Speeches

A. INTRODUCTION

A1. Mr Chairman, I thank the Members for their comments and questions for the Ministry of Finance.

A2. The Members’ cuts covered three broad topics: 

a. First, fiscal sustainability, investment, and other tax-related measures;

b. Second, how to ensure that resources are employed efficiently and effectively; and

c. Third, our plans to strengthen support for businesses.

A3. I will address the cuts in the first topic and Minister Indranee will take the remaining cuts.

B. FISCAL SUSTAINABILITY 

B1. Mr Liang Eng Hwa and Ms Foo Mee Har asked how the Government ensures sustainability in our spending and resilience in our revenue streams. 

Ensuring Prudent and Effective Spending 

B2. These are indeed very important issues. We ensure long-term fiscal sustainability in a few ways.

a. First, the Government continues to spend within its means, so as to achieve a balanced budget over the medium term.  

b. Second, we remain prudent in our spending and emphasise value for money in every programme. For development projects, especially the major ones, we have robust processes to scrutinise and ensure that they are prudently managed. Our overall government expenditure is around 19% of GDP, less than half of what many governments of developed countries spend.  Even so, we are able to deliver good outcomes in many areas such as healthcare, education, home ownership and public safety.

c. Third, we have and will continue to manage expenditure growth carefully precisely because of concerns that Mr Liang highlighted on this rise in government expenditure. In fact, we have tightened government spending in recent years, by permanently reducing the budget caps of all Ministries and Organs of State by 2% from FY2017, and reducing the growth in ministries’ annual budgets from FY2019. 

B3. Even as we continue with these best efforts to manage our spending, we recognise that our needs will continue to grow, particularly in healthcare, security and infrastructure, as the Finance Minister explained earlier today. 

a. Already, our healthcare spending has more than doubled over the last decade to $10 billion in FY2018. This is close to what we collect from GST today.  

b. And over the next decade, we have projected that annual healthcare spending will increase by nearly 0.8 percentage-points of GDP to around 3 percent of GDP; we will also be spending more in areas like security and pre-school education. So overall, there is no doubt that our recurrent spending will continue to rise, despite our best efforts to manage expenditure.

Maintaining A Broad, Diversified and Pro-Growth Revenue Base 

B4. And this is precisely why we need to ensure that we have a diverse and resilient revenue base to meet these growing needs.  And I share Mr Liang and Ms Foo’s concerns that we really need to ensure resilient revenues, adequate revenues to fund these recurrent expenditures and not rely too much on the Net Investment Returns Contribution (NIRC). As both members noted, we would have had overall budget deficit in each of these last 10 years without the inclusion of the NIRC.

B5. In FY2018, NIRC and corporate tax contributed around 18% each to total government revenue, followed closely by personal income tax and Goods and Services Tax (GST), each of which accounted for around 13% of total government revenue.  Property-related taxes make up another 10%. Several other items make up the remainder.

B6. So overall, our revenue base is a diversified one, and we are mindful not to be overly-reliant on any single source. Even as the share of NIRC has grown over the last decade, we have taken steps to ensure the resilience and enhance the resilience of our other revenue streams. 

B7. First, we keep GST broad-based while providing targeted help to lower- and middle-income households through GST Vouchers and other forms of transfers. And in the recent Budgets, we introduced GST for imported services, and revised the import GST relief limits for travellers, to ensure that our GST base remains resilient with digitalisation and increasing travel. 

B8. Second, we have been looking at other possible streams of revenue as Ms Foo highlighted. We looked across all possible streams, and we have increased tax rates for personal income tax, property tax, and stamp duty in recent years. And we have been careful to do so in a manner that ensures our overall system is fair and equitable, while keeping watch over our competitiveness. 

a. So for example, today, about half of our workers pay personal income tax, and the top 10% of the taxpayers contribute 80% of our personal income tax.

b. Around 40% of companies assessed by IRAS pay corporate tax and around 10% of these companies pay about 95% of our corporate income tax. It is a fair and progressive system.

B9. And, we will continue to ensure that we have such a system, including one with a diversified base of operating revenues, while at the same time borrowing prudently for major infrastructure projects. I think this is the best way to ensure we have a resilient system and also one way we can have maximum flexibility to deal with event contingencies, like a slowdown or recession, as Mr Liang had highlighted. 

B10. Ultimately, and most importantly, sustainable government finances depend on whether we have a healthy and growing economy. With a strong economy, we will have more resources to create jobs for Singaporeans, and to meet the needs of our people. This is the key way to grow our revenues sustainably.

