ST interview: Heng Swee Keat on 'money not enough', why statutory boards need to borrow, and being the face of GST hike

Finance Minister Heng Swee Keat in an interview with The Straits Times on Feb 20, 2018, a day after he delivered the Budget speech.
Finance Minister Heng Swee Keat in an interview with The Straits Times on Feb 20, 2018, a day after he delivered the Budget speech.ST PHOTO: KELVIN CHNG

SINGAPORE - On Monday (Feb 19), Finance Minister Heng Swee Keat delivered the Budget speech, during which he laid out Singapore's long-term challenges and announced a GST hike from 7 per cent to 9 per cent, which will kick in between 2021 and 2025.

In an interview with The Straits Times' Yasmine Yahya and Ng Jun Sen the next morning, Mr Heng elaborated on the thinking that went behind the Budget. Here is an edited transcript.

ST: The centrepiece of the Budget which everyone is talking about is the GST. How did you settle on the 2 percentage point increase and the timeline? What was the thinking that went behind it?

Mr Heng: Much of the Budget is very forward looking, looking at what we need to do not in one or two years but in the next five, 10, 15 years.The first thing that we did was to ask ourselves what are the driving forces in the world and what are the critical uncertainties.

One is the outside world. What would the world be like? And what must Singapore do to ride on changes and to overcome challenges? The second major change is how will technology reshape the global economy, jobs and the competitiveness of economy and companies? And the third force is our ageing society. And in each of these driving forces there are also critical uncertainties; each of them by itself can have a whole range of outcomes.

After the last Budget, we had many teams of officers looking at many of these issues and doing projections - projections on our revenue, our expenditure, how healthcare expenditure, for example, will grow over time, what are the key drivers, what else needs to be done.

We had very extensive discussions with the Ministry of Health on how many more hospitals, polyclinics, eldercare centres and so on needs to be built. And all the ministries have been very, very forthcoming, cooperative in this. When I first raised the issue that we are in a very tight fiscal position, not this year, not next year but over the longer run and that we have to think about how we need to reduce expenditure and at the same time provide for longer term needs, my colleagues in Cabinet were all very supportive and so there was really a whole of government effort to look at this issue.

That Jack Neo's lovely movie Money Not Enough was a phrase that I used in many of my meetings. For instance our revenue growth will be difficult because if you look at the tax changes around the world, in fact it's in the other direction. So you find countries are looking at reducing corporate taxes and all that and this will have a ripple effect throughout the world and so we have to continue to monitor this very carefully.

And, again, looking at the various projections we think that we are okay for up to 2020 but we will certainly be short. We'll face a deficit or we will not enough revenue to do what that we need to do between 2021 and 2025.

ST: What were some of the other options that you looked to raise revenue?

Mr Heng: We looked at all the different taxes that we could change, even non-tax measures that we could take. So we evaluated this carefully but each of this has its plus and minuses and therefore when we look at the overall scheme of things, we decide that at this stage the GST is still the most appropriate.

Now will there be other possible revenue measures that we have to take later on? We will have to look at how our expenditure growth pans out in the coming years.

ST: There have been questions on why we can't tweak the net investment returns framework to let us spend up to maybe 60 per cent of expected long-term returns from assets, instead of raising GST. Was that considered?

Mr Heng: We have been extremely fortunate that our founding generation was so careful about their savings and our reserves today are the result of their prudence many years ago.There are issues of inter-generational transfers that we need to be careful about. For expenditure like infrastructure where the investments are upfront and very lumpy, where the benefits will come only many years down the road and in fact will benefit many people over many years, it is right that the future generation will have to pay for that.

 
 

And for recurrent spending, it is important for us to spend within our means and where the means are not sufficient, it's important for everyone to decide whether it is the right thing for us to do. Is it right for us to spend more to enhance security? Is it right for us to spend more to provide better healthcare for our people? Is it right for us to invest more in education for our kids?

And we have to be careful that we are doing it properly and that everyone appreciates what they are paying and what they are getting. I will touch more on this in the Budget debates later but I think it is that sense of responsibility that guides us in this decision.

What is right and appropriate for us to do and for the current generation to take care of? What is it that we must not transfer to future generations? It is our responsibility to make sure that this asset continues to grow as our economy grows so that as a percentage of GDP it does not diminish and that we can leave the future generation with a sizeable asset to manage unforeseen events.

ST: Singaporeans understand that principle well but one question that still lingers is why 50 per cent? Why not 60 per cent, for instance, or 70?

Mr Heng: Well, I think when this was fixed at 50, when the Bill was moved in Parliament, the intention is that our reserves must continue to grow and that given the nature of the financial markets and the volatility that it goes through, we need to continue to grow our capital in a sizeable way.

Now you can go and debate the numbers and all that, I think the principles behind it are also very important and it is important for every generation to also do its part.

In fact I just had a meeting with my colleagues this morning, I said that after this whole budget debate is over we need to look at some of this with even greater detail because, take for instance when your population ages and that number of people who are working goes down, how does that affect all our tax collection because there will be fewer and fewer people paying personal income tax? How would that change the shape of our revenue in the coming years? This is not something that will change in one or two years but this is something that will change dramatically in 20 years and by 2030 I expect that it will be a different curve.

So therefore we shouldn't just quibble about whether it is 40 per cent, 50 per cent, 60 per cent but rather we should be thinking hard about what are our responsibilities today and what is that we can do.

ST: Given that the GST increase will kick in only from 2021, why announce it so early?

Mr Heng: Well, I believe that, first, Singaporeans will appreciate that I speak plainly about this and set out these issues clearly and we can debate whether there is a need for us to take better care of our elderly and so on. I'm happy to debate that.

