Ensuring fiscal sustainability for the future

In his round-up speech at the end of the Budget debate yesterday, Finance Minister Heng Swee Keat set out the challenge Singapore faces in ensuring its finances are sustainable for the long term. Here is an extract of his speech.

Just as we seek to protect our home and environment for our future generations, we must ensure that our finances are sustainable for the long term.

As Ms Sun Xueling pointed out, our expenditures have started to exceed our operating revenues since FY2015.

The Government had in fact anticipated this and prepared early, by raising revenues ahead of our spending needs. Indeed, this is the approach this Government has always taken.

We had therefore raised the goods and services tax in 2007 and introduced the Net Investment Returns (NIR) framework in 2008.

In the last term of Government, we had also undertaken measures such as making our property tax rates more progressive and increasing the duties for betting, liquor and tobacco over time.

In Budget 2015, we announced increases in top marginal rates for personal income tax and revisions to the NIR framework. These measures now serve us well to meet our spending needs through to the end of this decade.

But beyond this decade, we can expect the fiscal situation to become more challenging as expenditures exceed revenues in the longer term.


Mr Heng said that Singapore must continue to prepare for its greater needs in the long term by working on two fronts - spending prudently and effectively, and growing revenues fairly and sustainably. PHOTO: SCREENGRAB FROM TV

•First, our economy is maturing. With slowing economic growth, our revenues will also grow more slowly.

•Second, our population is ageing rapidly and we can expect rising expenditure needs, especially for healthcare.

•Third, our infrastructure needs are rising, as we seek to build new infrastructure and renew old ones to enhance our quality of life and Singapore's economic competitiveness.

Going forward, we must continue to prepare for our greater needs in the long term by working on two fronts:

•Spending prudently and effectively; and

•Growing our revenues fairly and sustainably.

SPENDING PRUDENTLY AND EFFECTIVELY

With higher spending needs, it is ever more critical to ensure that we spend within our means to get the outcomes we want, as Mr Vikram Nair noted.

At the ministry level, we have designed our funding policies to drive agencies to operate efficiently and effectively. Today, we budget for ongoing functions using a Block Budget framework, where ministries are provided with budget caps for a medium-term period. Within the cap, each ministry decides how best to allocate its budget. This approach encourages ministries to strive for cost-effectiveness, because every dollar optimised means more resources available for worthwhile programmes.

This year, we sought to further reinforce the importance of spending prudently and effectively, by applying a permanent 2 per cent downward adjustment to the budget caps of all ministries and organs of state.

•This will free up resources that the Ministry of Finance can redeploy towards higher-priority requirements and projects that deliver value to citizens and businesses, such as initiatives by the Municipal Services Office.

•Within their adjusted budget caps, agencies will decide how to prioritise their programmes and projects and review how they can achieve greater efficiency.

•Fundamentally, we want to imbue these values of prudence and innovation in all officers in the public service: to always seek value for money, and constantly strive to improve and innovate, so that we can do more - and do better - with less.

At the project level, we are tightening scrutiny of major infrastructure projects to ensure robustness of their business case and value for money.

•We have a process today that puts large infrastructure projects (more than $500 million), or those that are highly complex in nature, through a series of reviews before funding is approved.

•This process taps a panel of senior public officers and industry practitioners, those with deep technical expertise and experience in major infrastructure development, with the aim of optimising the project's overall design, use of space and cost-effectiveness.

At the programme level, we are designing our schemes so that subsidies are targeted at the right groups. As a general principle, we price services to recover full cost and discourage over-consumption. We then target subsidies appropriately at those in need, such as through GST vouchers, service and conservancy charge rebates and public transport vouchers. This is more progressive than underpricing services, which implicitly subsidises all groups, including the rich.

GROWING REVENUES FAIRLY AND SUSTAINABLY

Ms Sylvia Lim asked whether we evaluate programmes and I think on the economic programmes, Minister Iswaran gave a detailed explanation of how agencies evaluate those programmes and have to adapt and change when necessary. Then, she raised the issue of the Productivity and Innovation Credit (PIC). The PIC in fact has largely achieved its objective but she raised examples of abuses to make her case. This is mistaken. In fact, those abuses were uncovered because of extensive audits that were done by the agencies, and we should commend the officers for the seriousness in which they undertake this. And in many other countries, those abuses would not even be known. The schemes were done in a way that is broad-based and reaches the right groups of people. The alternative, of course, is to have every detail scrutinised and approved before the businesses can use it. And in fact, in many of the Budget dialogues we had with businesses, their concern was that if you have too many schemes that are just based on approval, things will not move. So it is a delicate balance, and a good balance which the agencies should be commended for.