Transparency in our Reserves Regime

B11. Mr Pritam Singh highlighted the performance of GIC and asked for more information on GIC’s investments.

B12. Let me start by clarifying about how GIC has performed. The mandate that Government has given GIC is to achieve good long-term returns, in order to preserve and enhance the international purchasing power of the reserves that GIC manages.

B13. Consistent with this mandate, GIC’s portfolio performance is evaluated not just on the returns within a single year, but on a continuing basis over the long term. And in particular, we look at the annualised rolling 20-year real rate of return of its portfolio, which GIC publishes every year. 

B14. This 20-year return in recent years has been lower than that in previous years, and Mr Singh has highlighted this, and also highlighted the explanation that GIC has put up for this decline in the 20-year return, which is firstly because high returns earned in the run-up of the tech bubble in the late 1990s have dropped out of the past 20-year period, while the subsequent bursting of the bubble and decline in asset values has remained within the 20-year window. So that’s one reason.

B15. The second reason is that the investment environment in recent years has become more difficult, and that is so not just for GIC but for fund managers everywhere.

B16. Nevertheless, in these challenging market conditions, GIC has done creditably. And over a 5-year timeframe, GIC’s nominal return was 6.6% in USD, nominal terms. So it has continued to generate positive returns on its portfolio.

B17. And what I have just explained is published in the GIC annual report.  Every year’s annual report includes an extensive write-up on how GIC manages the portfolio, including its investment methodology and risk management framework.  While the relevant measure for its long-term mandate is the rolling 20-year return which I just highlighted, GIC has also been putting out more information in its annual report.  For example, it publishes other indicators including its rolling 10-year and 5-year nominal returns, and how they compare against a typical market portfolio adopted by large global investors. So the information is there. 

B18. Mr Singh would like even more short-term indicators. And has asked for annual indicators. It is well accepted in the investment world that a requirement to report short-term performance leads to short-term investment behaviour by fund managers. This is especially important because market booms and downturns are common features of global markets. For example, if there is a market downturn, a short-term investor will try to unwind its holdings to cut losses, so as to limit the damage to its short-term performance. By contrast, a long-term investor will be able to look at fundamental valuations, and ride through short-term market cycles so as to achieve better long term returns. That is in fact a major strength that GIC has, and it is important that we continue to preserve this long-term orientation.

B19. If GIC puts out annual indicators, there is the inevitable risk that this will incentivise its fund managers to be more mindful of short-term investment outcomes. And I think this will weaken and undermine GIC’s strategic advantage as a long-term endowment fund. 

B20. I should also clarify one point that while GIC reveals its past performance over 5, 10 and 20 year periods, this is categorically not the basis for estimating its future performance. As the Government has explained several times before in this House, including when the Constitution was amended for the NIRC framework, the process of estimating long term expected returns of the GIC, as well as that of the MAS and Temasek, rests on a thorough professional assessments of the future investment environment. Such assessments are reviewed by MOF; the Government then proposes these long-term expected return rates to the President, who does a further independent check, as advised by the Council of Presidential Advisors. So there is a robust system in place to determine and evaluate the long-term expected returns.

B21. And as we have explained in this house and as the GIC annual report also highlights, there are reasons to expect a weakening of investment returns for serious, diversified global investors over the next 20 years compared to the past. And this is due to structural headwinds in the external environment, for example demographics, elevated debt and low productivity in many countries.

C. TAX-RELATED MATTERS

Retirement Tax Reliefs

C1. Next, let me touch on tax related matters. Associate Professor Walter Theseira asked about Central Provident Fund (CPF) and Supplementary Retirement Scheme (SRS) tax relief. 

C2. We do have a range of policies to address the retirement adequacy needs of different groups.

C3. Currently, SRS and CPF contributions are exempted from tax, subject to certain conditions. And the tax exemption is meant to encourage people to save for their own retirement. I know Professor Theseira has highlighted some international studies. In the case of SRS, for every $1 of tax savings enjoyed, $7 is contributed to SRS on average.

C4. In keeping with progressivity, the Government limits the tax benefits that higher income individuals receive from CPF and SRS.

a. First, the reliefs are not unlimited.

i. For CPF, there is a salary ceiling and top-up limits that restrict the amount of contributions to the system and consequently, the amount of relief claimable.

ii. For SRS, there is an annual cap on contributions. The SRS is a tax deferral scheme, and not fully exempt like the CPF.

b. Second, these reliefs are subject to an overall personal income tax relief cap of $80,000.

