Budget hot topics

From GST hike to using the national reserves: 5 burning Budget questions

Monday's Budget generated a flurry of discussion among Singaporeans - especially over the GST hike due some time from 2021 to 2025. Will the tax take still attract talk by that time, when elections will have been held? And what of other measures firing up the kopitiam chat: Why allow statutory boards to borrow for infrastructure spending? Do ministry budgets need to be reined in more? Will that stamp duty increase really hit the wealthy? And should the Budget have done more for the rapidly ageing population? Insight gets out the magnifying glass ahead of Parliament's Budget debate this week.

Other than an increase to the GST, Finance Minister Heng Swee Keat announced a second major tax change - a 1 per cent hike in Buyer's Stamp Duty on the value of transacted residential properties in excess of $1 million. PHOTO: THE BUSINESS TIMES

1. Will GST be a political hot potato in the next election?

When the water price was set to rise for the first time in 17 years, Minister for the Environment and Water Resources Masagos Zulkifli explained the need to do so weeks ahead of the announcement.

But the phased-in 30 per cent hike, announced in Budget 2017, remained a bitter pill to swallow.

About 100 people turned up at Hong Lim Park to protest against it, and netizens dug up water agency PUB's profits in the past year - the authorities explained these came about due to government grants.

An upcoming 2 percentage point rise in the goods and services tax (GST) announced in this year's Budget could draw a similar outcry - and political watchers believe it will remain a hot issue in the next general election, due by 2021. "Consumption tax hikes are always risky for any government to introduce," says political observer Lam Peng Er.

Such taxes have cost leaders overseas their positions, he adds. Support ratings of then Japanese Prime Minister Ryutaro Hashimoto plunged after unpopular fiscal decisions, including a consumption tax increase, and he eventually resigned in 1998. However, Dr Lam points out the ruling People's Action Party (PAP) has yet to take an electoral hit from the GST, introduced in 1994.

While there have been increases in 2003 and 2007 - which came under fire from opposition parties in elections that followed - other concerns such as an overburdened public transport system and the liberal immigration policy were seized on by the electorate instead.

"The PAP may well suffer more from the SMRT train breakdowns, which have an immediate impact, than the GST hike, which looms over the horizon," says Dr Lam. How much of a hot potato issue it might be depends on how well the opposition milks the topic, he adds.

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A GST hike is usually introduced when the economy is on firmer footing, notes Bishan-Toa Payoh GRC MP Saktiandi Supaat, who also sits on the Government Parliamentary Committee (GPC) for Finance and Trade and Industry. "Theoretically, when the economy is down, such a move may contribute to some mild form of stagflation," he said, referring to a situation of sluggish growth and high inflation.

Drawing lessons from the water price increase, the need for a GST hike was also communicated "well in advance" this time, says Institute of Policy Studies senior research fellow Christopher Gee.

Although the hike from 7 per cent to 9 per cent is set to take place some time from 2021 to 2025, it was unveiled in this year's Budget.

Mr Gee adds that each tax hike has been paired with offset measures and rebates: "This has become a strong association, so the impact is not felt so badly."

But Lee Kuan Yew School of Public Policy associate dean Donald Low cautions that "just because something is announced earlier doesn't mean that people will be persuaded". Singapore's "lean, highly targeted social protection system" has been seen as a factor keeping the tax burden low, especially on the middle-income, he notes. For a future increase to be accepted, justifying the tax hike using the fiscal sustainability argument may not be enough.

This is why he calls for "a more universal approach to social spending". For middle-income Singaporeans to better accept the hike, they should also be beneficiaries of an expanded social protection system, he says.

As the Republic gears up for leadership renewal, with Prime Minister Lee Hsien Loong saying he plans to step down by the age of 70 - in about four years - observers say this is a chance for the next generation of leaders to show their "political chops" in the upcoming election.

"They have to prove that they are tough and able to push through a necessary but unpopular policy," says Dr Lam, adding that the PAP has a track record of successfully implementing such policies, including national service.

