24 February 2012

Budget 2012 Analysis, Reflections and Disappointments

Summary

The Government significantly under-estimated corporate income tax in Budget 2011 and 2010.

The Government recognises, belatedly, that investment–grade gold is an actively traded financial asset like other financial instruments that are GST-exempt.

Is government funding for buses a good thing for the public transport operators?

The enhanced earned income relief benefits only one-third of the older economically active workers.

Special transfers to endowment funds and GST Voucher Fund overstate current expenditure.

Did the GST rate rise from 5 per cent to 7 per cent over the last decade?

Temporary GST offsets versus permanent reductions in income taxes.

The GST Voucher disadvantages those who fall between the cracks.

The GST rate can be reduced.

A.3. We had originally estimated an Overall Budget Balance of $0.1 billion or 0.02 per cent of GDP.  We now expect higher corporate income tax collections, reflecting stronger corporate profits, and lower than expected claims for capital allowances.  In addition, property-related taxes such as stamp duties increased sharply in the buoyant market.  These temporary boosts to our revenues led to a larger Overall Budget Surplus for FY2011 of about $2.3 billion or 0.7 per cent of GDP.

It is unclear why Deputy Prime Minister / Finance Minister Tharman referred to stronger corporate income tax collection and stamp duties on properties as temporary.  Increases in corporate profit may not necessarily be temporary.  Higher stamp duties on properties would have continued but for the Government's intervention in cooling the residential property market.

Some people were critical somewhat unfairly I think — that revised budget surplus was 30 times higher than the estimate.  The budget surplus is a net figure derived from revenues and expenditure; it is not the budget surplus that is estimated per se but revenues and expenditure.  We do not necessarily want the Government to collect less revenue if the economy, or parts of it, are booming.  Neither do we want the Government to spend more just to stay close to its estimated surplus or deficit.

That said, however, the difference between the revised numbers for 2011 (the fiscal year will not end until 31 March) and the original estimates are surprising.

Corporate income tax was $12.2 billion (revised) versus $11.0 billion (estimate).  Since income tax in Singapore is assessed and collected in arrears, shouldn't the Government have a better estimate of corporate profit in 2010?  Furthermore, aggregate corporate profit is a component of GDP, notwithstanding that for that purpose, accounting profit rather than chargeable income is used.  Still, the difference is wide.  Looking back at FY2010, we see corporate income tax of $10.7 billion (actual) versus $10.5 billion (revised) and $7.6 billion (estimate).

Government expenditure was about $400 million higher than estimate, due to higher expenditure on social development and economic development while security and external relations expenditure was lower.  Development expenditure accounted for all of the difference and more, while operating expenditure was less than estimate.

C.62. We will facilitate the development of gold trading, which can draw on Singapore’s strengths as an international financial centre and trading hub, to meet strong demand for investment-grade gold in Asia.

C.63. Investment–grade gold and other precious metals are essentially financial assets that are actively traded and are just like other financial instruments that do not attract GST.  I will therefore exempt them from GST.  This change brings our tax treatment of investment-grade gold and precious metals in line with the practices of many developed economies, like Australia, UK and Switzerland.

It took the Government almost two decades to realise that investment–grade gold and other precious metals are essentially financial assets that are actively traded and are just like other financial instruments that do not attract GST!  Presumably, for those who want it, better late than never.

At present, an individual who buys physical gold pays GST on the purchase price.  When he sells it, no GST-registered buyer will pay him GST.  He will be poorer by the original GST paid unless he can find another individual who is prepared to share the GST cost with him.  Exempting investment-grade gold from GST will benefit individuals who want to hold physical gold.

Otherwise, it is possible to apply the Zero GST Warehouse Scheme to warehouse investment-grade gold for trading purposes.

D.4. The Government has decided to make a major commitment to improve bus service levels.  We will partner the public transport operators (PTOs) to add about 800 buses over the next five years, or a 20 per cent increase.  This is a significant increase.  It took the PTOs close to 20 years to grow the public bus fleet by 800 buses in the past.

The two PTOs had a combined fleet of 4,112 buses as at end-2011, according to Land Transport Authority.  Buying the buses is the easiest part of the transport solution.  Where will the buses be parked?  Will the PTOs be able to find enough drivers?  Will there be enough road space for the additional buses?

