We are starting the year on a positive note. Our economy has rebounded strongly from our worst recession since independence. We worked together to cushion the effects of Covid-19. We planned, we consulted, we took action. We committed close to $100 billion over the past two years to support Singaporeans and businesses through the uncertainties of Covid-19...
Our measures have borne fruit. The resident unemployment rate has come down to 3.2 per cent, close to pre-Covid levels. The median income of full-time employed residents grew by around 1 per cent in real terms last year, after a decline of of 0.4 per cent in 2020.
We expect to see steady recovery this year. Singapore will continue to benefit from the pickup in the global economy. This will be supported by more widespread vaccination and booster efforts in the major economies like the US and euro zone. The recovery of our key trading partners in the region will also support our growth.
That said, 2022 is not free of risks. The global economy is still vulnerable to pandemic-related risks and further supply-chain disruptions. Geopolitical and security risks loom, including the rising tensions in Eastern Europe.
We may also see a slowdown in external demand as the major economies scale back their pandemic support, and central banks tighten their accommodative monetary policies to deal with the threat of inflation.
We will continue to watch these potential threats. We stand ready to respond should the situation turn for the worse. Barring fresh disruptions, I expect the Singapore economy to continue to do well. Our economy should grow by 3 per cent to 5 per cent this year. Our investment pipeline is also strong. This will support our efforts to create more good jobs and secure the livelihoods of all Singaporeans at all levels of the workforce.
Moving Forward Together
Beyond the immediate outlook, we must set our eyes on the future.
We have come this far as a nation, because we are always thinking about tomorrow: planning and taking actions not just for the present, but also with the longer-term interests of Singapore and Singaporeans at heart. So we must position ourselves now for the challenges and opportunities of the decade ahead.
We are moving forward from a position of strength. Our responses to the pandemic have distinguished us from other countries. We have kept our air and sea ports open, and ensured an uninterrupted flow of critical supplies. We have enhanced our reputation as a trusted and reliable node.
This is why we are not only attracting more investments, but also securing more high quality, cutting-edge and innovative projects. Singapore continues to be a strategic launch pad for businesses around the world looking to expand into new markets in the region.
For example, BioNTech, the company that, together with Pfizer, developed the mRNA Covid-19 vaccine, is establishing its regional headquarters for South-east Asia in Singapore.
BioNTech also plans to build a fully integrated mRNA manufacturing facility here, which will be operational as early as next year...
Together with other new investments and plans to build businesses and headquarter operations in Singapore, this will create many good jobs for Singaporeans.
Our ability to create jobs will depend on how quickly we restructure and transform the economy to take advantage of new opportunities. It will also depend on us getting our foreign worker policies right. Even as we adjust these policies, we must remain open and welcoming to talent from around the world...
Our economic prospects are good. But we will have to contend with new external challenges and adapt quickly to a new environment.
We have entered a new era of greater contestation for influence between countries and blocs, which may erode the rules-based multilateral system that has been so crucial to Singapore's success...
The pandemic has also turbocharged the move to a digital future... Our local businesses, especially those that are digitally savvy, will be able to take advantage of the rich opportunities on offer, and transcend our geographical limitations. But this cuts both ways, as it will also be possible for MNCs (multinational corporations) to "reshore" more functions to their home countries, as they seek to simplify and localise their supply chains.
In short, we are entering a future where conditions are more volatile, the global environment more unpredictable and change more fast-paced than ever. We can and must adjust, and still excel in this new environment...
In the coming years, we expect an increasing shift in market rewards towards those with the highest skills and who are best able to take advantage of new technologies. This will make it harder to keep our growth inclusive and to hold our society tightly together.
Ageing society and climate change
Besides these growing economic and employment-related risks, there are other forces on the horizon that raise the stakes in our efforts to preserve social solidarity, and will also have significant implications for our future generations.
We are now one of the fastest ageing countries. In 2010, 9 per cent of our population were aged 65 and above. Last year, this became 16 per cent. By 2030, we expect Singapore to become like Japan and some European countries today - where one in four, or 25 per cent, of Singaporeans will be 65 and above.
Ageing will mean an inexorable rise in demand for healthcare and social care. At the same time, our means to provide for this will come under strain, as the ratio of our working population to aged dependants decreases. We must therefore plan ahead to ensure we will have the resources needed to look after more seniors.