Associate Professor Low notes that some say the advance notice this time, with the Prime Minister himself helping to prepare the ground, could also have been aimed at taking the heat off the fourth-generation leadership. At the PAP convention last November, Mr Lee said "(Finance Minister) Heng Swee Keat is right when he said that raising taxes is not a matter of whether, but when".

But looking ahead, a longer runway could have its downside as well, with arguments thrown back and forth between critics and political leaders, says Dr Lam. These may include comments taken out of context, which could sway public perception - and "this will reach a crescendo by the next election".

Already, online posters have circulated comments by Mr Lee in 2015 that the PAP would be mad to raise taxes just because it had garnered a certain percentage of votes. A GST hike would be needed only if there are "profligate spending and irresponsible, unsustainable plans", he had said.

Mr Lee was responding to Workers' Party chief Low Thia Khiang, who had said at a rally during that year's General Election that the PAP could change its mind anytime and raise the GST if it won.

"Raising, adjusting taxes is a very big decision. You consider it carefully, you discuss it thoroughly, and you do it only when you absolutely have to," said Mr Lee at the time.

Ahead of parliamentary debates this week on government spending, MPs agreed that GST will be a key election issue and called for more assistance to be given to lower-and middle-income groups. MP Liang Eng Hwa, chairman of the GPC for Finance and Trade and Industry, suggested raising the income ceiling for aid schemes - like what was done with the Edusave Merit Bursary this year - to allow more middle-income Singaporeans to benefit as the cost of living rises.

2. What is the best way to borrow for critical projects?

Over two decades since Singapore stopped borrowing for major infrastructure projects, it is reconsidering this option, amid a rise in infrastructure spending, Finance Minister Heng Swee Keat said in his Budget speech last week.

MPs and academics agree that long-term borrowing helps ensure each generation contributes its fair share towards the building of infrastructure, as it spreads the financing out over a longer period, and across generations.

Infrastructure spending has ballooned from $8.5 billion to an estimated $20.0 billion between financial year 2011 and FY2018.

The Government is looking at allowing borrowing by statutory boards and government-owned companies. Projects that may benefit from this include the Kuala Lumpur-Singapore High Speed Rail and Changi Airport's Terminal 5.

To reduce interest rates on the borrowing, the Government may also provide guarantees for long-term debt to fund critical national infrastructure.

While agencies such as the Housing Board and Land Transport Authority already issue bonds, what is new with the latest announcement is the larger scale of borrowing for projects and the possible use of the reserves as a guarantee.

Some, like socio-political commentator Devadas Krishnadas, say the Government's change of heart has been too slow in coming. He notes that by not resorting to borrowing earlier, Singapore "has missed the opportunity of a decade-long very low interest environment".

But Ms Sun Xueling, who sits on the Government Parliamentary Committee for Finance and Trade and Industry, notes that even low interest rates can add to the project's cost over the long term - and it was therefore not such a straightforward decision to start borrowing again.

How the borrowing will be carried out - the details - will matter a great deal, say MPs and experts.

Having the central government as guarantor and statutory boards as the borrower is better than the alternative of ministries borrowing and giving the money as grants to statutory boards, says MP Ang Hin Kee, deputy chairman of the Government Parliamentary Committee for Transport. This is because the former encourages financial prudence and discipline in the end user of the funds - statutory boards, which will have to repay the debt over the long haul, he said.

On concerns that borrowing may lead to external stakeholders having a say over how national projects are designed, Ms Sun says this can be avoided if the borrowing is done via issuing bonds. "When we issue bonds, we do not have to worry about shareholders and ownership, which would be the case if we issue equity... We (also) do not need to share future equity upside with the bond holders," she says.

External funding also means the agency that borrows may have to make sure it generates sufficient surpluses from the project to pay off interest, notes Singapore Management University accounting professor Sum Yee Loong.

Some of this cost may be passed on to consumers using services from the agencies, notes Prof Sum, who adds: "It's a way to make sure that future infrastructure projects, which benefit the public, will also be indirectly funded by the public."

