18 March 2012

Raising Government Revenue after 2016

Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam told Parliament on 1 March 2012 that the Government would have to find new ways to raise revenues after 2016.

He did not say why he thought 2016 was likely to be a watershed year.  It appears the need for new sources of revenues will not arise before 2016.

One likely reason is healthcare spending.  Mr Tharman said that it was going to be the biggest driver of Government expenditures over the next 10, 15 and 20 years.  Current spending is 1.6 per cent of GDP, rising to 2 [2.0?] per cent by 2016 and 3.5 per cent by 2030 the aging of the population has set in.

Another reason is the lumpy expenditures.  The Government will transfer $3.63 billion to the GST Voucher Fund this year.  Only $0.68 billion will be disbursed this year.  The remaining $2.95 billion will be disbursed in the following four years i.e., up to and including 2016.  There are two ways of looking at this.  Either, this year's overall budget surplus of $1.27 billion could have been higher by $2.95 billion because this amount is really not this year's expenditure.  Or, there will be a Budget surplus of at least $0.7 billion in each of the next four years (all else remaining the same) because the GST Voucher disbursements will have already been funded in FY2012.

Providing in one year — this year — five years' of GST Voucher disbursements is not wrong but may lead to the erroneous conclusion that there is insufficient revenue for the programmes under consideration, and consequently raising revenue or curtailing or even shelving programmes or both.  Assuming the same rate of increase in GST Voucher disbursements (see note), the Minister for Finance will need $4.26 billion for FY2017-2021 even though the actual disbursement in FY2017 will likely only be $0.80 billion.

Similarly, the Government has provided $1.10 billion to fund the purchase of buses and related operational losses for the next ten years.  $280 million is for the purchase over the next five years and $820 million is for the operational losses over the next ten years.  Thankfully, the Budget 2012 expenditure covers the outlay for the next ten years so hopefully the Government will not have to top it up in FY2017.

What are the potential sources of Government revenue after 2016?

Mr Tharman said an important feature of the Government's strategy was to keep the tax burden low for the middle income group.  This was echoed by Minister for Law and Foreign Affairs K Shanmugam, who said on 11 March 2012 that the Government must take care not to burden younger Singaporeans with higher taxes.

Mr Tharman said that half of the personal income taxes in Singapore was collected from non-citizens.  Not only non-citizens but citizens who were well educated and talented were mobile.  Singapore had to ensure that we keep our best talents here.

But, as Nominated Member of Parliament Laurence Lien pointed out (Parliament, 29 Feb 2012), the era of racing to the bottom in global tax competition is over.

The Government should review the personal taxation system and consider having Singapore’s top income earners who have benefited from Singapore’s solid infrastructure, growth policies and public goods to bear some of the responsibility of funding the transfers to the poor and needy in society.  So urged Ms Denise Phua (Parliament, 28 Feb 2012) and other Members of Parliament.

For a start, the Government should stop lowering personal income tax rates and excluding any more sources of personal income from tax.

Mr Tharman said that the Government would make the tax system more progressive over time, particularly with regard to property taxes.

Property tax in FY2012 is estimated to be $3.7 billion.

Unlike higher personal income tax which may result in the wealthy fleeing Singapore or parking their wealth outside Singapore, there is no escaping property tax.

What about GST?

Mr Tharman said last April, "As Finance Minister, I have made it very clear in Parliament that at least for the next five years — it does not mean we will raise it in five years' time — but at least for five years, there is absolutely no reason to raise the GST, because this was the whole idea — we strengthened our revenue base in time.  ("GE: Tharman says GST will not be Raised for at Least Another 5 years" channelnewsasia.com 23 April 2011).  Five years from 2011 is 2016.

It is likely that GST will be raised.  But this will be a very unpopular move.

Whatever source or sources are tapped to raise Government revenue, the people would need to be convinced that the Government is exhausting other options, like re-allocating budgets across ministries and maximising the net investment return contribution, warned Mr Laurence Lien (Parliament, 29 Feb 2012).

Coincidentally, the People's Action Party's current mandate to govern Singapore expires in 2016.

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Note

1. The $2.95 billion transferred to the GST Voucher Fund for FY2013-2016 is more than four times the disbursement for FY2012.  I have assumed that the projected disbursements in each of the next four years is progressively higher, probably due to of inflation (the actual reason is immaterial).  The implied annual increase works out to 3.27 per cent.  Applying this rate of increase to the disbursements over FY2017-2021 gives $4.26 billion.

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