GST hike is a reasonable price to pay for a stronger fiscal footing

IF the Singapore government means to build a more sustainable fiscal base, a Goods and Services Tax (GST) hike may be hard to avoid in the next few years.

Total outflow from Singapore's national budget has grown at an annual pace of 7.1 per cent over the past five years - driven by needs in health care, transport and non-recurring funding for key initiatives such as the Pioneer Generation Package and the Wage Credit Scheme - while operating revenue grew at just 4.5 per cent per year.

As a matter of responsible fiscal planning, and because each Parliament is forbidden from running a fiscal deficit over its term, raising revenues is something that the current government may need to consider, as Prime Minister Lee Hsien Loong noted over the weekend.

Policy changes that allow Singapore to extract more of the net returns from its invested reserves and funds - currently set at 50 per cent of expected long-term returns - has helped to cover the bill in recent years. Singapore could draw an even larger percentage of its investment returns, but that path exacts a steep cost on future generations, and should only be taken with great care.

Since Singapore does not borrow from the market to fund its budget, that leaves taxes and fees as the government's most likely tool of choice if it wants to raise revenue.

New types of taxes will have limited impact. A sugar tax is valuable given the national focus on diabetes prevention, but it is not a cure for fiscal sustainability. As with all sin taxes, improved behaviour reduces revenue collected, which is counter-productive. A sugar tax is also unprogressive, with sweet foods often a cheap - albeit unhealthy - source of nutrition for the poor. Yes, poor people should be healthy too - but neither should they be hungry.

The coming carbon tax will help coffers, but it may not be enough. The current proposal to tax upstream producers between S$10 and S$20 per tonne of greenhouse gas emissions will yield only about S$500 million to S$1 billion, assuming that all of Singapore's 51.4 million tonnes of emissions in 2015 are fully taxed.

GST, which was expected to contribute S$11.3 billion to the budget in 2017, ticks a few boxes. (see amendment)

Firstly, it is a tax with a wide reach. A one percentage point increase in GST in 2017, to 8 per cent from 7 per cent, would have increased GST takings by S$1.6 billion.

Moreover, unlike corporate and personal income taxes, a rise in GST will have less impact on Singapore's competitiveness with regard to doing business and being a key financial and wealth management hub.

And while GST may be unprogressive, since staples are taxed at the same rate as discretionary products, schemes such as the GST Voucher allow the government to mitigate some of the impact on lower-income households. That support should continue.

The key risk for the government in raising GST would be the impact on consumer spending and the already suffering retail industry. Today's slightly firmer economy may alleviate some concerns but should the GST be raised, the government should help retailers in the short term. A resilient retail sector benefits jobs and spills into other segments such as tourism and property.

A GST hike will be felt by all. But if the Singapore government can mitigate its impact, it will be a reasonable price to pay to place the country on a stronger fiscal footing.

Amendment: An earlier version of this story wrongly stated that GST was expected to contribute S$11.3 million to the budget in 2017. It should be S$11.3 billion.