3. Ministry spending: Can it be tightened further?

When the Ministry of Manpower paid almost $272,000 to buy 472 Herman Miller designer chairs for staff in 2011, it caused a stir.

Some citizens asked: Was the ministry spending too much?

As a third goods and services tax hike looms, Singaporeans want to see that government agencies are challenging themselves to manage costs and spend taxpayers' money wisely, says MP Sun Xueling of Pasir Ris-Punggol GRC. To this end, Budget 2018 has made moves stressing the need for more prudence.

The rate at which ministry budgets can expand will be reined in further from April next year. Their annual block budgets may grow at 0.3 times of gross domestic product growth, down from 0.4 times.

The move sends a strong signal to Singaporeans, say observers.

"A government that urges us to be self-reliant, to rely on the community, on family, and to provide for one's own retirement and social needs has to send a signal that it is equally responsible in remaining lean and efficient," says taxacademic Stephen Phua.

"If the Government is seen to be spending without restraint, it loses credibility and legitimacy" to provide only targeted help and to make some forms of welfare conditional on willingness to work and help oneself, he adds.

As spending needs rise in healthcare, security and education, Finance Minister Heng Swee Keat said in an interview with The Straits Times that beyond raising revenue, there is a need to look at how expenditure is handled.

Adding that he is "squeezing" all ministries by limiting their budget growth factor, Mr Heng hopes "the message gets across to all, and that we have to learn to do more with less", both in the public and private sectors. Academics and MPs add that more can be done. For example, says Associate Professor Phua, "we should minimise any disincentive to underspend budgeted projections".

Instead, agencies that underspend as a result of efficiency or savings from productivity should be rewarded, he argues.

MP Liang Eng Hwa, chairman of the Government Parliamentary Committee for Finance and Trade and Industry, says although government expenditure is about 19 per cent of GDP - leaner than most developed economies - there is scope to streamline functions and leverage on smart technologies.

Successfully adopting Smart Nation initiatives like going cashless with transactions, for example, can reduce the cost of running the government, adds Prof Phua.

"We should go down to details to ensure that every individual is motivated and every process is designed to save taxpayer monies," stresses Ms Sun, who intends to raise this issue in the Budget debate.

Economist Randolph Tan, a Nominated MP, suggests doing more studies to track if expenditure is achieving intended outcomes.

But amid calls for prudence, Nee Soon GRC MP Louis Ng cautions against cutting the size of public service, citing strains on manpower.

"Public expectations are rising for the Government to deliver more and deliver faster," he says. Making cuts in manpower will hit its ability to provide "personalised service".

4. Buyer's Stamp Duty hike: Is it progressive enough?

Other than an increase to the goods and services tax, Finance Minister Heng Swee Keat announced a second major tax change in this year's Budget - a 1 percentage point hike in Buyer's Stamp Duty on the value of transacted residential properties in excess of $1 million .

Taking effect last Tuesday - a day after the Budget was delivered - the duty went up from 3 per cent to 4 per cent. Experts estimate it could raise over $400 million for the Government annually.

Mr Heng said the change enhances progressivity, something he acknowledged that many had been calling for. "This reflects a desire for a progressive system, with those with more contributing back to society," he said.

Senior Minister of State for Finance and Law Indranee Rajah later added that the Government decided against the use of an outright wealth tax, as that would work against Singapore's plans to become a hub for wealth management, which creates employment in the financial industry.

But given concerns over rising inequality, some experts are asking if the Government can go further in making the tax system more progressive.

One suggestion by Lee Kuan Yew School of Public Policy associate dean Donald Low is to build on the stamp duty change by introducing more tiers after the $1 million mark - for instance, by having a 5 per cent stamp duty rate on properties in excess of $1.5 million.

Another possibility is to simply raise income taxes for the rich.

But Singapore Management University accounting professor Sum Yee Loong says this could make Singapore less attractive to top talent.

Prof Sum lauds the Buyer's Stamp Duty hike, as it hits not just individuals who buy expensive property but property developers as well.

