Enhanced offsets ease GST concerns

With Singapore’s inflation running at a 14-year high and expected to remain elevated, the $1.4 billion boost to the GST offset package announced by Deputy Prime Minister and Finance Minister Lawrence Wong on Nov 7 was appropriate. The increase, which raises the size of the package to $8 billion, from $6.6 billion previously, will enable the Government to meet its commitment to ensure that it would offset the impact of the GST increase for most Singaporean households for at least five years and for lower-income households for about 10 years. The offsets, together with the GST Voucher Scheme, add significantly progressive elements. Even after the GST increase from 7 per cent to 8 per cent from January 2023, the effective GST rate for households in the bottom three income deciles will be below 3 per cent and most of the tax will be borne by high-income households, tourists and foreigners.

However, the GST continues to be a contentious issue, as the recent parliamentary debate on the GST (Amendment) Bill attested. While there is broad agreement that future spending will need to increase, particularly on healthcare, as well as on housing subsidies, skills upgrading, protection against climate risks and green initiatives, the debate centred around how to raise the necessary resources. Opposition parties, which long opposed the GST hike, suggested alternatives, including raising direct taxes and property taxes as well as contributions from net investment returns.

But these fall short in many respects. Personal income tax was already hiked in Budget 2022, with the top rate now at 24 per cent. Raising it to punitive levels would discourage high-income earners from staying here, while hikes in corporate tax would dampen investment, competitiveness and economic growth. Trying to broaden property tax – which was also increased in Budget 2022, with properties at the higher end seeing steeper hikes – would hit middle-income owners, while the suggestion to raise the contribution from net investment returns would erode the resources available to future generations.

As to the concern expressed by an opposition MP that “assurance packages are temporary while the GST hike is forever”, it is worth pointing out that wage levels will not remain stagnant – they will rise with economic growth, as well as the expansion of the progressive wage model to more lower-income groups and tighter restrictions on foreign workers. Another proposal was to exempt essential items from GST. This would not only lower revenues, but also distort the tax structure, raise compliance costs and benefit the better-off, who consume more of such items in absolute terms. Targeted assistance is a far superior approach. With this now enhanced, the GST should go ahead as scheduled.