We must also take decisive steps to join the global effort in tackling climate change. If the world is unable to cut emissions sufficiently in time and temperatures rise beyond a certain level, we risk extreme flooding and weather events. This could result in food and water stress for hundreds of millions of people around the world. Island nations like Singapore will be especially threatened.
Moving to net-zero emissions will be a very costly affair for Singapore, a built-up city-state with very limited scope to tap on renewable energies. But it is a cost we cannot afford to skimp on, for it is existential... So we must take actions now to progressively decarbonise our economy and change our way of life.
The changes brought about by the pandemic, rising geopolitical contestation, climate change, as well as domestic issues like our rapidly ageing society - these are the defining challenges of our time. They call for robust policy responses to reinforce our resilience and retool our capabilities for the future.
More importantly, to overcome these major tests and trials, we must continue to stand united as one. This is why it is more important than ever to renew and strengthen our social compact.
Government spending
Even with the demands of building a nation and reinvesting continually in our future, we have been able to keep public expenditures in Singapore extremely lean. Government spending today, excluding Covid-19 related expenditure, stands at $88 billion, or about 18 per cent of GDP (gross domestic product). This is probably the lowest among the more developed economies, yet it has produced social and economic outcomes that have been better than most.
We generate sufficient revenues to fund this expenditure and maintain a balanced Budget. We are supported by our Net Investment Returns Contribution, or NIRC, which is a continuing stream of income from the reserves we have accumulated over the years.
Over the past five years, NIRC provided on average a revenue stream of around $17 billion, or about 3.5 per cent of GDP.
So this means that for every dollar we spend on public services, about 80 cents is funded by tax, and the remaining 20 cents is funded through the NIRC.
This fiscal approach has enabled us to keep our overall tax burden low. Currently, half of our workers do not have to pay personal income taxes. In particular, for the middle-income, we have deliberately ensured a low tax burden so that they can enjoy the rewards of their hard work.
Put another way, for the quality of public services we have in healthcare, education, housing, transport and many other areas, the amount of tax our citizens pay is much lower compared to many developed countries.
The continental European and Nordic countries have a different social compact, arising from their different histories. They have much higher levels of state-financed welfare provisions, designed to meet the needs of their citizens from cradle to grave. Their governments typically spend well above 30 per cent of their GDP. To fund such spending, they impose high income taxes, usually much higher than 30 per cent, even for the middle-income group, as well as consumption taxes that range from 20 per cent to 25 per cent.
We do not intend to adopt the European model of comprehensive universal welfare and high taxes. But as we tackle the challenges of a changing world, and as our own society ages and faces new stresses, we will have to do more to preserve and strengthen the unity of our people and our social compact.
In fact, we have already been adjusting our approach over the years, with the Government progressively doing more to support the community and individuals. Our social spending in particular, has almost doubled from $17 billion to $31 billion over the last decade, and now takes up close to half of our annual Budget.
The increase has gone to programmes that have made a difference in Singaporeans' lives, like higher subsidies in our healthcare system and in tertiary education, as well as schemes like SkillsFuture, Workfare and Silver Support.
In the coming decade, we will invest even more in our people and social infrastructure...
These plans require additional spending. They reflect the need to respond to lasting, structural shifts in our society, as well as our new social and environmental aspirations. The spending requirements will therefore be recurring in nature, not temporary.
Given this, it would not be right to dip into our reserves to meet these new needs. We must husband our reserves for use in major crises and emergencies, as was necessary during the global financial crisis, and especially in the last two years. We must ensure that we continue to get a steady stream of income from the reserves to benefit both today's generation of Singaporeans, and our children and grandchildren.
The fiscal outlook
Let me summarise our fiscal outlook over the coming decade:
a. On the expenditure side, our needs are significant and growing. By 2030, we expect government expenditures to increase to more than 20 per cent of GDP. Most of this increase in spending will go to healthcare.
b. On the revenue side, we will not have enough to cover the additional spending needs. The stream of income from NIRC should keep pace with economic growth over time, in spite of a more challenging global investment environment. But our sharply slowing labour force growth, and hence slower GDP growth compared to the last decade, will constrain our tax revenues.
This is why we will make significant enhancements to our tax system in this Budget. These tax adjustments will help to raise additional revenue and also contribute to a fairer revenue structure. That means everyone chips in and contributes to a vibrant economy and strengthened social compact, but those with greater means contribute a larger share.
