Financing the changes, more tax progressivity, likely themes of Budget

Hints have been dropped, pundits have proclaimed, but whatever Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam pulls out of his briefcase next Friday, it's a safe bet to say the fundamental goals will not have changed.

It comes four years after the unveiling of an ambitious plan to raise productivity as the economy moved into a new decade.

Since then, key planks of that restructuring process have been articulated and laid down. These include building an inclusive society, helping the less well-off, making small and medium-sized enterprises more productive, and raising wages to tackle the growing income and wealth gap.

The backdrop is a rapidly ageing population and the recognition there is a limit to resources in terms of land and people.

This Budget is not going to deviate from that path. It is the pace at which changes are implemented, and the tone and emphasis, that vary year to year.

However, shaping up to be its cornerstone is a focus on the elderly and their health-care costs with the Pioneer Generation Package. Older workers will not be forgotten, with the possibility of lifting their CPF contribution rate. And this raises a question that has more urgency nowadays, amid a more progressive tax system: How will this be paid for?

Pioneer Generation Package

This rewards the pioneers of Singapore for believing in its future when the nation was in its infancy. It will include more Medisave top-ups, subsidies for outpatient care and subsidies for MediShield Life premiums, for these 450,000 pioneers.

In Budget 2013, Mr Tharman noted that today's generation of older Singaporeans will not benefit as much as younger ones from enhancements to Workfare, CPF and other schemes. He said then: "We want to do more for this senior generation of Singaporeans, who worked over the years, often with low pay - they made today's Singapore possible."

In terms of scale, such a package is similar to previous years' Budgets showcasing large, impactful schemes.

Last year, it was the $3.6 billion Wage Credit Scheme where pay rises were co-funded by the Government to ensure productivity gains are shared with employees. Budget 2010 launched the Productivity and Innovation Credit, with tax breaks for investing in productivity improvements.

Totting up the cost

No official estimates have been made of the cost of the pioneer package. This begs the question of how such schemes will be financed.

The year 2013 is expected to come in with a handsome surplus, as in most previous years. By UOB economists' reckoning, it will be $5.9 billion. Citi's Mr Kit Wei Zheng puts it at $6.5 billion. Wherever the number lands, it should be significantly higher than the Government's projection of $2.4 billion.

But such a windfall might soon be a thing of the past.

Even Government Parliamentary Committee for Finance deputy chairman Liang Eng Hwa notes: "With slower pace of economic growth expected, coupled with steep increase in social spending, the Minister of Finance would need to demonstrate that we can still balance the Budget in the years to come. The Pioneer Generation Package is expected to be very significant and will impact the basic Budget position. We need to know the estimated costs and how it would be sustained and funded."

The Budget essentially needs to be balanced over each term of government, which means that spending has to more or less match the revenue.

Returns on reserves

Clearly, then, funding such an extensive scheme as the Pioneer Generation Package poses a challenge. Having to fund a permanently elevated level of health- care costs could mean that this is the year when there will be moves, or at the very least hints, to draw more from the returns on the reserves.

The question, as always, has been whether the net investment returns contribution is close to the maximum allowed under the framework.

In other words, the question is whether last year's Budget number of $7.7 billion is close to the maximum allowed already.

Some say it is close to the limit - which is set at up to 50 per cent of the net investment returns on net assets managed by GIC and Monetary Authority of Singapore and up to 50 per cent of the investment income from remaining assets, including Temasek - while other analysts are confident there is much more where that came from.

This new framework of determining the contribution level was introduced in 2008. If changes are made to the framework, this would indeed be a significant move.


Such funding needs would force the Government to take a closer look at how the tax system could work harder. If taxes are going to be raised, experts are tipping that those on assets - such as luxury property - could be raised further. Targeting higher taxes from asset ownership would meet the aim of filling the coffers as well as being more progressive.

This would follow on from Budget 2013 which introduced progressive elements - a more progressive property tax structure, with lower tax rates for the majority and significantly higher taxes for higher-end property.

There was also a tiered additional registration fee which took into account the unhappiness that the certificate of entitlement (COE) system did not make enough of a distinction between luxury and workaday cars. More such taxes could well be in store for investment property owners or those who enjoy fancy cars.

There is even talk that the tax bands for individuals may be tweaked. The top rate of personal income tax is 20 per cent. Even if not raised, it could apply to a wider base. It now applies only to those earning $320,000 and above. Lowering that threshold would ensure a larger pool of higher-earning workers will be subject to the 20 per cent tax rate, says UOB.

Sustainable, innovative and responsive

However, in other ways, the Budget is unlikely to be different from previous years. It will be responsive to feedback and tweak existing schemes. For example, businesses feeling the pain of restructuring may get more measures to help them cope. Feedback on how the Productivity and Innovation Credit scheme can be improved and extended beyond its expiry next year are also likely to be taken into consideration.

Still, the Budget may also stand out for its innovative elements. Take the Wage Credit Scheme - Singapore Business Federation CEO Ho Meng Kit says it can be adjusted "to target income level and age of Singaporeans. By paying through employers, this maintained the ethos that the Government will help Singaporeans who help themselves".

Mr David Sandison, tax partner at Big Four firm PwC, notes that this is an advantage - that such schemes do not depend on a formal infrastructure as in Britain for example, where it is difficult to make changes.

Even as the Budget innovates and responds, it will be known for its moves and schemes that are sustainable and apply across the long term. This is especially so in the case of the Pioneer Generation Package. Prime Minister Lee Hsien Loong has said that the benefits will be provided for the whole lifetime of this generation, with more given to those who are older.

The restructuring journey is one that Singapore will continue over the next few years. Mr Tharman had noted last month that restructuring the economy "is a multi-year task. We are in the early to middle stages of that task. But we are only beginning to see the pickup in productivity".

So expect the big-bang package and headline-grabbing changes. The Budget will showcase changes and improvements, but in many areas, it will remain constant.

This article was first published in The Straits Times on Feb 15, 2014