Budget Debate 2002 (Round-Up Speech) by DPM and Minister for Finance Lee Hsien Loong at The Parliament, 14 May 2002

OVERALL RATIONALE FOR TAX CHANGES

The tax changes are a vital part of our economic restructuring efforts to secure economic growth and job creation. Rationale stated in budget speech - to create jobs, we need to attract investments and talent. For that we must bring down direct taxes, to be competitive. Then we must make up the shortfall in revenue, which means raising the GST.

This is not a quick-fix for this year or the next, but a strategic shift for the medium and long term. Happy that growth for this year is turning out well, but that is not our measure of success. Our measure is that the economy continues to grow 4-6% p.a. for the next decade, and to deliver prosperity for Singa-poreans.

Hard to quantify exactly how much difference this shift will make, but quite clear that over last 15 years had we not brought our CIT and PIT rates down from 40%, and introduced the GST, we would not have enjoyed the 9.2% growth in the decade up to 1997, nor come off as lightly as we did in the last 5 years.

Nub is we have to bring down corporate and personal income taxes, and make up the revenue somehow. Some MPs (Ong Kian Min and Low Thia Kiang) have described this as a tax change which will only benefit the rich. In fact it is to benefit the whole economy.

The way to help lower income Singa-poreans is not to tax better off Singa-poreans as heavily as possible. If we tried to do that, higher-income individuals and companies would leave Singapore altogether. We would lose the jobs that they created, as well as the taxes they were paying. All Singaporeans would be the worse off for it.

Lower income Singaporeans will not benefit directly from the income tax cuts (though they will enjoy the offset package). But they will benefit from the increased growth and job opportunities that the tax cuts should foster.

Tan Soo Khoon says the GST is regressive. But we have to look at the whole tax system, which is very progressive. Even after the tax restructuring, we will still be collecting only $4 bn of our revenues from GST, compared to $12 bn of revenues from CIT and PIT. Two-thirds of working Singaporeans do not pay any PIT.

If we account for the benefits which a 3 or 4-room household enjoys from the Govern-ment, what he receives in terms of housing subsidies, education, health care, etc. is far greater than all tax he pays. [For a median household with $50,000 annual income in a 4-room HDB flat, tax burden is $7,500, benefits in kind is $18,600.]

GST

Will it work? (Yeo Guat Kwang, Chong Weng Chiew, Low Thia Kiang)

Some MPs have asked whether the strategy of cutting PIT and CIT and raising GST will work.

Direct tax rates are the primary fiscal tool that government can use to attract investments and talent.

Already, EDB reports that American companies have fed back that they have taken note of Singapore's bold fiscal moves. Recent EIU rankings have placed us first in Asia, ahead of Hong Kong, mainly in recognition of our planned tax cuts and avoidance of budget deficits. If we don't do this, our chances of maintaining 4-6% growth in medium term are considerably dimmed.

Is the timing right? (Iswaran, Inderjit Singh)

Some MPs like Iswaran and Inderjit Singh have questioned the necessity of increasing GST in 2003. Better to do it now when we have the means toIf we put it off, we may not be in a better position in future when our economy would have been weakened, because we had failed to make the structural tax changes in good time.

Must we raise GST at all? (Low Thia Kiang, Tan Soo Khoon)

Raising the GST to 5% anchors the tax restructuring strategy.

Going from 3% to 5% GST is the key move which enables us to reduce CIT and PIT to 20% within 3 years, and also fund all the programmes we need. If we collect more revenue than expected, that will be a happy problem. Govt can share the surpluses. Alternatively, strong revenue position can position us for further competitive cuts in CIT or PIT below 20%, should that become necessary.

The increase in GST is expected to raise an additional $1.3 billion of tax revenue per year. If we forgo this increase in GST, we would have to reduce government's development expenditure by 15% in order to balance the budget. $1.3 billion is roughly equal to: - 1 year's worth of HDB upgrading and public housing subsidies

(Tan Soo Khoon)

1994 package was in fact revenue neutral as promised. His own table shows this.

Since 1994, we have been enjoying 8-9% growth, thus revenue was buoyant. Question is, can we expect such strong growth without making the changes. If we believe the world has changed, then can we really not raise GST and do without the extra $1.3 billion.

He says 'economic pie will expand' If he is right and I am wrong, Govt can share out surpluses. If he is wrong and I am right, then we must make this fundamental move now.

