SINGAPORE: After two years of significant spending to contain the economic impact of COVID-19 and with the need to invest in longer-term social infrastructure, this year’s budget is likely to focus on the issue of sustainability budget, economists and tax experts said.
Beyond the 2022 budget, the national conversation on possible changes to Singapore’s tax system should continue, they added.
Taxes will be front and center when Finance Minister Lawrence Wong delivers his budget speech on Friday, Feb. 18, these observers said. One of these, unsurprisingly, will be the long-planned increase in the Goods and Services Tax (GST), which authorities have said is essential to generate the additional revenue Singapore needs for a ageing population.
“The last two years of the pandemic have taken a heavy toll on Singapore’s fiscal resources, and there is now an urgent need to refocus on fiscal sustainability,” said DBS senior economist Irvin Seah.
KPMG Singapore’s tax partner, See Wei Hua, noted that the 2022 budget will be “one of the most tax-focused budgets in recent years.”
“(People are watching) any changes to the tax regime, especially as the government has taken more than S$50 billion from reserves in the past two years,” he said.
“Now that we are emerging from COVID-19, the question is how can the government ensure that its fiscal position will be sustainable over a longer period of time?”
Singapore is not alone.
Other countries, such as the UK and Indonesia, have also started considering tax hikes. As the Organization for Economic Co-operation and Development (OECD) pointed out in a report last year, the pandemic “has caused a significant deterioration in public finances, which calls for a rethinking of tax and spending policies once recovery well underway”.
The fight against the pandemic over the past two years has seen Singapore rack up budget deficits of S$75 billion, while drawing the equivalent of about 20 years of budget surpluses from past reserves.
Prior to COVID-19, government spending was already on the rise, with government revenues struggling to keep up.
Over a 10-year period from fiscal year 2010 to fiscal year 2019, annual spending on public administration, economic development, and social development increased by an average of 9.1%, 7.7%, and 7.4% respectively, according to a UOB report.
In contrast, operating income – largely from taxes – grew at a slower pace of 6.6% per year over the same period. According to the Inland Revenue Authority of Singapore (IRAS), tax revenue accounted for 73.6% of total government revenue in fiscal year 2020.
As a result, the government’s primary balance, defined as operating revenue minus total expenditure, has been negative in five of the past six fiscal years, noted UOB economist Barnabas Gan.
“This suggests that tax revenues, including those from personal, business and GST income, have not been sufficient to cover the increased spending,” he said.
The “only way” to close this gap in the primary balance has been to tap into the contribution of net investment returns, noted Barclays economist Brian Tan. “It’s not sustainable. Ideally, you’ll want it to be a bonus you can do without, rather than something you absolutely depend on for fiscal sustainability.
Going forward, government spending will only increase in the face of challenges such as a rapidly aging population and climate change.
For example, Singapore’s health spending has tripled in dollar terms over the past decade, now standing at 2.2% of gross domestic product (GDP). Such spending is expected to reach 3% of GDP by 2030 and “will continue to rise” even beyond that, authorities said.
These longer-term needs will incur “significant costs” and require a sustainable source of income, Seah said.
“Unfortunately, there are not many options available when it comes to reliable sources of tax revenue,” he added, noting that there is “limited” room to change tax rates for businesses. companies and individuals without diluting the overall competitiveness of the country.