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Taxing Questions

26 Nov 2017

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Tham Yuen C

It has been a week of speculation since the Prime Minister signalled that a tax hike is on the horizon, saying that such a move is inevitable given increased government spending. But not all are convinced. Insight examines the issues.

You would think it hard to find fault with cuddly pandas.

But the Singapore Zoo's Kai Kai and Jia Jia have become the target of some vitriol, ever since Prime Minister Lee Hsien Loong said last Sunday that taxes are set to rise as government spending grows.

The bears have been labelled a "waste of taxpayers' money" by some discussing the impending hike online - though erroneously, as taxpayers' funds were not used to bring them in from China. The pandas were sponsored by real estate company CapitaLand

That Kai Kai and Jia Jia have become collateral damage in the debate on the tax hike speaks of how hairy the issue is.

The Government argues that a tax hike is a necessary move. Investments in infrastructure and social spending are costly, and the bill has to be footed somehow, said PM Lee at the People's Action Party convention. So raising taxes "is not a matter of whether, but a matter of when".

Already, government spending more than doubled between 2007 and last year, from $33 billion to $71 billion, and looks set to grow due to infrastructure needs, and also because the country takes care of both an ageing and aged populace.

But questions remain: Is the Government spending taxpayers' monies wisely? Must taxes be raised to foot the bill? And just how will this hike eventually happen?

Is the Government spending wisely?

Few quarrel with the Government's broad principle that it needs to spend on social services such as healthcare and education, ramping up infrastructure such as rail networks, and preparing Singaporeans for the future economy.

In fact, some economists and politicians believe that Singapore should spend more, such as on schemes to help reduce the rich-poor gap, and projects to improve transport infrastructure.

But some big-ticket items have come in for criticisms for wastefulness. Take the new, gleaming Changi Airport Terminal 4. Critics point out that the $45 million Budget Terminal was used for just six years before it was torn down in 2012. It was recently rebuilt as T4 to the tune of $985 million.

Asked about this by Insight, Senior Minister of State for Finance and Law Indranee Rajah said the idea to have a terminal for budget carriers was first proposed when such airlines were becoming popular, but had to be changed "to keep up with current trends" as technology advanced.

Experts acknowledge that hindsight is perfect, but said that given the cost of mega infrastructure - infrastructure shot up from 15 per cent of government spending in 2007 to 22 per cent last year - policymakers have to be better in deciding which projects to embark on.

This is even as the Government grapples with the challenges of setting priorities as needs evolve: To build flats ahead of demand or just in time to meet demand? Build an underground road network for cars or pour the billions into public transport?

Another category of spending identified by PM Lee was on social services. Over the same period, it went up from about 35 per cent of expenditure to about 41 per cent.

Singapore actually spends relatively less on education, healthcare and welfare compared with other countries in the Organisation for Economic Cooperation and Development (OECD), but the Government has said it gets bang for its buck. For example, government expenditure on health makes up just 2.1 per cent of gross domestic product here - compared with 6 per cent to 9 per cent in countries like Australia, Britain and France, but Singapore's healthcare system has consistently been ranked highly.


Still with the Budget running an operating deficit three years in a row, there are those like Nominated MP Randolph Tan who feel spending can and should be slashed in some areas.

"We should never rule out cutting down on social spending if it is necessary," said the Singapore University of Social Sciences economist, acknowledging that this would be an unpopular and difficult line to take for any government.

The self-professed fiscal conservative is also a supporter of means-testing as a way to limit spending.

"There will always be needs that the Government will have to step in to provide, but we should not cast the net so wide that it is spread out too thinly," he said.

So for instance, the Pioneer Generation Package, rolled out in 2014 and costing $8 billion, entitles anyone in the cohort - regardless of whether he has three properties or nothing to his name - to benefits such as healthcare subsidies.

An outreach programme linked to the package came under criticism by Straits Times reader Elsie Loo, who wrote to the paper's Forum page last Friday lamenting that taxpayers' money funnelled into the programme "could be better used elsewhere".

