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Higher wealth taxes may be on the cards
[SINGAPORE] Moves to secure future revenue streams may be put in place in the upcoming Budget, as public spending rises with a rapidly ageing population and the government move towards greater redistribution.
Observers expect higher wealth taxes on cars and properties as well as a wider top personal income tax bracket. A hike in the Goods and Services Tax (GST), though unlikely this year, is also expected eventually.
Revisions to the cap on how much goes into the government's purse from the investment returns on the Republic's reserves, as well as the policy of government land sales income being locked up as reserves, cannot be ruled out either, they said.
Fiscal prudence amid rising spending pressures has provided fodder for debate after each Budget in recent years - particularly after the global financial crisis prompted the government to seek presidential approval in 2009 to draw down past reserves.
This will be thrown into sharper relief in Budget 2014 with the government's major commitments, such as changes to MediShield, the national medical insurance plan, and a Pioneer Generation Package that will help pay the MediShield premiums of those who are now in their late 60s or older.
There are also longer- term public infrastructure and development projects to finance - a ramp-up in public housing, new MRT lines, Changi Airport's new terminal and the relocation of the port, and possible extensions to measures to boost productivity. But as Prime Minister Lee Hsien Loong put it in his National Day Rally last August: "All good things must be paid for."
Economists BT spoke to say further wealth taxes are most likely, since they fit in with the goal of a more progressive tax regime - a main theme of Budget 2013.
Last year, higher property taxes on investment and higher-end owner-occupied homes were introduced. These could be fine-tuned without shock to the system, Mizuho Bank economist Vishnu Varathan said.
But as the property market has begun to cool, UOB economist Francis Tan reckons policymakers may not wish to exacerbate a slowdown. Car taxes, in the form of further tweaks to the tiered additional registration fee rolled out last year to tax luxury cars more, seem more likely to him.
DBS economist Irvin Seah believes a capital- gains tax ought to be considered, but this was one wealth tax others thought less likely. It would be seen as a policy reversal, said UOB's Mr Tan, while Mr Varathan said the effect of such a move on Singapore's status as a financial and wealth management centre would have to be considered carefully.
Another way to boost the taxman's takings while making the tax regime more progressive would be to raise the top personal income tax rate of 20 per cent, or lower the income threshold at which that top rate kicks in. The latter is more likely, as policymakers would be wary of the impact a higher headline rate may have on attracting top global talent here, Mr Tan said.
Another strong, though not immediate, candidate for revenue generation is a hike in the GST. The government has promised not to raise it before 2016, but it is likely that Singapore will bring its GST of 7 per cent closer in line with the 10 per cent charged in most countries, economists said.
"Taken alongside means-based GST rebates, such GST hikes could also be less regressive than they would have been on their own," Mr Varathan added.
The contribution from net investment returns (NIR) on reserves is another spending tap. Currently, the government can take up to 50 per cent of the net investment returns on net assets managed by GIC and the Monetary Authority of Singapore and up to 50 per cent of the investment income from remaining assets, including those managed by Temasek.
Analysts estimate that the $7.65 billion figure for FY2012 and the estimated $7.7 billion sum for FY2013 fall far below the cap, last revised in 2008. Therefore, there is room for the NIR to rise. But Deputy Prime Minister Tharman Shanmugaratnam said last year that the government did not rule out further revisions to the rule.
The use of land sales proceeds as government income was ruled out, though. Some analysts have discussed the possibility of changing the framework to recognise part of receipts from land sold as leasehold rather than freehold as recurring revenue. Still, any revisions to the NIRC (NIR contribution rate) or land sales income "amount more to accounting than revenue creation", noted Mr Varathan.
More remote is a hike in the corporate income tax rate of 17 per cent. "It would not only erode the competitiveness of Singapore as a regional base, but could be misconstrued as back-peddling on previous rate cuts," said Mr Varathan.
This is especially unlikely since businesses feel they are still struggling to raise productivity amid rising costs and a labour crunch.
Mr Seah believes that apart from seeking fresh revenue streams, efforts to contain rising cost are needed, to slow the anticipated increase in social spending.
"With the population ageing very fast in coming years, healthcare demands will rise, and healthcare costs will be a significant driver of inflation in Singapore in the years going forward. We can't continue to just focus on subsidising costs. We need to nip the problem in the bud and address what is causing these cost increases," he said.
Growth will remain key, too. "We should not forget the traditional sources of revenue: corporate income tax, personal income tax. The way to increase these is economic growth," said Mr Seah.
Said Mr Varathan: "Raising productivity is perhaps one of the best ways to deal with the ageing issues from an increasingly constrained resource-efficiency point of view. What's more, productivity gains help to boost profits, helping to manage a higher cost base."
"The basic tenet that being competitive need not preclude being compassionate is perhaps a key take-away that the Budget could embody."
For now, Singapore is far from worried about a Budget deficit. Bank of America Merrill Lynch economist Chua Hak Bin estimates that Singapore's budget surplus for the fiscal year ended March 31 may come in at $6.3 billion, far exceeding the official forecast of $2.4 billion a year ago.
Assuming that expenditure and net investment returns are in line with forecasts, stronger government revenues - thanks to better-than-expected GDP growth in 2013 and hikes in property-related stamp duties - are expected to pad up the surplus, Dr Chua said.