With tax revenues down, S'pore aims to rebuild fiscal position by strengthening economy

Deputy Prime Minister Heng Swee Keat said the key focus for now is on strengthening the economy. ST PHOTO: CHONG JUN LIANG

Singapore's tax revenues have fallen owing to the Covid-19 pandemic, and to rebuild its fiscal position, the Government will look to strengthen the economy and make future revenue streams more resilient, said Deputy Prime Minister Heng Swee Keat.

In an interview with The Straits Times and The Business Times yesterday, Mr Heng, who is also Finance Minister, said contributions to government coffers from goods and services tax (GST) and stamp duties have dipped since the outbreak started, as people spend less and buy fewer properties.

But revenue from these sources will recover when the economy bounces back. For now, the key focus is on strengthening the economy, he said.

"If our economy bounces back faster and stronger, then revenue will grow, whether it's corporate income tax, the GST, personal income tax or stamp duty."

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The Government announced a $21 billion draw on the reserves in April, when more measures were announced to help companies and people during the circuit breaker period.

The Fortitude Budget rolled out last month requires a further $31 billion draw, bringing to $52 billion the sum that may need to be drawn from past reserves this financial year.

More importantly, Mr Heng said, Singapore's investment entities such as GIC and Temasek are "fully focused", have a clear mandate and have been accelerating their review of investment strategies in the last few years.

The setting up of GIC in 1981 to manage the country's reserves for long-term returns, he said, was a major policy move that allowed Singapore to build sizeable reserves that it can tap during crises.

"The Government does not interfere in what (GIC or Temasek) buys or sells specifically, but there is a process of governance that allows us to ensure proper accountability. So that has been helpful."

The Government is also looking at ways to make future revenue streams more resilient, especially given recent developments, he said.

The first is global competition for the tax dollar owing to the base erosion and profit-shifting initiative, or BEPS 2.0, which aims to stop large companies from shifting profits to low-tax places.

Mooted by the Organisation for Economic Cooperation and Development, measures discussed under BEPS 2.0, such as taxing foreign profits, could significantly impact how countries compete for investments and how corporate profits are allocated and taxed.

"There is very intense discussion on tax rules, particularly for cross-border activities," said Mr Heng.

Second, Singapore's ageing population means expenditure, such as on healthcare, will go up over time, while revenue will go down as more people retire.

The Government needs to also speed up work on long-term infrastructure projects, which will boost the country's productive capacity and improve the quality of life for Singaporeans, he said.

While the Government is considering borrowing to fund long-term infrastructure, it will not borrow to fund recurrent expenditure despite low global interest rates, he added.

"Even as we borrow, we want to make sure that the project is economically justifiable and brings economic and social returns. We have to be very clear-headed about that - it's not just because there is cheap money, then we build."

Citing how some countries had tried to spend their way out of the 2008-09 global financial crisis by building roads and airports to nowhere, he said: "Those (projects) will eventually have to be paid for by future generations of taxpayers, and that will not be fair."

Responding to a question on whether the Government would consider raising the 50 per cent cap on the Net Investment Returns Contribution (NIRC), he said the Government will have to study this carefully.

"My approach is never to say never, but for now, I don't see a need because the formula has been quite robust, in that we are not looking at year-to-year returns," he said.

The NIRC comprises 50 per cent of the net investment returns on net assets invested by GIC, the Monetary Authority of Singapore and Temasek - the three entities tasked with managing and investing the reserves - and 50 per cent of the net investment income derived from past reserves from the remaining assets.

The NIRC is the top contributor to government coffers.

Under the Net Investment Returns (NIR) framework, the Government can spend up to 50 per cent of the long-term expected real returns, including capital gains, on the relevant assets.

Expected, instead of actual, rates of return are used to provide some smoothness over the years in the amount of NIR that can be spent.

Mr Heng concluded by observing that the financial markets have turned positive as investors scramble for yield.

But "markets cannot defy gravity", especially if the real economy will be in the doldrums for some time. And how the real economy performs depends on the trajectory of the pandemic, he said.

"Which is why global cooperation, whether to find a vaccine or to find new therapeutics to combat Covid-19, is probably the most important thing that people and governments can do, in order for us to then fight on all the other fronts."

Grace Ho

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A version of this article appeared in the print edition of The Straits Times on June 09, 2020, with the headline With tax revenues down, S'pore aims to rebuild fiscal position by strengthening economy. Subscribe