It is this effect on developers that has led some to note a potential positive side effect of the stamp duty hike. It could help to cool the ongoing collective sale fever among private property owners, says MP Alex Yam, who is chairman of the Government Parliamentary Committee (GPC) for National Development.

Mr Yam adds that introducing the hike for properties over $1 million ensures that those who buy Housing Board flats - which house over 80 per cent of Singaporeans - will remain unaffected, as very few HDB flats are sold for over $1 million.

But progressivity is not the only goal. MPs also suggested ways to make the tax regime fairer.

Ms Sun Xueling, who sits on the GPC for Finance and Trade and Industry, hopes an e-commerce tax on goods can be considered, to level the playing field between physical retailers and online ones, whose sales have boomed in recent times.

Mr Heng announced this year that GST on imported services like Netflix would take effect in January 2020, but he said a tax on goods imported through online retailers will be reviewed, and there are international discussions on how such taxes can apply.

5. Should the state do more for the ageing population?

The number of seniors living alone more than doubled between 2006 and 2016, to 47,400. At the same time, family sizes are shrinking and couples are having children later.

So, when Finance Minister Heng Swee Keat announced moves to strengthen community networks and family support for the greying population, some observers asked: Will it be enough?

With one in four citizens aged 65 and older by 2030, they wondered if emphasising family and community support puts too much stress on caregivers.

Help will be offered to caregivers in the form of better use of technology, said Mr Heng. The Proximity Housing Grant will also be raised to make it easier for family members to live near, or with, each other.

The Community Networks for Seniors - a programme to get older folk involved in activities, and to care for their needs - will also go nationwide by 2020.

"The efforts of the Government and our community partners need to be well coordinated," Mr Heng said. "Our 'many helping hands' need to work 'hand-in-hand'."

Some, like the Association of Women for Action and Research (Aware), claim the measures seem "piecemeal". While welcoming the potential benefits, Aware cautions that the moves "suggest that we must continue to rely on our informal family networks for caregiving, without substantial support from the Government".

Calling on the state to adopt "stronger, long-term solutions to fill the caregiving gap", the group suggests providing family caregivers with an allowance and Central Provident Fund contributions.

It also notes that, with 300,000 women outside the labour force last year due to family responsibilities, including caregiving, pressure on female caregivers in particular is set to grow as the population ages.

National University of Singapore economics professor Chia Ngee Choon says that when taken as a whole, the Budget announcements were not piecemeal, but show a clear shift towards "integration between healthcare and social support for seniors" - with consolidation of senior-related services under the Ministry of Health.

Institute of Policy Studies senior research fellow Mathew Mathews says over-reliance on family support could strain "sandwiched generations" providing for aged parents and young children.

But there are benefits to keeping families close, as "there are many transfers between grown-up children and their parents... Grandparents (also) provide substantial help with grandchildren".

There is also scope for more options "between stepped-down care in nursing, and staying at home", says Mr Desmond Choo, an MP for Tampines GRC.

Assisted living can fill this gap, says Mr Choo, who sits on the Government Parliamentary Committee (GPC) for Social and Family Development: "We have studio apartments, and can enhance them by delivering more services, having people going to check in on older citizens' healthcare."

Assisted living also helps older people live independently as long as possible, says Dr Mathew.

Ms Tin Pei Ling, deputy chairman of the GPC, hopes there can also be clearer guidelines on making the design of spaces elder-friendly in the future - as much is retrofitted now.

Ms Denise Phua, also a GPC member, says initiatives like the Proximity Housing Grant should not be misread as an "excuse for Government to shift responsibility to citizens". She pointed out other forms of state spending on the elderly that are more direct - such as healthcare spending, which is increasing. It is expected to rise from 2.2 per cent of gross domestic product to almost 3 per cent in the next decade.

She also lauded the Proximity Housing Grant move, and called for more measures that bring families closer, like higher priority in housing allocation and more jumbo or adjacent flats for multi-generational families.

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A version of this article appeared in the print edition of The Sunday Times on February 25, 2018, with the headline From GST hike to using the national reserves: 5 burning Budget questions . Subscribe