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Budget 2011 Debate Round-Up Speech by Minister for Finance, Mr Tharman Shanmugaratnam

02 Mar 2011

Budget 2011 Debate Round-Up Speech

Minister for Finance, Mr Tharman Shanmugaratnam, delivered the Budget 2011 Debate Round-Up Speech in Parliament on 2 March 2011. His response to the concerns raised by Members of Parliament on the Budget is set out along the lines of the following key issues:

- Whether we have adpoted the right strategies to boost productivity;
- How we can keep social mobility going and uplift lower-income Singaporeans;
- How we are addressing the issue of rising cost of living and
- How do we sustain a progressive fiscal system whilst meeting future expenditure needs.

Read the speech here.

Follow-on clarifications by MPs after RUS

MP Low Thia Khiang:

1.     Sir, the Finance Minister has covered himself well, in almost every aspect. He said that whereas the total tax package is progressive, but not all taxes are progressive. Yes, I think he knows very well that the GST itself is regressive. That is why you need off-set package. My question is, and perhaps the Minister can clarify, why you first of all tax the low income family and then you give them off-set package. Can we not tax them, and also give them some help? Does he not agree that the fundamental principle of tax must be that whether you need to tax? Do you really need the GST to be 2% more? You have now 2 IRs and new streams of income are coming in. Betting tax and probably with the increase in tourism visits?

2.     Next, I would like him to clarify whereas the chart shows that the lower income pays about 16% of the total GST tax. But if you look at different percentile of people who pay the GST, will it be because the tax is wide-based, that the middle and upper-middle class are actually paying much more in totality? And in view of the inflation that is coming in, would it be a serious middle income squeeze? And they will be adversely affected. And I think some want to know what we are helping for. The Workers Party helps and aims to help ... Sir, we help the whole spectrum of society, and the focus is workers. Workers of course refer to people who are employed. So while we are focused on the lower-income family, we are also looking at the middle-income families as well.

3.     Sir, the next issue which the Minister has mentioned, which I agree with him, is that what is important is that can we keep raising incomes for Singaporeans? I would like to clarify with him, he put up a chart to show that from 2000 to 2009, the chart shows that there is 1.7% increase per year. And the target is to raise income by 30% for the coming decade. I would like to ask him how confident the Government is about raising this 30% in the next decade. Because given the situation in the last decade we were into, maybe half of it, the whole picture changed. If let's say in the chart that you showed to us, take out 2010 income, would it show a different picture in terms of income growth of Singaporeans in the past? ....... In your speech you also showed that the income has grown significantly, especially, I suppose, in 2010. But the Minister has also said that 2010 is an exceptional year. So the question is whether or not we are going to have more exceptional years to grow the same level of income for Singaporeans? Or will we be somehow depending on the global situation as the Minister also mentioned that we are a global city affected very much by changes in global circumstances. So I think that is about all. Thank you.

Minister Tharman Shanmugaratnam:

4.     First, I think I have to go over very briefly what I have just explained about how the GST, together with 'GST plus' – Workfare, and the other transfers we provide – amount to a highly progressive tax system. Mr Low may not have followed everything that was on the chart I showed. But essentially, what I have showed is that the GST, being a flat tax, impacts all in society. Second, the wealthier groups pay more of the GST. Third, we use the revenue thereby collected to provide more benefits to the lower income groups.

5.     And this is not limited to the GST off-set package. The off-set package is not permanent, although it lasts for several years for the lower-income group. The real part of 'GST plus' that I'm emphasising is not the off-set package; it is Workfare and the other enhanced, permanent schemes to benefit the lower-income group. So on the chart, we show that the permanent benefits that we introduced together with the GST after 2007, themselves exceed the increased GST cost that the lower-income group has to pay. Then you add on to that the GST offset package, and you have a substantially larger number. So as you can see, the bar on the right, which comprises both permanent and one-off transfers, significantly exceeds not just the GST but all taxes they pay. That's the 'GST Plus' system. GST alone is a flat tax, it is not a progressive tax, but the GST plus what came with it, and what motivated it, is a highly progressive system.

6.     Secondly, I really have to emphasise a more fundamental issue, which is an issue that concerns us in Government when we think through these schemes, and has to concern any government. Which is that there are tradeoffs in everything we want to do. Ideally, we should be able to reduce taxes on the lower-income group, if possible also on the middle-income group, and perhaps even some of the higher-income group, foreign domestic maid levies, why not? And still do everything that we are doing – Workfare, enhanced support for the poor, plus investing in the future. Well, it doesn't work out that way. The arithmetic is simple. You have to balance your budget. If you are taking out less revenues, you also have to put back less expenditures, and you have to decide what to cut. So, what we are doing is having a broad-based tax system with the GST, and that therefore allows us to have much lower GST rates than most developed countries.

7.     In fact the US is the only developed country without a consumption tax and most reasonable observers will tell you that it is a matter of a few years, not even a decade, by which they are going to have to introduce one. But our GST rate is far lower than the VAT rates that are applied across the developed world. Why? Because we have kept it simple – flat, across the board, collect as much as possible from the upper-income group through the GST and use that revenue to subsidise and help uplift the lower-income group.

8.     So that's the basic trade-off we have to address. And these are trade-offs not just for Government to address, but for any responsible opposition to address. That is what first-world government, and in fact first-world opposition, has to be about – addressing the real trade-offs in every public policy. Including the trade-off I was talking about earlier, which Mr Hri Kumar had spoken about yesterday. The real trade-offs that we always face between doing something to reduce inequality, and doing something to keep up the drive to upgrade and improve and raise incomes.

