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Fiscal prudence with an eye on the future: Singapore Budget 2018

27 Feb 2018

The government has a long-term strategic vision for the economy and the social compact.


BUDGET 2018 was aptly titled "Together, a Better Future". The Singapore government has been an excellent planner with a long-term strategic vision for both the economy and the social compact, while deftly managing fiscal resources for a small, open economy with few natural resources. The fiscal track record is enviable and bodes well for Singapore's long-term economic future.


Now that the dust has settled slightly, it might be pertinent to evaluate Budget 2018 in terms of how much it has met market and business expectations and what burning questions might remain.


How to spend the windfall FY2017 fiscal surplus?


To recap, Singapore racked up a bumper fiscal surplus of S$9.6 billion, the highest in three decades and equivalent to 2.1 per cent of GDP. This far outstrips what a 2 percentage point Goods and Services Tax (GST) hike could potentially bring in per annum.


That said, because it was not a structural surplus, policymakers chose the prudent approach of opportunistically using it to fund major lumpy projects, for instance allocating S$5 billion for the Rail Infrastructure Fund and S$2 billion for the ElderShield review. The government will also be distributing another S$700 million to Singaporeans aged 21 years and above in an SG Bonus "hongbao" of between S$100 and S$300 per person depending on income.


On one extreme end of the spectrum, it would be fiscally profligate - though politically expedient - to suggest fully distributing the fiscal surplus to Singaporeans, to enhance the feel-good factor of the Budget.


But on the flip side, would it have been too fiscally stringent to channel the entire windfall surplus into partially meeting the lumpy infrastructure investments, so as to possibly postpone the day of reckoning for higher GST?


How to fund big infrastructure projects equitably?


There is also the philosophical question of whether the current generation of taxpayers should fully fund big infrastructure investments such as the Singapore-KL High Speed Rail project, or whether there is a better way to spread out the lumpy costs.


To play the devil's advocate, what if all working Singaporeans contributed and saved a small part of their income to a mandatory Infrastructure Fund (shall we call it the "Nation-building Fund"), akin to Medisave, since these are critical to the economic competitiveness of Singapore and the quality of life for all Singaporeans? As Finance Minister Heng Swee Keat quoted the Minister for National Development Lawrence Wong: "We are not done building Singapore yet." The government could offer enhanced tax deductions for this scheme.


Another way policymakers are addressing this issue is by expanding borrowing by statutory boards and government-owned companies that build infrastructure - a commendable move that kills two birds with one stone. First, it helps to spread the costs and better distribute the share of funding more equitably across generations. In addition, it will give the domestic bond market a big lift.


Why a GST hike?


Impending tax changes, particularly the likelihood of a GST hike, were a hotly debated topic ahead of the Budget announcement. However, the biggest surprise was the long lead time for the 2 percentage point GST hike to be implemented only between 2021 and 2025. Previous GST hikes usually did not stretch beyond a year or cross terms of government before they were implemented.


Moreover, the announced GST hike came with a caveat that its exact timing depends on the state of the economy, how much expenditures would grow and how buoyant existing taxes are. This suggests that while the intent is there, the decision would still be data-dependent. This is reminiscent of the US Federal Reserve's forward guidance on monetary policy, which basically gives it the option of recanting if economic conditions change.


The 2 percentage point GST hike is estimated to provide additional revenue equivalent to about 0.7 per cent of GDP per year, which would supposedly help to close any future financing gaps. But as a comparison, the 2017 budget surplus of S$9.6 billion is equivalent to 2.1 per cent of GDP, which could have implicitly meant a three-year delay to the implementation of the planned GST hike.


Admittedly, Singapore's GST rate is relatively low compared to other major international economies.


That said, it would be hard to envisage Singapore's GST rising to double-digit levels. Already, the government is plugging GST leakage from the purchase of online services and goods with the introduction of GST on imported services with effect from Jan 1, 2020. The review of GST on the import of goods is ongoing, and the challenge ahead probably lies with implementation and compliance.


How much of expected net investment returns to use?


The Net Investment Returns Contribution (NIRC) is now the largest contributor to the 2018 Budget, amounting to S$15.85 billion and outpacing the traditional stalwarts of Corporate Income Tax (CIT), Personal Income Tax (PIT) and GST. As recently as FY2015, CIT was still the largest contributor to the coffers, until Temasek was included in the NIR framework in 2015.


Not to downplay the value of having a big nest egg in the form of the NIRC to provide an additional buffer, but the basic principle of fiscal sustainability should be to maintain a dynamic and innovative Singapore economy that continues to attract companies to set up shop here and create well-paying jobs for workers, so that the CIT and PIT remain significant tax revenue contribution channels.


The need for fiscal prudence has always been considered sacrosanct in any Budget discussion. However, the lack of a clear expenditure trajectory makes it hard to model Singapore's fiscal path and sharpen revenue policy tools over the next few years, much less over the next decade. So far, the Singapore economy has been in a fortunate position where revenues have usually sufficed to meet expenditures on an ongoing basis. Singapore's overall government spending as a percentage of GDP is also leaner than most developed economies. But expenditures are likely to increase over time with the ageing demographics and growing needs, therefore it may be pertinent to consider drawing a line in the sand at, say, 30 per cent of GDP.


Similarly, a more open and meaningful discussion over whether it is possible to use more than 50 per cent of the expected NIR would require some parameters about Singapore's reserves to work with, so this remains a work in progress.


The writer is head of treasury research & strategy at OCBC Bank