Addressing a recent political meeting,
Singapore’s Prime Minister Lee Hsien Loong said that “… raising
taxes is not a matter of whether, but when.” That statement has
resulted in a great deal of speculation.
Which taxes will be raised? When will the rate
hike be implemented? More importantly, what will be the impact on
ordinary Singaporeans and on the country’s economy?
Back in 2015, Deputy Prime Minister Tharman
Shanmugaratnam had said that the revenue measures taken by the
government were sufficient for the planned spending till the end of
the decade. At that time, he was the country’s finance
minister.
The government was quick to point out that
there was no contradiction between the Prime Minister’s speech and
the earlier statement of the Tharman Shanmugaratnam.
So, will there be a tax hike or not? The
ministry of finance has subsequently issued a statement titled
“Did the government change its position on raising taxes during
this term of government?” It says that “Any decision to
raise taxes will not be taken lightly….”
This seems to indicate that a tax hike is in
the offing, but not immediately. If the government says that it
needs to raise taxes, the first question that Singaporeans will ask
is what is the money is needed for.
It’s useful to remember that Singapore has a
balanced budget. This implies that revenues must be equal to or
exceed expenditure. In fact, by adopting a prudent spending policy,
the government has ensured that the country has a surplus
budget.
Source: Singapore
government budget 2017
The table reproduced above shows that there
was a surplus of S$5.18 billion in FY2016 and an estimated surplus
of S$1.91 billion in FY17. In fact, Singapore’s constitution
requires that the budget remains balanced over each term of
government.
If the budget is balanced, why should taxes be
raised?
The government needs money for a host of
different projects. It has said that annual spending on pre-schools
is set to double to S$1.7 billion by 2022. Additionally, the
country’s workers need to be reskilled so that they continue to
contribute meaningfully to their employers and to the overall
economy.
The country’s infrastructure also requires
vast amounts. A High Speed Rail is being planned to link Singapore
to Kuala Lumpur. The recent SMRT train collision that left 25
people injured highlights the need for investments to upgrade the
country’s transport network. This was only the second time that an
accident of this magnitude has taken place in the train system’s
30-year history.
Funds are also required to increase the
volumes that the country’s seaport and air services can handle. The
projects that need financing include Terminal 5 at Changi, which is
regarded as among the world’s busiest and best airports.
Health services for the elderly are another
area that will require additional resources. Currently, about
440,000 of the nation’s population of 5.6 million is over the age
of 65. By 2030, this number is expected to increase to 900,000.
Consequently, the government will have to allocate more funds
towards adding to the existing healthcare facilities in the
country.
The country has a fairly attractive tax
structure. Income tax
rates are reasonable with the highest slab being 22%.
However, this rate is applicable only for those who earn more than
S$320,000 per year. For those who earn less, tax rates are much
lower.
A person earning, say, S$120,000 would pay
only S$7,950 in income tax. That’s an effective rate of a little
less than 7%. That leaves plenty of scope for levying more
taxes.
There are no capital gains or inheritance
taxes in Singapore. But there is a goods and services tax (GST).
This was first introduced in 1994 at a rate of 3%. In 2003, it was
increased to 4% and then to 5% in 2004. In July 2007, the GST rate
was raised to 7%. It has remained at this level since then.
Analysts say that the GST rate may
be raised when the government decides to implement its
plan to raise taxes.
Remember that the government has three main sources of
tax revenue. In FY2016, GST contributed S$11.1 billion, while
corporate income tax provided S$13.6 billion. Another S$10.5
billion was raised through individual income tax. The increase will
probably come from one or more of these three when the tax hike is
put into effect.
In 2017, Singapore ranked #13 in the IMD World Talent
ranking. Switzerland, Denmark, and Belgium claimed the first three
positions. Hong Kong is at #12. This ranking is prepared by the
Swiss-based International Institute of Management Development (IMD)
and takes into account the competitiveness of nations.
The attractiveness of a country is judged on the basis
of several factors. These include:
Tax rates and the cost of living play a large part in
making a country attractive for overseas talent. Currently,
Singapore ranks #59 among countries in the IMD’s cost of living
comparison. It is at #45 in the “effective personal income tax
rate” ranking. Any increase in taxes could negatively affect these
criteria and make Singapore a less attractive destination for
skilled workers from overseas.
The current government is nearly halfway through its
term. It is unlikely to raise taxes immediately before the next
election. According to UOB
economist Francis Tan, the timing of the tax increase could be
as soon as in next year’s budget.
However, there is no indication from the government
about when the tax hike will be implemented. The current rates may
continue for a year or even more. The final decision will only be
taken after considering all the relevant economic and political
factors.
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