"The cost incurred will grow and will be huge considering the fast-growing number of seniors," she wrote, urging the authorities to consider mass briefings instead.

Asked about the package, Ms Indranee said it was conceived to thank the first generation of Singaporeans for their contributions, adding that it was "fitting that we recognise them".

Economist Tan Khee Giap from the Lee Kuan Yew School of Public Policy (LKYSPP) said that the Government also needs to think about the "exit mechanism" of schemes such as the Workfare Income Supplement, which tops up the income of low-wage workers. First announced in 2007, it was paying out at least $300 million a year for a start, and is expected to pay out $770 million this year.

At some point, the responsibility should fall on employers to train such workers and increase their pay, he added.

To put such comments in perspective, government spending makes up 18 per cent of GDP here, which is in line with Hong Kong and lower than OECD countries like South Korea (21 per cent) and Switzerland (33 per cent). Ms Indranee said all spending is approved only after many levels of internal checks, and is measured in terms of "the outcome and what that particular expenditure achieves".

The Government has also moved to rein in costs, such as by implementing a permanent 2 per cent downward adjustment to the budget caps of all ministries and organs of state from this April.

But those hoping that such moves will help to stave off tax hikes will be disappointed, since economists said these are not likely to push spending below current levels.

Rather, these are done to control the growth of spending, to guide Singapore onto a gentler trajectory as expenditure grows.

Why can't we use more of the reserves?

The next question then, is whether raising taxes is really the inevitable option.

Instead of making today's taxpayers fork out more, why not tap the reserves and their investment returns instead, some ask.

Currently, the net investment returns contribution (NIRC) framework allows the Government to spend half of the long-term investment returns generated by the Monetary Authority of Singapore, Temasek Holdings and GIC, the three entities tasked to manage and invest the reserves.

Some, such as Maybank Kim Eng economist Chua Hak Bin, call for more of the investment returns to be used.

After all, only 50 per cent can be used now, and there is room to tweak the formula, he said.

Dr Chua believes this can be done without eroding Singapore's savings, as long as enough of the investment returns are ploughed back for the principal sum to grow at the same rate as nominal GDP.

If the reserves are meant for a rainy day, is not the rainy season here, others wonder.

But even using up to 50 per cent of the returns is not uncontroversial. Before the NIRC was put in place in 2009, only half of the net investment income of the reserves - which excludes capital gains - could be drawn upon.

During earlier debates, the Government had warned of the slippery slope of touching more of the returns from investment, saying it could lead to endless demands to do more and spend more. Emeritus Senior Minister Goh Chok Tong, when he was prime minister, described the reserves as Singapore's golden goose. Killing the golden goose to get at its meat would be to the country's detriment, he said.

Others say the Government could also review the way it uses revenue from land sales, by allowing a portion of it to go towards funding big development projects such as Changi Airport's Terminal 5.

Under current laws, proceeds from land sales must be locked away as reserves, a unique feature of Singapore's Budget. But past reserves can be used to fund land-related projects such as land reclamation and land acquisition as this is seen as converting the reserves from financial assets to state land.

Dr Chua points out that Singapore's conservative system of budgeting means a Budget deficit here is not really considered one under the International Monetary Fund rules. If proceeds from land sales were included in the operating revenue, Singapore is deemed to run surpluses.

But those against the move to unlock the funds point to Hong Kong as a counter example. With land sales going directly towards the government's operating revenue, there is pressure for land to be priced higher - a hidden tax - to meet spending needs, and this has driven property prices in the special administrative region sky high.

LKYSPP's Professor Tan contends that "taking more money to spend without making more money is not very good". He argues that the question should not be about what proportion of returns on investing the reserves to spend, but how to aim for better profits.

"The big reserves we have built up are a blessing from the earlier generations. Without them, we will be crying now. We should think of whether GIC can generate better investment returns instead," he said.