Besides spending prudently and effectively, we will have to grow our revenues through new taxes or raising tax rates over time. This challenge of raising revenues for growing needs is not unique to Singapore. If you look at many other countries, the need for more revenue to meet spending needs is a common theme that cuts across different systems. For example, Hong Kong announced at its recent budget that it would be setting up a tax policy unit to comprehensively review its tax system. One of its objectives would be, and I quote, to "explore broadening the tax base and increasing revenue, so as to ensure that adequate resources are available" to support sustainable development.

Mr Saktiandi Supaat and Mr Yee Chia Hsing had asked how we intend to review our own tax system. I would like to assure them that we will ensure that our tax system continues to be both fair and sustainable.

First, our tax system must be fair and progressive across income groups. What this means is that those who are better off must contribute more. In recent Budgets, we have continued to make our personal income tax and property tax rates more progressive, even as we introduced or enhanced permanent schemes such as Silver Support and Workfare to provide more support to lower-income groups.

Second, a sustainable tax system is fundamentally one that rewards effort by individuals and enterprise by our companies.

As Ms Foo Mee Har pointed out, the only way to sustain a healthy revenue stream is to have a healthy and growing economy.

In more recent years, more countries have lowered or announced their intention to lower corporate income tax rates. The United Kingdom has lowered its corporate tax rate from 30 per cent to 20 per cent over the last 10 years, and plans to further lower it to 17 per cent by 2020. The new administration in the United States has also indicated plans to cut corporate tax rates. We must ensure that Singapore continues to be an attractive place to work and do business, so that we have a thriving and vibrant economy.

Third, sustainability is also about striking the right balance between current and future generations. We have spent prudently, built up our reserves, and tapped on their returns judiciously. Ms Lim suggested using the proceeds from land sales. Now, the proceeds from land sales go into past reserves, and it is because of this prudence that we are able to build up our reserves, and we can use part of these returns for our expenditure. So we must remain disciplined and prudent in spending the returns of our reserves, so that they remain a stable and sustainable source of revenue over the long term.

We must remain disciplined and prudent in spending our reserves, so that they remain a stable and sustainable source of revenue over the long term. Any decision to raise taxes will not be taken lightly. We will study all options carefully.

While our finances today are sound, we must start planning early. This is the right and responsible way, rather than leaving problems to be dealt with by future governments when Singapore comes under fiscal strain. Planning for the issue now will allow us to better ease in the needed measures, to give our people and businesses some time to adjust.

We must plan for the long term, not five years, not 10 years, but big ambitious plans for decades ahead - like the new airport; new towns, each with distinctive features to attract families; new MRT lines.

We are in a good position today, because we have planned early and invested in the long term. This ability to plan and invest for the long term is a key strategic advantage. We must ensure that we continue to have this capacity to invest in critical programmes and infrastructure with long-term benefits, in a way that is equitable to both current and future generations.

This Budget sets the strategies for building a better Singapore in a sustainable way. We can move forward confidently on these strategies, as we are starting from a position of strength. This is a cumulative effort from previous Budgets:

•We have a well-functioning economy where most Singaporeans have good jobs;

•We have a good social security system that serves the majority of Singaporeans well;

•We have spent prudently so we have the necessary resources.

In this fast-changing world, we cannot predict how the journey ahead will pan out, but we can expect that it will not be always smooth-sailing. There is no step-by-step guide for how to venture into the volatile, unpredictable future that lies ahead for the whole world, not only Singapore.

But for Singapore, we have our compass, a compass of our shared values and our common hope.

In this Budget, we set our minds:

•To seize opportunities to succeed;

•To be part of, to play a part in, a caring and inclusive community; and

•To build, protect and pass on a truly special home to future generations.

Let us develop the deep capabilities, strengthen the spirit of enterprise to adapt and try out new things, work together in partnership, and care for and support one another.

I am confident we can do it. We have been through tougher situations. Each time, despite the naysayers, we emerged stronger and more adaptive, as we held strong together as one people.

A version of this article appeared in the print edition of The Straits Times on March 03, 2017, with the headline 'Ensuring fiscal sustainability for the future'. Print Edition | Subscribe