Budget 2018

To justify GST hike, emphasise universal benefits

The announcement in Budget 2018 that the goods and services tax (GST) will be increased from 7 per cent to 9 per cent between 2021 and 2025 was not much of a surprise. But the fiscal context in which the announcement was made has complicated the Government's task of persuading Singaporeans of the necessity of the increase.

First, the surplus for financial year 2017 is now estimated at $9.6 billion - more than five times the original estimate of $1.9 billion - which is almost large enough to finance a large ministry such as the Ministry of Health.

Despite the Finance Minister's explanation that this larger-than-anticipated surplus was exceptional and unlikely to be repeated, people may ask how certain the Government is that spending needs will increase in 2021-2025 by an amount large enough to justify a fairly significant hike in the GST.

Second, even if spending needs increase substantially in the next term of government, Singaporeans will ask whether there are alternative ways to pay for that increase. For instance, the current rule of spending up to 50 per cent of net investment returns (NIR) means the reserves are still growing quite considerably every year.

In his Budget speech, the Finance Minister argued against using 100 per cent of NIR, on the grounds that "the principal sum of reserves will stagnate over time, and the NIRC (net investment returns contribution) as a share of GDP (gross domestic product) will consequently fall as our economy grows".

Indeed, spending all of the NIR may not be prudent, but there is nothing scientific about spending exactly 50 per cent of it. Why not 60 per cent, or even 70 per cent? At these levels, the Government would still be adding to the principal of the reserves.

Third, and perhaps most significantly, the Budget speech did not articulate a social policy vision, or a new social compact, that would persuade the majority of Singaporeans to accept a tax increase.


A shopper making payment at a store in The Shoppes at Marina Bay Sands. At 9 per cent, Singapore's GST would not be high by international standards - many European countries have rates above 20 per cent. But neither can Singapore still boast of a low GST, which would be higher than the 8 per cent in Japan and be close to the 10 per cent in both South Korea and Australia. PHOTO: ST FILE

BEYOND TARGETING

Over the years, Singaporeans have been told that one virtue of our lean, highly targeted social protection system is that it keeps the tax burden - especially on the middle-income - low.

Since everyone contributes to it, the social protection system has to benefit everyone. Middle-income Singaporeans, in particular, must feel that they have a stake - and are intended beneficiaries of the system.

In previous Budget debates, whenever more comprehensive social protection was suggested, the Government's response has often been: "How are we going to pay for it?"

At 9 per cent, Singapore's GST would not be high by international standards. Many European countries have rates that are above 20 per cent.

But neither can we still boast of a low GST. It would be higher, for example, than in Japan (8 per cent), which has an older population and arguably better social protection for its older people. And it would be close to the rates in South Korea and Australia (both 10 per cent).

In this context, justifying the GST increase solely in terms of an increasing elderly population and new infrastructure needs is unlikely to be sufficient or compelling.

Increasingly, tax increases in Singapore need to be justified in terms of a social protection system that is more broad-based, and even universal in some important respects.

The Government would also have to modify, significantly, much of the logic and language underpinning current social policies. These emphasise targeting help at the needy and place individual responsibility and family support at the heart of the system.

The new social compact must go beyond that. Since everyone contributes to it, the social protection system has to benefit everyone.

Middle-income Singaporeans, in particular, must feel that they have a stake - and are intended beneficiaries of the system.

A NEW UNIVERSALISM

In public housing and education, the state has already embraced a near-universal approach, and played a central role in financing and providing these social goods directly, including to the middle-income.

Unsurprisingly, these are also the two areas of social policy that have most substantively improved the lives of Singaporeans, and mitigated inequality to a much larger extent than targeted help schemes.

 

But with changing demographic realities, the state needs to bring this universalism further.

Such universalism in social protection has at least three major benefits. First, when social investments benefit all Singaporeans, they foster social inclusion and a sense that "we're all in it together". They are therefore more willing to pay for it. In contrast, a highly targeted welfare system tends to be stigmatising and is likely to be resented by the middle-income, who feel they contribute to it financially but do not benefit much from it. Over time, this erodes middle-class support of social protection and breeds distrust of the state.

Second, while a highly targeted welfare system may be adequate in alleviating or reducing poverty, it is less able to mitigate inequality. The scale of inequality is, increasingly, too large to be addressed by relatively small transfers to the poor. A more universal social protection system, by channelling benefits to a much wider segment of the population, is likely to be more effective in reducing inequality.

 

Third, universal social protection systems may be more cost-effective. While public financing and provision of universal programmes would cost the state more, these additional costs are likely to be smaller than the savings in private spending on, say, early childhood development or long-term care insurance. This is because the state has significant economies of scale and risk-pooling capacity unavailable to private financing by individuals relying on commercial providers.

As Singapore enters a future characterised by greater social needs and higher taxes, the state has to organise and deliver social protection in ways that are more broad-based and universal - and yet more efficient.

•Donald Low is Associate Dean of Executive Education at the Lee Kuan Yew School of Public Policy, National University of Singapore, and co-author of Hard Choices: Challenging The Singapore Consensus.

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A version of this article appeared in the print edition of The Straits Times on February 21, 2018, with the headline 'To justify GST hike, emphasise universal benefits '. Print Edition | Subscribe