At the same time, we are mindful of the impact of the tax increases on households and businesses and will have a very comprehensive set of measures to cushion the impact and help Singaporeans adjust.
This Budget therefore is about charting our new way forward together. It is a first step in renewing and strengthening our social compact for a post-pandemic world, and in realising our vision of a fairer, more sustainable, and more inclusive society.
The Green Transition
Climate change is a global crisis that becomes more pressing with each passing year. At last year's UN climate change conference in Glasgow, or COP26, countries were urged to get to net zero emissions by or around the middle of the century, to keep alive the ambition of limiting global warming to 1.5 deg C above pre-industrial levels...
Two years ago, we made an international commitment to peak our emissions around 2030. We also announced our Long-Term Low-Emissions Development Strategy, or Leds, to halve our emissions from its peak by 2050, and to achieve net zero emissions as soon as viable in the second half of the century.
Singapore takes these commitments very seriously. We are on track to achieving our 2030 target. We have since reviewed our longer-term plans. With advances in technology and new opportunities for international collaboration in areas like carbon markets, we believe we can bring forward our net zero timeline.
Carbon Tax
To achieve this net zero ambition, we will need to set the right price of carbon, so that businesses and individuals will be able to internalise the costs of carbon, and take actions to moderate their emissions.
When we introduced the carbon tax in 2019, we kept the initial tax low - at $5 per tonne of emissions - to give our businesses time to adjust. To move decisively to achieve our new net zero ambition, we will need a higher carbon tax.
I will therefore raise our carbon tax to $25 per tonne in 2024 and 2025, and $45 per tonne in 2026 and 2027, with a view to reaching $50 to $80 per tonne by 2030...
I appreciate that some businesses and households may require support as they adjust to the carbon tax increase.
For example, we are mindful that firms in our emissions intensive and trade-exposed sectors may face higher costs than those in countries with lower or no carbon tax. Some will need a little more time to make the necessary reduction in emissions or investment in cleaner technologies. Hence, to support such firms and manage the near-term impact on their competitiveness, we will put in place a transition framework.
Such transition frameworks are found in many countries with carbon taxes. They provide existing companies with allowances for a share of their emissions. For our framework, the allowances will be determined based on efficiency standards and decarbonisation targets. This will help mitigate the impact on business costs, while still encouraging decarbonisation...
From 2024, we will also allow businesses to use high-quality, international carbon credits to offset up to 5 per cent of their taxable emissions, in lieu of paying carbon tax. This will moderate the impact for companies. It will also help create local demand for high-quality carbon credits and catalyse the development of well-functioning and regulated carbon markets.
We will also do more to support companies, especially SMEs (small and medium-sized enterprises), to invest in energy-efficient equipment and decarbonisation solutions.
For households, the higher carbon tax will be felt mainly through an increase in utility bills. At $25 per tonne, this would translate to an increase of about $4 per month in the utility bills for an average four-room HDB household. We will provide support, such as additional U-Save rebates, to help cushion the impact during the transition...
Over the coming decade, we expect to see a "greening" of traditional sectors of our economy, like aviation, energy, and tourism.
At the same time, emerging green sectors like green finance, and carbon services will grow in prominence. Millions of new green jobs will be created around the world, and demand for talent with green skills will increase.
Moving quickly will position Singapore to build on our competitive advantages to capture these opportunities. We can become the go-to location in Asia for expertise in carbon services, and the trusted regional marketplace for carbon credits. As a key node for international air and sea transport networks, we can become a front runner in the development of sustainable aviation and marine fuels...
The public sector will do its part to develop a robust green finance market. We aim to issue up to $35 billion of green bonds by 2030 to fund public sector green infrastructure projects.
Prepare for Future Healthcare Needs
We have made heavy investments in healthcare over the years. For example, we have added five new polyclinics and doubled the number of beds in community hospitals in the last decade. To encourage ageing in place, we have injected a significant supply of aged care services, especially in home and community care.
We have improved the quality of care while keeping our healthcare affordable and accessible for all. And we have achieved better overall healthcare outcomes, with Singaporeans living longer and healthier lives.
But there are challenges ahead. As one of the fastest-ageing nations in the world, our healthcare costs will increase significantly. Government healthcare expenditure has already tripled from $3.7 billion in 2010 to $11.3 billion in 2019. If our current healthcare spending, excluding Covid-19-related expenditure, continues to increase at a similar rate over the coming decade, we will spend about $27 billion, or around 3.5 per cent of GDP, by 2030.
