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Impact of GST hike on prices will depend on size, timing

Economists say govt will need to stagger the hike and offer buffers in the form of GST vouchers and rebates

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The impending hike in Goods and Services Tax (GST) is likely to push up the cost of living here but the impact will depend on the size and timing of the increase, economists say.

Singapore

THE impending hike in Goods and Services Tax (GST) is likely to push up the cost of living here but the impact will depend on the size and timing of the increase, economists say.

Besides measures to help lower-income households cope, the authorities will also have to keep an eye out for profiteering behaviour - companies taking the opportunity to raise prices unreasonably.

These comments come amid expectations of a GST hike within the next few years - possibly as soon as Budget 2018 - as demands on the government purse grow.

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The government took in S$10.85 billion in GST for the 2016 financial year - the second-largest source of tax revenue after corporate income tax.

DBS senior economist Irvin Seah said a staggered GST hike would help smoothen price increases over a few years, while a one-off increase could result in a sharp spike in prices of goods and services.

"The timing is also crucial - if the hike is announced early next year and implemented in the second half, the impact on inflation will be felt more in 2019," he added.

Consumers might also attempt to pre-empt the GST increase by buying big-ticket items ahead of time, said UOB economist Francis Tan.

"This front-loading of bigger purchases could also push prices higher even in the run-up to the GST hike," he said.

While the GST is generally regarded as a regressive tax which hits lower-income households harder than the rich, there will likely be help available to cushion the impact, said Mizuho Bank economist Vishnu Varathan.

"We are likely to see more targeted subsidies and offsets. Tools like GST vouchers and rebates can be fine-tuned a lot more."

He also said "signs of profiteering will need to be addressed", to make sure companies keep price hikes reasonable.

"Higher GST is a great excuse to raise the price of kopi-O."

Besides economic considerations, the social and political backdrop of the day could also affect the implementation of the GST hike, said Mr Varathan. "If widening inequality is seen as a pressing issue, the government might augment the GST increase by classifying luxury and non-luxury goods and taxing them differently," he said.

Ultimately, the timing and size of the GST increase will depend on policymakers' views on the economic outlook, economists said.

The last GST hike in July 2007 - when the rate was raised from 5 per cent to 7 per cent - coincided with a surge in oil prices, which pushed inflation up even more.

Inflation came in at about one per cent in 2006 but hit 2.1 per cent in 2007, further soaring to 6.6 per cent in 2008.

While the global economic environment has since become more subdued, the outlook is brightening.

"External inflationary pressures remain benign for now but growth is picking up around the world," said DBS's Mr Seah. "The concern is whether inflation will catch up as well, going into 2018 and 2019."

Higher inflation could put pressure on the central bank to tighten monetary policy, by allowing the Singdollar to appreciate at a faster rate against the currencies of key trading partners in a bid to counter imported inflation, said UOB's Mr Tan.

In addition, a higher GST rate could also deter people from spending more and weigh on overall economic growth.

"If the MAS tightens monetary policy in the wake of the GST hike, that could result in a 'double tightening' effect on both the fiscal and monetary fronts," Mr Tan noted.

"It's not clear if next year would be the right time for such moves especially since we have only just started seeing signs of a pick-up and trade-driven growth has yet to fully spill over into the services sector."

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