore’s Gini coefficient has been on a steady decline since 2007 for nearly 15 years now, on the back of “deliberate Government measures”.
The Gini coefficient is equal to zero in the case of total income equality, and is one in the case of total inequality.
After taking into account the redistributive effects of taxes and transfers, the key measure of income inequality has been further reduced every year and fell to a historic low in 2020.
“We monitor this closely, because we understand the threat that inequality poses to our social fabric,” he said.
Singapore has also made “good progress” on social mobility, said Mr Wong.
He cited a 2015 study by the Ministry of Finance (MOF) which found that of the children born from 1978 to 1982 to parents who were at the bottom one-fifth of the income stakes, 14.3 per cent moved to the top fifth among their peers in their 30s. This was higher than corresponding figures for other countries in Northern America and Europe.
This data was recently updated for children born from 1985 to 1989, and the percentage was 14 per cent - slightly lower than before, but still “much better than many other places”, the minister said.
“These trends reflect the important role that education has played in our society’s progress.”
But there is still more to be done, said Mr Wong, which is why the Progressive Wage Model was recently expanded and the Workfare Income Supplement scheme enhanced to better support lower-wage workers.
The SkillsFuture initiative also aims to help working adults keep up with learning so as to improve their job prospects, he added.
“All these efforts will require more funding. But these are areas that MOF will not hesitate to spend on.”
Mr Wong was asked if support for the unemployed can be shifted towards one that is “more automatic”, such as regular unemployment insurance, given the economic uncertainties ahead which could give rise to more social inequality.
The minister replied that schemes like the COVID-19 Recovery Grant have been put in place.
Apart from that, “tremendous effort” has gone into “active labour market facilitation” in the form of ensuring workers are trained with new skills and matched with jobs that are available.
“So that's the system we have put in place – some help coupled with very active labour market facilitation to ensure that anyone who is displaced can get skills upgrading and can find a job as soon as possible,” he said.
“We continue to review these schemes to see how they can be enhanced, but it's something that we are looking at very carefully.”
The second “curve” relates to Singapore being one of the fastest ageing societies, with one-quarter of Singaporeans projected to be 65 and above by 2030.
This can place “significant strain” on the society, he said, adding the rise in healthcare spending is expected to “keep rising even beyond 2030”. At the same time, the decline in the working-age citizen population will shrink the country’s income tax base.
Mr Wong said that the shrinking labour force growth means that productivity will be key. This is why the Government has been helping businesses to transform and shift away from manual processes, and equipping people with new skills.
It also means growing the silver economy for businesses to innovate with new goods and services for the elderly, while raising the retirement and re-employment ages, as well as providing wage top-ups and grants to incentivise companies to employ senior workers.
“The demographic curve may be inevitable, but it is a window of opportunity too. It is on us to find the silver lining,” the minister said.
REVISED CARBON TAX RATE
Turning to the third “curve” that is emissions, Mr Wong said that Singapore is committed to the global effort of fighting climate change and is taking proactive steps to decarbonise its economy.
But this will not be easy because Singapore faces “a double disadvantage” – a lack of land space and natural resources which makes it very challenging to deploy renewable energy at scale.
It also faces significant risks of coastal inundation and inland flooding. “But our economic story has always been one where we defied the odds,” the minister added.
Among the steps it is taking, Singapore is “seriously considering the import of green electricity” and is finding ways to overcome the high cost, and technical and security challenges.
It is also actively pursuing new opportunities to grow as a sustainable finance hub, while investing in the research and development of new technologies like hydrogen and carbon capture.
The latter, said Mr Wong, will take time to bear fruit but can put Singapore in good stead in the longer term.
Meanwhile, Singapore has also been reviewing the level and trajectory of its carbon tax.
“One of the key levers for the green transition is the carbon price. Our carbon price today is too low,” said Mr Wong, adding that the tax review is done to ensure “it reflects the cost of carbon, and influences investment decisions effectively”.
The Government intends to announce the revised carbon tax rate for 2024 at next year’s Budget, while indicating what to expect up to 2030.
“We are mindful that businesses will need predictability and time to adjust,” he added.
Announced at Budget 2018, Singapore's carbon tax rate has been set at S$5 per tonne of greenhouse gas emissions from 2019 to 2023. The Government said then that this would be increased to between S$10 and S$15 per tonne by 2030.