Now, the Government can and must spend more on healthcare for Singaporeans. But the current trajectory of increase is not sustainable. We therefore need to fundamentally rethink the way we deliver healthcare.
An important aspect of this is to bring care closer and make it more accessible to the community. A strong primary care sector will serve as the bedrock of our healthcare system, and allow us to go upstream for preventive care and better manage chronic conditions.
This can improve our quality of life and reduce the risk of costly downstream complications. It will also enable our hospitals to focus on complex conditions and emergency cases.
Our healthcare ecosystem must therefore be restructured over the longer term to centre the healthcare system around the patient. It must be designed to keep patients healthy, and provide care in the most appropriate setting. For example, patients with diabetes will require dietary and lifestyle changes to manage the condition well. These are best coordinated by a trusted primary care doctor.
So to do all these, we will need to build closer partnerships between our healthcare clusters and community partners, particularly with the GPs (general practitioners). We will also need to integrate our healthcare IT systems so that information can flow beyond hospitals to community healthcare providers, to enable quality care and maximise convenience to patients.
We are thinking through this "Healthier SG" strategy carefully. It will entail a review of our resourcing approach and healthcare financing schemes, as well as the need for more upstream investments in preventive healthcare.
This will be a challenging long-term effort involving many components and stakeholders. But if we succeed, we will be able to use our resources more effectively while providing quality care and enabling Singaporeans to stay healthy.
Building a fairer and more resilient tax system
To bring all the plans I have just laid out to fruition, we will need more revenues. I will therefore make major enhancements to strengthen our tax structure.
Our corporate tax system will need to be updated due to global tax developments relating to the Base Erosion and Profit Shifting initiative, or BEPS 2.0.
There are two pillars in BEPS 2.0:
a. Pillar 1 re-allocates the profit of the largest and most profitable multinational enterprises, or MNEs, from where activities are conducted to where consumers are located. There are ongoing international discussions on how to determine the jurisdictions which will surrender profits for re-allocation to the markets under Pillar 1 and how much each will have to surrender. Given our small domestic market and the extent of activities conducted here by MNEs, Singapore will lose tax revenue under Pillar 1.
Pillar 2 introduces, amongst other things, a global minimum effective tax rate of 15 per cent for MNE groups with annual global revenues of 750 million euros or more, under its Global Anti-Base Erosion (or GloBE) Model Rules. What this means is that if such an MNE were to have an effective tax rate of less than 15 per cent in Singapore at the group level, other jurisdictions such as its home jurisdiction can collect the difference up to 15 per cent.
We will adjust our tax system in response to Pillar 2 GloBE rules. We are exploring a top-up tax called the Minimum Effective Tax Rate, or "METR". The METR will top up the MNE group's effective tax rate in Singapore to 15 per cent.
Iras will study this further and consult the industry on the design of METR. We will also continue to closely monitor international developments before making any decisions on the METR.
At this stage, it is premature and difficult to determine the eventual fiscal impact of both pillars. As I mentioned just now, there will be a negative revenue impact under Pillar 1. METR might yield some additional tax revenue in the short term, but the eventual impact of Pillar 2 on our revenue will depend on how governments and companies respond. The net impact of both Pillars depends on the rules and details, which are still being developed by the Inclusive Framework on BEPS.
While BEPS 2.0 may have reduced the scope for tax competition, it has not reduced global competition for investments. In fact, competition is likely to intensify as governments worldwide seek to restore and rebuild their economies after the effects of the pandemic. So there may be less tax competition but there will be other forms of competition. We will have to take this into consideration and ensure that Singapore remains one of the best places in the world for business.
Personal Income Tax
Where personal income tax is concerned, there is room for greater progressivity, so that those who earn more, contribute more.
I will therefore increase the top marginal personal income tax, or PIT rate, with effect from the Year of Assessment 2024. The portion of chargeable income in excess of $500,000 up to $1 million will be taxed at 23 per cent, while that in excess of $1 million will be taxed at 24 per cent; both up from 22 per cent today.
This increase is expected to affect the top 1.2 per cent of personal income taxpayers and will raise $170 million of additional tax revenue per year.
