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Panel asks if government's structural transfers are sustainable

MOF points to higher top marginal tax rates, inclusion of Temasek in NIR, CFE's work to ensure a growing economy
Friday, January 27, 2017 - 05:50

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MOF said it had anticipated higher expenditure needs, and believes the CFE's proposals would help grow the economy, create jobs and grow its revenues sustainably.

Singapore

FEARS of a growing tax burden on future generations in Singapore amid more permanent transfers - with disbursements in 2015 more than doubled over ten years - were examined in a government report this week.

It comes as the Committee on the Future Economy (CFE) is expected to soon push out recommendations shaping how Singapore builds a healthy and growing economy for fiscal spending to be managed sustainably.

The comments were from the report of the Estimates Committee, which was presented to Parliament this week. The committee, which reviewed the Budget for financial year 2016/2017, queried the Ministry of Finance (MOF) over the expenditure of structural transfers, and how much this is expected to grow in time.

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"The committee expressed its concern on the sustainability of future budgets in the long run and whether this would then impose a growing tax burden on future generations."

In response, MOF said the disbursements from structural transfers in 2015 were more than two times that in 2006, growing at a rate of 9.1 per cent annually on average. A separate check on a Budget 2015 speech showed that about 90 per cent of transfers in recent years comprised structural transfers.

MOF said it had anticipated higher expenditure needs, pointing to the increase in top marginal rates for personal income tax from the year of assessment 2017. It has also included Temasek Holdings in the government's net investment returns (NIR) framework from Budget 2016.

"On the revenue front, a healthy and growing economy would remain crucial to ensuring a healthy revenue stream," it added. "MOF was confident the recommendations of the CFE would help grow the economy, create jobs for our people and grow our revenues sustainably."

Structural transfers are permanent schemes in place to distribute funds to households, particularly to the low-income families. These, therefore, have annual recurring expenditures that are funded though the various ministries' budgets, or through separate funds. Examples include the GST Voucher and the Workfare Income Supplement.

After taking in transfers and taxes, Singapore's Gini coefficient - a measure of income inequality - stood at 0.41 in 2015. This measure is based on household income from work per household. The Gini coefficient would be lower after accounting for economies of scale within the household, according to Singstat data.

MOF did not forecast future expenditures growth in structural transfers, noting these would vary with a range of factors. These could include the cost of quality eduction, the use of new drugs, and manpower expenses.

The committee also raised concerns that given the current tough investment environment with modest growth prospects, the NIR framework would deliver lower returns than in previous periods, impacting the government's budget.

In response, MOF said the NIR framework was based on the expected long-term real rates of return on the reserves invested by GIC, Temasek Holdings, and the Monetary Authority of Singapore.

"The expected long-term rates are used because the NIR framework seeks to smooth out budgetary spending across market cycles so as not to overspend when markets are bullish, or face shortage of resources during a market downturn," MOF said.

It added that the while the contribution from the NIR was large, the government's operating revenue remains the primary source of revenues, accounting for slightly over 80 per cent of total revenues.

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