Commitment not to increase further for 5 years Chiam See Tong)

Chiam See Tong wants Govt to promise. Can honestly say that this is not in our plans, but cannot promise because the future is unpredictable. The situation is different from 1994.

Raising the GST to 5% will be sufficient for us to cut CIT and PIT to 20%. We do not need to raise GST again just to move CIT and PIT to 20%.

Will increased GST raise prices and reduce consumption? (Heng Chee How, Iswaran)

Offset package will restore households? purchasing power, and may even cause them to bring forward spending.

Impact of GST increase on prices expected to be small. When GST was introduced in 1994, inflation was hardly noticeable - rose from 2% to 3% in 1994, then fell back to 2% for several years. This time, inflation is expected to be zero or negative in 2002, and the GST increase is only 2%, so it should not trigger inflation. As Low Thia Kiang acknowledged, hawkers are not doing well and cannot increase prices.

Happy that Chiam See Tong and Steve Chia have agreed to serve on the Committee Against Profiteering chaired by Chan Soo Sen.

Dispelling misconceptions about GST (Leong Horn Kee, Hawazi Daipi)

Leong Horn Kee and Hawazi Daipi said more should be done to dispel misconceptions about the GST, especially the belief that GST involves tax on tax, so that the real rate is higher than 5%. [Explain how GST works using handout.]

RESERVES & SURPLUSES

Why is the Govt obsessed with surpluses and reserves' (Chiam See Tong)

Unlike other countries that can always fall back on their natural resources, the only resources we have are our people and our financial reserves.

The stability of the S$ depends upon us maintaining healthy financial reserves. Having a strong financial position instils investor confidence in both the government and the Singapore economy.

Critical as our reserves may be, it does not mean that we will never draw on them. The government is prepared to tap on our reserves in extremis. We must be careful about using the reserves because we never know how long bad times will last. In more developed economies, prolonged recessions are not uncommon.

Our reserves give us the flexibility and capability to respond to the needs of Singaporeans in difficult times. E.g. we used current reserves to fund the Off-Budget package in Oct 2001 to tide Singaporeans through the downturn, and to fund the generous GST-offset package.

In any case, Chiam See Tong has got his sums wrong on the FY2002 Budget surplus. We are not expecting a small surplus as he has said. We are expecting a small deficit.

OFFSETS

AV vs. Income Criterion (Iswaran, Lim-Ho Geok Choo)

Iswaran and Lim-Ho Geok Choo said that one's housing type was not a good criterion for distributing ERS. We had considered using income. But income may not be fair either because some well-off people may have no earned income. Also, we have to use household income, which means checking everyone's income from IRAS and piecing them together. It would be very complex and too intrusive.

Using AV means that Singaporeans who do not live in HDB flats but in cheaper private property will also get the higher amount of 1200 shares. It may not be perfect, but it is reasonable and practical.

If any household is not fairly treated because of their circumstances, e.g. retirees living in terrace houses, then they should approach their CCC, who will help them through the CCC Assistance Scheme. Of course low income retirees will also benefit from the revision of the Singa-pore Allowance.

Adequacy of offset (Leong Horn Kee, Lim-Ho Geok Choo, Yeo Guat Kwang, Chin Tet Yung)

Bottom line - every lower income household, with a household income below $3,600, will have their extra tax offset completely for at least 5 years.

For those that earn less than $2,000 per month, ERS alone will be sufficient (additional $40 of GST per month, or $2,400 in 5 years, offset by 2 persons' ERS of $2,400). So the very poor households are likely to be more than adequately covered by the offset package.

For those who earn more than $2,000 but less than $3,600, CCC Assistance Scheme is there to help.

Universality of ERS allocation (Lim-Ho Geok Choo)

Received feedback from NSS scheme that people were not happy with multi-tier share allocation based on housing type. Therefore, for ERS, we decided on a flat distribution for the bulk of Singaporeans who are likely to be affected by restructuring, before tapering to a smaller quantum only for the top 10% who would benefit more from the tax cuts.

Indeed other MPs have asked why those living in larger private properties are getting only $600 of ERS!

Not giving higher weighting for the poor (Irene Ng)

The ERS is to help offset the net increase in taxes, particularly GST, not share wealth or to address income inequality. Even so, the package of ERS and rebates is still more generous for the lower income if we were to compare the number of years of additional tax offset (8-10 years for lower income compared to 6-8 years for middle income).

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