Wealth Taxes
Next, wealth taxes. This is an important part of our tax system. Apart from generating revenue, they also help to recirculate a portion of the wealth stock into our economy and in so doing, mitigate social inequalities. Wealth taxes are therefore needed to build a fairer society where everyone can aspire to succeed regardless of their backgrounds.
Currently, we tax wealth in several ways - through property tax, stamp duties, and the Additional Registration Fee, or ARF, for motor vehicles. The higher value the residential property or motor vehicle, the higher the tax rate.
Ideally, we would want to tax the net wealth of individuals. But such a tax is not easy to implement effectively. Estimating wealth accurately and fairly is a more complex exercise than estimating incomes. Further, many forms of wealth are mobile, and as long as there are differences in wealth taxes across jurisdictions, such wealth can and will move.
Singapore is not alone in facing such challenges. Countries like Germany, France, and Denmark have stopped levying taxes on individuals' net wealth. The number of OECD countries that levy net wealth taxes has dropped from 12 in 1990 to only three in 2020. And this is partly because of the difficulties in effectively implementing net wealth taxes.
We will continue to study the experiences of other countries and explore options to tax wealth effectively. In the meantime, we will strengthen our current system of taxes.
In particular, I will make several adjustments to property tax, which is currently our principal means of taxing wealth.
I will increase the property tax rates for non-owner-occupied residential properties, which includes investment properties. For such properties, I will increase the property tax rates from 10 per cent to 20 per cent, which is the current range, to 12 per cent to 36 per cent. All non-owner-occupied residential properties will face higher property taxes, and the increase will be more significant for properties at the higher end...
The increases in property tax rates will be implemented in two steps, starting with the tax payable in 2023. When fully implemented, they will raise our property tax revenue by about $380 million per year.
I will also tax luxury cars at a higher rate to make our vehicle tax system more progressive. I will introduce an additional ARF tier for cars at a rate of 220 per cent for the portion of Open Market Value in excess of $80,000.
The new rates will apply to all cars registered with COEs obtained from the second COE bidding round this month. And the additional ARF is expected to generate an additional $50 million in revenue per year.
Goods and services tax
Finally, the GST. The revenue from the increase in GST will go towards supporting our healthcare expenditure, and to take care of our seniors. In fact, the GST revenue by itself will not be sufficient to cover our additional healthcare spending. Further, other areas of social spending are rising too. This is why we need not only the GST increase but also the changes to personal income tax, property tax, and vehicle tax.
Where the timing of GST is concerned, I have carefully considered the overall situation - the ongoing pandemic, the state of our economy, and the outlook for inflation. Our revenue needs are pressing. But I also understand the concerns that Singaporeans have about the GST increase taking place at the same time as rising prices.
I have therefore decided to delay the GST increase to 2023 and stagger the increase over two steps. The first increase will take on Jan 1, 2023, from 7 per cent to 8 per cent, and the second increase on Jan 1, 2024, from 8 per cent to 9 per cent.
I want to assure all Singaporeans that we will continue to implement the GST in our unique Singaporean way, with features and schemes that support the less well-off...
We had earlier announced a $6 billion Assurance Package to cushion the impact of the GST increase for all Singaporeans. I will provide an additional top-up of $640 million to the Assurance Package.
No painless solutions
The Budget is about using our collective resources to build our nation and to improve the lives of all Singaporeans. The Budget supports spending on programmes for all, in areas such as security, housing, education, health. Every dollar collected flows back to our taxpayers in one way or another.
The benefits show up in many ways:
a. In our seniors' Silver Support payments;
b. In our lower-wage workers' Workfare payouts;
c. In the subsidies for our loved ones for healthcare;
d. In the childcare subsidies that parents enjoy;
e. In the quality education every child receives.
We are reminded of them every day when we look around - our roads, MRT lines, hospitals, schools, the beautiful parks. In the safety and security our families enjoy.
But when it comes to paying for these benefits, we should not shirk from our responsibilities. No one likes to talk about taxes. But there are no painless solutions. Ultimately, every need must be paid by someone - every dollar not paid by one person will have to be made up by someone else, either today or in the future.
But what we can and will always do is to ensure that we have a fair and progressive system in Singapore. And this means that those with more will contribute more taxes than the benefits they receive.
Those with less will still contribute, but a lesser amount, and they will receive more benefits in return. This reflects our values and who we are as a society. This is how we strengthen our social compact. This is how we will fund our common aspirations for tomorrow.