GIC's 20-year annualised real rate of return was 3.7 per cent for the year ended March 31, down from the previous year's 4 per cent.

Ms Indranee said the funds play a key role in maintaining confidence in the Singapore dollar and acting as a buffer in the event of a crisis.

Though the full size of Singapore's financial reserves is never revealed for strategic reasons, it is estimated at more than $1 trillion.

"It would be easy to spend the reserves, because then you don't have to do anything right?" she said.

She added that it is a delicate balance that the Government is trying to strike in drawing the line at using 50 per cent of the projected returns on investment. "You use a portion of the expected returns, but you don't dip into your principal and do away with your nest egg," she said. "That, taken as a whole, actually reflects our value system which is resilience, hard work... It is also the story that each generation tries to hand over something to the next generation, each generation plans ahead for the future."

Others note that with the NIRC having tripled in the past 10 years, it already makes up a substantial proportion of revenue.

For the first time, the reserves component overtook corporate tax collections as the single largest contributor to government coffers last year. It made up 17.3 per cent of operating revenue - up from just 5.6 per cent in 2007, while corporate taxes, typically the biggest chunk, comprised 16.3 per cent.

Drawing more from it could result in a less diverse revenue stream, which may leave Singapore more susceptible to investment fluctuations, they said.

In the end, determining how much to use is more an art than a science, said Dr Chua. Ultimately, it is about balancing the needs of the current and future generations.

He is of the view that future generations of Singaporeans will probably be better educated and be in a better place to take care of themselves, compared with ageing baby boomers.

To him, some philosophical question are worth re-examining as Singapore's population continues to age: "How much reserves do we really need, and is it really necessary to have such a big sum? Which generation are we saving for?"

When will the tax hike be?

Since the tax hike is impending, when then might it kick in?

Ms Indranee said that the Government is still working on the "when".

But some of those reading the tea leaves are glimpsing a hint in comments by PM Lee, along with Deputy Prime Minister Tharman Shanmugaratnam who spoke on the matter in 2015. Both have said the Government has enough money for its current term, which will last until the end of the decade.

This has led some to speculate that while the announcement for the hike may be made by the next Budget, it will likely take effect only after the next general election.

This also gives the Government time to plan ahead "well before the time comes" and explain to Singaporeans what the money is needed for and how it will be spent to benefit everyone, as PM Lee said had to be done.

Those predicting a goods and services tax hike believe it could be announced first, with the increases staggered over a few years, as it was done in the past when GST was first introduced.

Mr Low Hwee Chua, regional managing partner for tax at Deloitte Singapore and South-east Asia, said Singapore's GST at 7 per cent is still considered low, compared with the rates in Australia (10 per cent) and New Zealand (15 per cent), and has room to go up to a potential ceiling of about 10 per cent.

If this were so, the Government may need to give retailers and businesses a lead time of at least a year from the date of announcement to prepare. Even when it raised income taxes in the past, the Government announced it first and then implemented it later. This was the case when the most recent round of income tax increases was announced during the 2015 Budget, but implemented this year.

Some have ascribed political motives to the move, such as Workers' Party assistant secretary-general and Aljunied GRC MP Pritam Singh.

In a Facebook post, he linked the increase in taxes to the PAP's leadership transition.

"Raising taxes before a new PAP prime minister takes office would allow the new leader to start on a relatively 'clean slate', preserving his political capital," he said, adding that PM Lee had said he would hand over to the next generation of leaders after the next general election due by 2021.

If he is right, this would mean the tax hikes would have to be announced and take effect sooner rather than later, for the political sting to be taken out for the future government.

Ms Indranee disagrees with Mr Singh's "underlying suggestion that it is being done for purely political purposes", and reiterated that taxes are being raised because of increased spending. Declining to be drawn into discussing the timing, she said: "Both PM Lee and DPM Tharman have explained that we have enough revenue for the current term of government. The question is what you do going ahead."

Source: The Straits Times © Singapore Press Holdings Limited. Permission required for reproduction.