But I think it's important for us to set out what we see as the issues and to be quite honest about it because I don't think we should duck difficult issues.

There are two paths that we can take. One is to take the easy path, put our heads under the sand, pretend that there's no problem and then go on and assure everybody that, you know, look we have a wonderful big surplus in this year's Budget and, therefore, we are okay but I don't think that will be honest and I would not want to do that.

The other path which is a more difficult path is to say that: Well, after all the very careful work that we have done we see this coming and, therefore, I would need to do this. Revenue will not be enough and we have to find some way to raise revenues and looking at all the options, raising GST by 2 percentage points between 2021 and 2025 will be the right thing to do and will be the appropriate thing to do then.

I think it is far better for Singaporeans that I set it out clearly and that in no way do I want to mislead and that I want to be honest about this. And I believe that Singaporeans will appreciate that.

ST: Are you comfortable with being the face of this GST hike?

Mr Heng: I believe in doing the right thing and so if we are convinced that this is right thing to do, I think we must have the courage to say it and to do it because otherwise we cannot be making national decisions of such a nature by just thinking about what does it mean for me. I think that would be very selfish.

ST: Is there any room for possibility that - if the economy performs well, our taxes are buoyant - we might be able to delay the GST hike or not even have to do it?

Mr Heng: I'll be very happy if that happens but I will caution that it is unlikely because the existing taxes will have to be extremely buoyant and the growth will have to be very, very high in order for us to be able to come up with that extra revenue to meet the expected rise in expenditure.

ST: You've talked about how you're looking at allowing statutory boards to borrow. How big a change is this, because as far as I know HDB, for example, already issue bonds.

Mr Heng: You're indeed correct that HDB, LTA and all that are already borrowing. But what is the change? I think the change is in two areas.

One is the scale of the borrowing because when we look at projects whether it's Changi Airport, whether it's Cross Island Line, the High-Speed Rail, the scale of borrowing is going to be significantly higher. And have we borrowed for major infrastructure projects in the past? Yes, we had. In the earlier years of our development, we borrowed from a variety of sources including multilateral development banks like the World Bank, Asian Development Bank and so on to fund some of these major long-term infrastructure developments. But as our economy grew and the tax collection was strong, we stopped borrowing some time in the mid 1980s for our major infrastructure projects.

And now we are coming back to another major spike in our infrastructure needs. And therefore we will have to think about how to do this in a way that is fiscally sustainable and we'll have to structure the projects very carefully to do this, and at the same time do our best to lower the financing cost.

The possibility of using the reserves to provide a guarantee is new. And we will still need to seek President and the Council of Presidential Advisers' approval for this. So we are not using the past reserves in any way but we're using the reserves to provide a guarantee. The question is, what sort of safeguards would need to be put in place. That will have to be discussed very carefully with the President and the CPA.

ST: Something now going around is a short quote by Prime Minister Lee Hsien Loong in 2015 about what could lead to a GST hike: "profligate spending and irresponsible, unsustainable plans".

(Background: PM Lee was criticising opposition parties' manifestos during the general election campaign that advocate more spending, while rebutting the argument by Workers' Party chief Low Thia Khiang that if voters gave the People's Action Party too free a rein, the Government may hike the GST rate after elections, like it did after the 2006 polls.)

Did the 2015 comments by PM Lee create any difficulties for you in coming to and crystallising this decision to raise the GST?

Mr Heng: Not so. We have been very careful about managing our expenditure. And it is not as tomorrow we're going to spend on something that is totally superfluous and therefore we need to do all this (raise GST). I've set out what are some of the things that we need to spend on - the infrastructure and the expected increase in healthcare expenditure. If people feel that these are profligate spending then I will be very sad.

This Budget is not an accounting exercise; it is really about our priorities - where do we want to go? It is about our future - what are the trends and expectations and uncertainties, and how we can navigate this in a very turbulent sea.

ST: Some of the people have said this could be quite a difficult pill to swallow especially as GST is regressive in nature. How do you make this an easier thing for people to accept going ahead? What's your plan?

Mr Heng: First of all, I hope that Singaporeans appreciate that the expenditure trends that we are talking about... are the right ways to spend.

I mentioned healthcare, security, education, lifelong learning and so on. If we think that all those are unnecessary expenditure, then all that we need to do to balance it is just to cut all those expenditure, or not provide for an increase.

And in fact I'm squeezing all our ministries very hard by limiting their budget growth factor. In fact, some ministries, especially the smaller ones, are complaining that it's getting harder and harder to manage. But I hope that the message gets across to all, and that we have to learn to do more with less and it applies right across public sector as well as the private sector.

ST: To what extent were the other fourth-generation ministers involved in the discussions about the GST hike, and were there disagreements given that there could be potential political costs for them, since the 4G team will be firmly in place by 2021 and 2025?

Mr Heng: No, I think first of all the ministers who were most involved with me doing this work of course is Lawrence and Indranee. And they are together with me in MOF and they have been extremely helpful. Very very thoughtful and in a way we had many many good discussions. So they were involved in all my discussions from almost day one. So that's been very helpful.

Now, for the other ministers in fact we discussed quite a bit in Cabinet as well. So everyone has an input. But everyone was prepared to review the Budget and what it needs to do. And in some cases we had ministries coming back and said, we can think of how to slash this bit of cost and that bit of cost from what was earlier planned. I thought that's very good.

So that has been going on and therefore we do have very good consensus among Cabinet colleagues that this is the right thing to do. This is what our Cabinet has been able to do over the years. And I'm very glad that even though this is a difficult decision, everyone is prepared to back this.