GST hike - by how much and how soon?

Singapore

THE Goods and Services Tax (GST) is likely to be raised by two percentage points in the coming years as Singapore's spending needs continue to grow, according to DBS senior economist Irvin Seah.

While the announcement could come as soon as Budget 2018, Mr Seah expects a staggered hike implemented over two years to help cushion the impact on households.

His predictions follow recent comments by Prime Minister Lee Hsien Loong that Singapore will be raising its taxes as government spending grows. This sparked speculation among economists and tax specialists about the format and timing of the tax increase.

Higher tax revenues are unlikely to come from raising corporate tax rates, given the need for Singapore's economy to stay competitive, Mr Seah noted in a report out on Tuesday. Personal income tax rates for top-income earners have also been recently adjusted.

This makes GST the top candidate, especially since Singapore's rates are relatively low compared with its regional peers.

"The GST is perhaps the most direct and effective tool in terms of raising tax revenue. It has a relatively broader tax base and it is also the second-largest source of revenue, just behind the corporate income tax," said Mr Seah.

"Hiking the GST is politically challenging given its regressive nature. In this regard, timing is crucial. With the next general election due in 2020, policymakers will have to act fast."

He estimates that a one percentage point hike would raise tax revenue of about S$1.6 billion to S$1.8 billion, equivalent to about 0.4 per cent of Singapore's nominal gross domestic product.

Mr Seah expects a staggered GST hike, which would strike a balance between the need to raise tax revenue and a still-cautious economic outlook.

"While economic growth in recent quarters has been encouraging, the economy has just emerged from two consecutive years of slow growth. And pockets of uncertainties remain in the external environment, which could pose risks to Singapore's economic performance in 2018," he noted.

The labour market also seems to have bottomed, but "a more pronounced recovery remains visibly lacking".

"Hence, introducing a sharp GST hike at this moment could result in a double whammy for some workers and households," added Mr Seah.

The GST was implemented at a single rate of 3 per cent on April 1, 1994. It was raised to 4 per cent in 2003 and to 5 per cent the following year. The last hike to 7 per cent came in 2007.

Mr Seah expects a GST offset package worth at least S$4 billion to be announced alongside the hike. Higher GST voucher payouts, a one-off income tax rebate as well as rebates on conservancy charges and utilities could be on the cards, he noted.