Is the Government is bailing out or helping the PTOs?  There are no details yet of the Government's initiative.  However, it is noted that neither SBS Transit's nor SMRT's bus operations are profitable.  SBS Transit's bus operations have incurred operating losses in the most recent three quarters.  SMRT's bus operations have incurred operating losses in seven of the last eight quarters.  Perhaps, the Government believes that neither PTO is prepared to invest heavily in new buses when this segment of their business is not profitable.

Profitability aside, both PTOs seem to have difficulty recruiting local drivers for their existing fleet of buses.  With a much larger fleet imposed on them, they will probably have even more difficulty recruiting drivers.

We should not assume that the Government is giving the buses to the PTOs without any strings attached.  I have, in an earlier article [here], mentioned that the Public Transport Council does not have to give any reasons to the PTOs when deciding on a fare revision.  There is a formula to guide the PTC, but the PTC does not have to approve the maximum fare increase derived from the formula.  The PTC has the discretion to take into consideration any factors that it believes to be in the best overall interest of all the stakeholders when setting fares.  There is no reason to think that the PTC will not impute the cost of the Government-funded buses (or more precisely, the annual depreciation).

The PTOs are not really in an enviable position, being forced to acquire 800 new buses, which they have to put into operation to meet commuters' (and, of course, the Government's) expectations.

E.34. I will also raise the income tax relief for older taxpayers so that they can retain more of their income from work.  They deserve this.  I will double the Earned Income Relief for those aged 55 and above. Those aged 55 to 59 will now enjoy $6,000 in Earned Income Relief per annum, while those aged 60 and above will enjoy $8,000.

E.35. 119,000 older Singaporeans will benefit.  The increased relief will cost the Government $30 million per annum, and will be effective from Year of Assessment 2013.

According to Ministry of Manpower's Report on Labour Force in Singapore 2011, there were 378,600 economically active residents aged 55 years or older in Singapore as at June 2011.  We do not know how many of these are citizens.  If we assume that the ratio of citizens to permanent residents is the same as that in the general population (which ratio was 6.1 in June 2011), we find that there are 325,000 economically active citizens aged 55 years or older.  Of these, only about one-third (119,000 / 325,000) will benefit from the higher earned income relief.  The remainder do not benefit, because presumably their chargeable income is less than $20,000 before taking into account the increased relief.

The nature of a tax relief is that the monetary benefit is a function of the individual's marginal tax rate.  The extra $3,000 tax relief for an individual aged between 55 years and 59 years is worth nothing if his chargeable income before the increase is less than $20,000; $60 if his chargeable income is between $23,000 and $30,000; $210 if his chargeable income is between $43,000 and $80,000; and $600 if his chargeable income is more than $323,000.

E.91. To support the Government’s and community’s efforts, I will also make several top-ups this year.

The Government will transfer $1.0 billion to various endowment funds (e.g., Community Care Endowment Fund, Medical Endowment Fund, ElderCare Fund, Lifelong Learning Endowment Fund and Edusave Endowment Fund) this year.  It transferred $2.2 billion last year and $0.4 billion in 2010.

The endowment funds provide funding for admirable social purposes.

However, the nature of an endowment fund is that only its investment income may be used, but not its capital.  For example, the capital of Community Care Endowment Fund (or ComCare) is held by the Accountant-General on its behalf and the Fund is allocated interest (3.72 per cent for the 12 months ended 31 March 2011, according to its annual report 2010).  So while the capital injected into the ComCare Fund is treated as expenditure in the Budget, it ends up with the Accountant-General and cannot be used.  There is nothing wrong with this, however.

The Government could have given ComCare the equivalent of what it spends every year.  This would have avoided the additional administration of setting up an endowment fund, including an annual audit.  But an endowment fund ensures that ComCare will have the investment income to spend regardless of the state of the economy or the Budget.

Nevertheless, from a macroeconomic perspective, the actual amounts spent by the endowment funds in the economy is the interest they receive from investing its capital (plus any unspent amounts brought forward) while the capital is preserved.  In a sense, therefore, transfers to the endowment funds are not really spent.

Note too that only $0.68 billion of the $3.63 billion to be transferred to the GST Voucher Fund this year will be spent this year and will have a direct economic impact this year.  The remainder will be disbursed in the next four years (see below).

E.101. ... [T]aken as a whole, our fiscal system has in fact become more progressive over the last decade despite our raising the GST from 5 per cent to 7 per cent...

GST did not rise from 5 per cent to 7 per cent over the last decade.  GST was increased from 3 per cent to 4 per cent in 2003, then to 5 per cent in 2004, and then to 7 per cent in 2007.

E.103. [W]e provided a substantial package of temporary offsets for individuals and households when we raised the GST in 2007.  These temporary offsets lasted until last year.