C5. At the same time, the Government provides substantial support to help the lower- to middle-income achieve a more secure retirement.

a. These include Workfare which helps to build up CPF savings, higher CPF interest for the first $30,000 and $60,000 of CPF balances, and top-ups to CPF and MediSave accounts.

C6. So overall our system of taxes and transfers remains progressive. I do share Professor Theseira’s objective of having a fair and equitable system to improve retire adequacy for Singaporeans. We will continue to review our schemes such that the balance of support remains tilted towards the lower- and middle-income groups.

Foreign Maid Levy Relief

C7. Associate Professor Daniel Goh asked about the foreign maid levy relief.  And as he highlighted, this relief is quite specific with an objective of encouraging women to stay in the workforce after marriage and child birth.

C8. He asked about broader support. And indeed we have a range of broad-based schemes in place today to support caregiving.

a. Tax reliefs of up to $9,000 per parent or $14,000 per handicapped parent are available for the support of dependent elderly parents. There are similar tax reliefs of up to $4,000 per child or $7,500 per handicapped child for those who care for their dependent children. And for these reliefs, the family has the flexibility to decide on the care arrangements for the child or elderly parent, which may not necessarily involve the hiring of a foreign domestic worker.

b. Families which hire foreign domestic workers to take care of children, household members with disabilities or elderly family members pay a concessionary levy of $60 instead of the standard $265.

c. And the tax reliefs for the care of dependent children and aged parents, and the concessionary foreign domestic worker levy, are not dependent on the gender of the caregiver. So these support measures are also on top of existing subsidies to the care recipient such as subsidised healthcare.

C9. Basically, we do want to do more to support caregivers. And we will continue to review our policies regularly to ensure their relevance and effectiveness.

GST for Vehicle Rental Charges

C10. Mr Ang Hin Kee asked about GST waiver for taxi rentals. I think the Government has made clear its position. Singapore adopts a broad-based GST regime, with few exemptions. And we chose this approach to keep the GST rate relatively low, and administration simple.

C11. Nevertheless, we will certainly do what we can to help taxi driver and private-hire care drivers better manage their business and regulatory compliance costs.

a. For example, last year, after a review with the National Private Hire Vehicles Association and the Ministry of Transport, MOF amended the Income Tax Act to allow private-hire car drivers to claim tax deductions for motor car-related expenses like car rental and petrol against their driving income for income tax purposes. Taxi drivers are already entitled to this, but we have extended it to private-hire care drivers.

b. To reduce the record-keeping burden on drivers, we allow both PHC and taxi drivers to claim tax deduction on a deemed expense ratio at 60% of their gross driving income. This percentage was decided after an extensive public consultation by MOF. And drivers, of course, can opt to claim tax deductions based on actual expenses incurred if these expenses exceed 60%. Mr Ang has suggested raising this 60% to a higher figure, but I think we have had extensive consultations and we have arrived at this figure just very recently. MOF will continue to monitor and review and update the figure, if and when necessary.

More Support to Manage Higher Diesel Cost

C12. With regard to diesel duties, I think we have explained the need for this restructuring of the diesel regime from ownership to usage based taxes, which is necessary for cleaner environment and better health. Beside the restructuring of these taxes, we also have a range of measures to encourage the shift towards cleaner vehicles, and taxi operators are indeed responding. We are seeing strong growth in the number of cleaner taxis, and we now have more than 5,000 electric and hybrid taxis plying our roads, or about 30% of the entire taxi population.

C13. To cushion the impact of the increase in diesel duties, we have provided some measures to help users, including taxi drivers, manage the transition.

a. The Special Tax reduction for taxis is expected to permanently cover more than 75% of the cost impact to drivers.

b. As Mr Ang is aware, the Government has been working with taxi companies to encourage them to pass down the savings from the Special Tax reduction to their drivers, and I’m glad that all taxi companies have agreed to do so.

c. Mr Ang had many other suggestions to work with companies and to help the drivers, including through licensing or through the pump prices that the companies offer. We will study these suggestions and we will continue to work with taxi operators to see how best to improve the welfare of drivers.

D. CONCLUSION

D1. Mr Chairman, let me conclude by reaffirming MOF’s commitment to ensuring the long-term sustainability of our fiscal system. We will continue to build a resilient and progressive tax and benefit regime to support our rising spending needs.

D2. I will let Minister Indranee address the other questions raised.