9.     Casino taxes. That's built into my projections, built into the 17% of GDP revenue that we feel will comfortably assure us of being able to pursue all the important programmes we want to do over the next 5 years. It is not as large as some people imagine. And I think that Ms Denise Phua's point was a very important one. Besides our core taxes, let' not assume too much for taxes th at we get from specific business activities. Nothing is secure. Competition grows, it shifts. Don't bank on large casino revenues forever, and base your fiscal policies on that by making permanent changes that assume the casino revenues will continue to grow rapidly.

10.      And you asked about the middle-income group. First, I think you have misunderstood the chart I have shown. The 16% of GST that is being paid is not from the low income group. 60% of our population, the bottom 60%, pays 16% of GST. The remaining 84% of GST is paid by groups that are higher up the income ladder and foreigners. It is a remarkably efficient system, and a fair one.

11.     I recognise Mr Low';s desire, particularly at this point in time, to emphasise that he serves a wide spectrum of Singaporeans, and I recognise too that the wide spectrum includes in particular the wealthy, which his proposals would serve even better, as I have explained. I don't think that was intended. I don't think it was his intention to deliberately favour the wealthy. But this illustrates the folly of policies that don't address trade-offs, that don't address how we have to fund expenditures, and that concentrate only on trying to give and give. It illustrates the folly of ignoring trade-offs and ignoring the fact that if you want to do something good, you need some revenue and you have got to decide on the most efficient way of raising that revenue.

12.     You asked the question about raising incomes of Singaporeans, and I'm glad I get a chance to clarify. I had shown a chart to compare with other countries, from 2000 to 2009 – what was happening to median households. I must first explain two things. This chart is, for purpose of comparability with other countries, it is looking at all resident households, not just employed households. And therefore the growth rate of income that you see here – 1.7% per year – is a little lower than what we get for our employed households, because it includes retirees, includes people who are temporarily not working, and so on. So for all countries, you find that is the case – that when you include all households, the income growth rate is a bit lower because there are many people who are actually not in the income-earning group.

13.     Secondly, this is only up till 2009. I didn't include 2010 because there is no comparable data for the other countries. If you want the 2010 data [for Singapore], we look at the Budget speech. It showed a 20% increase in median household incomes over the decade, from 2000 to 2010. And it will be a challenge to raise our incomes by 30% over the next decade. It is a real challenge and that is why everything that DPM Teo was talking about yesterday, everything that the MPs were talking about, is not easy work. It is not going to come easy. Whether it is the IGP scheme (the Inclusive Growth Programme) or all the other schemes we are doing, starting from young, helping kids to discover their strengths – this is going to be hard work. We may not succeed. But we want to give it our best shot and we are putting in significant government resources to support our businesses and our workers to try and achieve this.

MP Low Thia Khiang:

14.     Thank you Minister of Finance's comprehensive reply.

15.     On the issue of GST, he says revenue collected from GST will provide the necessary benefits and help for the lower income families, and this is a trade-off. It seems to me that this government looks at GST as a panacea to everything... of income to help the lower income. Sir, my concern is whether this mindset is a risk – of GST as a way of being able to get the resources to help the lower income and to fund many other projects, and even social projects. If maybe one day, we end up like Japan, high cost, high GST, very expensive, and low income growth.

Minister Tharman Shanmugaratnam:

16.     I think Mr Low has repeated his question in a slightly different way. Not that different, but slightly different. So I will try and get him the answer in a slightly different way.

17.     First of all, the trade-off that I was talking about is not the trade-off between taking something from you and giving something back to you. It is a trade-off between taking out revenue that comes from a broad base of people and being able to provide benefits to where we feel it is most important – for the lower income, for the elderly, for the disabled, and for all whom we feel we have to do more for.

18.     It is also a trade-off between providing benefits and retaining the edge to improve and succeed, which is at the core of Singapore's success. In all countries, including those in Europe, which are best known for having built up a system of welfarism, are now having to address this – because of the systematic decline in the work ethic that came about because they gave more and more benefits on an entitlement basis. So it is a real trade-off that all governments have to address. As I mentioned, it is a trade-off which any opposition has to address. The alternative policy cannot be about giving more and more. Where are you going to get the money. If are you taking less money from the rich, you have to explain how you are going to give more to the poor.

19.     We don't see GST as a panacea. We see it as part of an efficient and equitable system because it is part of 'GST plus'. On the contrary, Mr Low does see reducing the GST as a panacea. Because as I mentioned, he commented on nothing else in our Budget, including the long-term programmes, the important ones, that Ms Jessica Tan, Mdm Halimah Yaacob, everyone else was talking about and making suggestions on how we can improve on them. Those were not his concern. His panacea was: 7% down 5%. Food, bring it down to 0%. Voila.

20.     The Japanese are, in fact debating their budget. They have 5% GST, but because they have extremely high income taxes, and there are many other inefficiencies in their fiscal system, they are now in a bind. One of the highest debts in the world, and they anticipate having to raise their GST to 15%. Some people say even more. And even those who are not fiscal conservatives in Japan are now increasingly recognising this. That's what happens when you don't keep the system as a whole in balance – where you retain the drive to excel and to grow incomes. And in the meantime fund your expenditures by borrowing on future generations' accounts.

21.     Let's not pursue a path of easy giveaways without the means to finance it. First, it is not fiscally possible or sustainable. Second, and more fundamentally, it is the way we decalcify our society.