E.104. To carry on with these offsets, I will now introduce a permanent GST Voucher to help lower-income Singaporeans.  The GST Voucher will provide continuing assurance that our GST does not hurt the poor.

Why did the Government wait until now to make the GST offsets permanent?

Consider the other end of the income or wealth spectrum.  Over the past decade, the Government has reduced the income tax burden of the middle- and upper-income individuals.  It has reduced income taxes.  Most sources of interest income have been tax exempt since 2003 (partially) and 2005 (completely).  Dividend is now tax exempt (the elimination of Income Tax Act section 44 credits in 2003/2007 benefits only those whose marginal income tax rate is higher than the corporate income tax rate i.e., their chargeable income exceeds $200,000).  Distributions from real estate investment trusts, or REITs, have been tax exempt since 2004.  Overseas income brought into Singapore has been tax exempt since 2004.  Estate duty was scrapped in 2008.  GST on investment-grade gold will be scrapped this September.  Unless something really bad happens to the Singapore economy, none of these measures are likely to be reversed i.e., they have become permanent, and the trend seems to be to continue to lessen the income tax burden on the middle- and upper-income individuals and, if necessary, offset it with higher GST.

E.105. [The GST] Voucher will fully offset the 7 per cent GST that the lower half of retiree households pay on their expenses.  Many retirees in the upper half will also have their GST offset by a significant amount.

E.106. The GST Voucher for other lower-income families (who do not have elderly members) will also offset about half their total GST bills...

E.107. There will be three components to the GST Voucher — cash, Medisave top-ups and U-Save. The amount each Singaporean will get will be based on both their income and the Annual Value (AV) of their homes.  This is by no means a perfect system, but it is fair to have both criteria.  For example, retirees and home-makers who have no incomes but live in higher-end homes, are generally better off than most lower-income Singaporeans.

Generalisations such as "[m]any retirees" and "retirees and home-makers who have no incomes but live in higher-end homes, are generally better off than most lower-income Singaporeans" are of no help to those who fall between the cracks.  Why should it be assumed that the annual value of an individual's residence is an accurate gauge of his financial situation or that his financial situation is better than that of every individual who lives in an HDB flat?

There is a better way that is adopted by Hong Kong and described by a reader in a letter to The Straits Times [here].  Apart from giving people living in one- to three-room HDB flats more, everyone else should be given the same amount; there is no need for the Government to decide whether Mr Tan is more deserving than Mr Ganesan or Ms Fatimah.  Since this results in middle- and upper-income individuals also receiving GST Vouchers, the income tax rates of middle- and upper-income individuals should be adjusted upwards; there is no need for the Government to decide whose income tax should be cut back less because this is part is based wholly on the individual's income.  This will also serve to maintain the net Budget position.

One possible reason why the Government may not want to adopt this approach is that it will not be able to show that it is giving more financial assistance to individuals who earn less.  And, in politics, you have to be able to do this.  Under the present system, the generous reduction in income tax paid by the middle- and upper-income individuals is kept out of the picture.

E.116. In total, the GST Voucher will cost about $680 million this year.  As I have explained, this will be a long-term feature of our fiscal system and not a scheme of temporary offsets. To ensure that we can provide this GST Voucher irrespective of economic circumstances over the next few years, I will set aside $3.6 billion this year to finance the scheme for the first five years.  To do this I will set up a GST Voucher Fund from which payouts will be made in the coming years.

Since the Government will fund the GST Voucher Fund for the first five years, it does not need to provide any more funding in the next four years other than to enhance the benefits.  As the GST Voucher Fund will disburse $0.68 billion this year, the remaining $2.95 billion of the $3.63 billion that will be transferred to the GST Voucher Fund this year represents future expenditure.  It is not a capital injection into an endowment fund (e.g., Community Care Endowment Fund or Medical Endowment Fund) nor development expenditure.  Had it not been not for this provision for future expenditure, which could be and should be funded out of future revenues just like other forms of operating expenditure, there would have been an overall Budget surplus of $4.22 billion instead of $1.27 billion for FY2012.

Perhaps, the case for the GST rate to be reduced cannot be clearer or stronger.  Estimated GST revenue for FY2012 is $9.24 billion, or $1.32 billion per percentage point of the GST rate (assuming demand does not change with changes in GST rate), suggesting that there will still be a significant Budget surplus if the GST rate were lowered to 5 per cent.  Alternatively and better still, exempt essential food from GST.

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