30 August 2013

Saying No To Higher Taxes To Fund NDR 2013 Plans

After listening to Prime Minister Lee Hsien Loong's National Day Rally speech 2013, many people would have come to the uneasy conclusion that a tax increase in on the cards, and it would most likely be an increase in the GST rate, given the PAP Government's aversion to increasing personal or corporate income tax rates.

However, some of the planned programmes need not be funded by taxation.

MediShield Life for the Pioneer Generation
PM Lee said, "One group which we need to take special care of is our pioneer generation. They are special. They are the ones who worked hard to build today’s Singapore. They made this place. They enabled us today to enjoy these facilities. They earned less than us [sic]. They had fewer safety nets when they were working. They brought up this generation and they paved the way for us to live a better life than themselves [sic]. That was their goal. They achieved it and I think we should know that and we should be grateful to them. Now mostly they are retired, at least in their late 60s, many older. And we must take special care of this pioneer generation in their golden years... And I think in these new health care arrangements, we will likewise make sure that they are well taken care of. So, we will have a special Pioneer Generation Package to help pay for their premiums for this group under MediShield Life, to make sure that our pioneer generation will be well-covered and would not need to worry about health care in their old age. I think we owe it to them."

Read PM Lee's words carefully.

The pioneer generation laid the groundwork for today's Singapore and, by extension, its reserves. The Pioneer Generation Package should be funded out of past reserves, or current budget surpluses without raising taxes.

MediShield Life For The Needy
Compelling everyone to take up MediShield Life means that the State will have to assist the needy with the premiums, deductibles and co-payments.

The State is currently paying for some, if not all, of the medical expenses of the needy, and these expenses will be significantly reduced once the needy are on MediShield Life. The resulting savings should be channelled to paying their premiums, deductibles and co-payments.

Any argument that Medifund (Medical Endowment Fund) is an endowment fund with a defined mission should not preclude redefining its use to assist the needy with MediShield Life.

Housing Grants
To make HDB flats affordable (or less unaffordable, depending on one's perspective), PM Lee said that, instead of bringing down the prices of HDB's Build-To-Order flats, the State would subsidise the purchases of HDB flats with Special CPF Housing Grant, Additional CPF Housing Grant and Step-Up Housing Grants.

Ceteris paribus (i.e., if all else is held unchanged), HDB's operating surplus will fall after accounting for the more generous grants, and HDB will need even larger State grants to avoid a deficit (the State grant was $747 million in FY 2011/12).

HDB incurs an accounting deficit because it does not sell its flats at prices high enough to recover its costs, such as the price it pays for State land, construction cost, finance and administration expense etc.

Because the Government does not consider the amounts that HDB pays for State land to be current revenue, but as money that belongs to the State's reserves, this forces the Government to collect enough tax revenue to make up for HDB's deficit.

It is reasonable for the Government to ensure that there is sufficient tax revenue to provide housing grants to its citizens to buy flats from HDB, and for HDB to have enough money to pay for State land, provided the money from the sale of State land to HDB is required to balance the State budget.

However, it is nonsensical to do this if (as is the case now) the money from the sale of State land to HDB is locked up as the State's reserves.

Enhancing the housing grants will raise their annual cost from $290 million to $440 million, making it more unlikely that HDB will collect enough from the sale of new flats to pay for State land[1], and the Government will insist on covering this bigger deficit with tax revenue, which will eventually end up in the State's reserves.

The point is this: if the Government wants to make HDB flats more affordable, the answer is to extract less from the buyers — by either lowering the sales price or giving more generous grants — and consequently put less into the State's reserves and not try to make up for the difference by collecting more taxes.

Moving Paya Lebar Air Base to Changi East
It will cost a lot of money to build a new military air base at Changi East.

However, when the 800 ha of land (which is bigger than Ang Mo Kio or Bishan) now occcupied by Paya Lebar Air Base is vacated, it will used to build new homes, offices, factories, parks, living environment and communities.

Land adjacent to Paya Lebar Air Base will be able accommodate taller buildings, for which a development charge will be levied.

Land sales proceeds will be taken to reserves, as mentioned in the previous section.

It is not justifiable to raise taxes to fund the development of Changi East Air Base and then lock up the proceeds from land sales of Paya Lebar Air Base as the State's reserves. Whilst there is a timing issue because the former needs to be ready before work on the latter can even start and their respective costs cannot be finalised until nearer completion, neither issue is insurmountable provided there is political will not to tax the people unnecessarily.

Moving Tanjong Pagar Port to Tuas
The Government plans to move the port from Tanjong Pagar to Tuas. This will free up 1,000 ha of prime land, or 2.5 times the size of Marina Bay, in Tanjong Pagar, to build a Southern Waterfront City.
 
As with moving Paya Lebar Air Base to Changi East, it is not justifiable to raise taxes to fund the development of a new port at Tuas and then lock up the proceeds from land sales at Tanjong Pagar as the State's reserves. Here too, whilst there is a timing issue because the former needs to be ready before work on the latter can even start and their respective costs cannot be finalised until nearer completion, neither issue is insurmountable provided there is political will not to tax the people unnecessarily.

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Notes

1. According to HDB's annual report for FY 2011/12, it incurred a gross loss of $729 million from the sale of housing units before net decrease in provision for foreseeable loss, and a gross loss of $90 million after net decrease in provision for foreseeable loss. It incurred a net deficit of $1.2 billion from the sale of housing units before State grant and taxation. Including its other activities and after State grant and taxation, it realised a surplus of $303 million.

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