Room to enhance taxes as fiscal demands rise

[SINGAPORE] There is room for Singapore to "enhance asset taxes", Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said yesterday, as he laid down the principles that will underpin the government's response to rising fiscal demands.

The economy needs to stay vibrant and competitive, but that does not mean that tax rates - frequently discussed in terms of their impact on Singapore's competitiveness and attractiveness to talent - are immovable.

"It doesn't mean we keep taxes unchanged," said Mr Tharman. "For example, we made property taxes more progressive last year. And, there's further room over time to enhance our asset taxes. We have to keep all options open."

But this is provided that the system of taxes and transfers stays equitable and the tax burden on the average Singaporean household is kept low, he said, addressing points raised by Members of Parliament in the debate over Budget 2014.

Economists and tax observers read the Finance Minister's comments as a signal that tax hikes should still be expected, despite their notable absence from this year's budget. Many had expected hikes in wealth taxes or the top income tax rates, to raise revenues for future spending needs.

Barclays economist Leong Wai Ho said: "The good news is that unlike Korea or Taiwan, the government is not short of revenue in the near term. So it is thinking ahead and can afford to pass these increases on gradually."

Singapore's healthy fiscal position now is the result of earlier moves to strengthen revenue streams, such as raising the goods and services tax (GST) in 2007 and introducing the net investment returns contribution (NIRC) framework in 2008, Mr Tharman said. But additional changes may be needed as infrastructural and social needs are projected to push public spending up by as much as 3 per cent of GDP, by 2030. By 2020, expenditures would already have risen by 2 per cent of GDP, he said.

Hefty investment will be needed for the expansion of the rail network and Changi Airport, to build new public housing estates and to renew older ones. Education spending will rise too despite falling cohort sizes, as Singapore invests more in each student.

Healthcare spending has also climbed faster than projected. Two years ago, the government said that yearly total healthcare spending would double from $4 billion in 2011 to $8 billion, about 2 per cent of GDP, by 2016. But Singapore's healthcare spending is likely to reach $8 billion by next year - one year earlier than projected - and could rise to $12 billion by 2020, Mr Tharman said.

The government will have to ensure that all spending is judicious. "We have to... be obsessed with achieving value for money in every programme," Mr Tharman said. Even so, to balance the books, revenues will have to grow at at least the same pace as spending.

But revenue growth is expected to slow. Cooling asset markets mean less market-based tax revenues and slower foreign workforce growth means foreign worker levy collections will taper off. Noting that Hong Kong is projecting structural deficits in the next 7-10 years, Mr Tharman said that Singapore could run into structural deficits too, if it does not raise revenues in the next decade.

Economic health is thus the first principle. "We've got to be a vibrant economy. That's central to our social strategies because an inclusive society is a hollow concept if we don't have fruits to redistribute and share," he said.

"The reality is, we are a small country without a natural hinterland and business does not need to be here . . . We have to remain competitive so that we can attract investments and continue to grow talents. And that involves also retaining our own talents," said Mr Tharman, who reiterated during his 90-minute long speech his call for productivity to go beyond incentives to changes in workplace norms and individual behaviour.

The second principle, Mr Tharman said, is to ensure that the overall system remains fair and equitable, however it changes.

Currently, Singapore's tax and transfers system ensures that for every dollar of tax the poor pay, they get at least five dollars back in benefits, he said. The top richest 20 per cent of households pay more than half of all taxes collected.

This means that not every tax has to be progressive for the whole system to be so. "GST, in its own right is a regressive tax, but when we increased GST, we also made major changes in our other social policies: workfare, household grants, educational subsidies . . . that more than offset the impact of higher GST on the low-income group," said Mr Tharman.

The third principle is to ensure that the tax burden of Singapore's median worker - which is now lower than that of peers in Hong Kong, US and the UK, by the Ministry of Finance's estimates - stays low. "We have to keep the tax burden of the middle-income low, so that they get to keep as much as they earn," Mr Tharman said.

Many think that GST will eventually rise, though DBS economist Irvin Seah says that this will not happen before the next election. "Of the various forms of taxation, I think taxing property has the least effect on competitiveness," he said.

But Mr Leong says that a property tax hike is unlikely in the near term, given that the market is cooling. "There might be scope for raising property taxes on larger homes in the future. Betting and gaming taxes can also be tweaked higher," he said.

KPMG partner and head of tax Tay Hong Beng said that while traditional options such as raising the corporate tax rate goes against the grain of falling rates in many countries, there are a range of other options. These include luxury taxes, and the option of widening the tax rate bands for top income earners - rather than hiking the rate and discouraging the inflow of high calibre talent.