GST hike could feature in Budget 2022, kick in as soon as July: economists

Singapore

THE upcoming goods and services tax (GST) hike may be announced in the next Budget and implemented as early as July 2022, said some economists, with the economic outlook now robust enough to allow such a move.

"From an economic standpoint, the door is already open," said DBS senior economist Irvin Seah.

Others, however, think the government could hold back so as not to jeopardise the ongoing recovery.

The government intends to raise the GST rate by 2 percentage points to 9 per cent at some point between 2022 and 2025.

Its impact will be cushioned by a S$6 billion Assurance Package set aside in Budget 2020.

With tax revenue having recovered past pre-Covid levels in the first half of this financial year, some see fiscal leeway for delaying the hike.

According to data from the Accountant-General's Department on the Singapore Department of Statistics' website, tax revenue from April till September was S$39.4 billion - surpassing not just the S$23.7 billion in the year-ago period, but also the S$37.2 billion in the pre-Covid first half of FY2019. (see amendment note)

An announcement of the hike in Budget 2022, with implementation in July, is the base case for Citi economists Kit Wei Zheng and Ang Kai Wei.

Prior to the Monetary Authority of Singapore's policy meeting in October, the Citi economists said that it would be difficult to justify policy normalisation then "without confirmation of a GST hike in 2022".

That is unless the MAS decides to lower its implicit inflation tolerance threshold, has more hawkish baseline forecasts for core inflation than the Citi economists, or moves "much more pre-emptively than it has in the past", they said.

"Although we doubt MAS will be surprised by the timing of the GST hike, a tightening would be more easily communicated after an official announcement of the hike," they added.

Like most economists, they expected the MAS to stay put in October. As it turned out, the MAS surprised the market by tightening policy then, though their statement made no mention of a possible GST hike.

In Budget 2021, then Finance Minister Heng Swee Keat said the hike would be "sooner rather than later, subject to the economic outlook".

In October, current Finance Minister Lawrence Wong repeated this stance at the Institute of Policy Studies' Singapore Economic Roundtable, when asked whether rising inflation would affect the move's timing.

For DBS' Seah, it has become "very, very clear" that the hike will feature in Budget 2022, though the implementation timing is less certain.

From a political standpoint, making such a move early in the current term of government would help "distance the GST hike from the next election", he said. What remains to be considered is the economic outlook.

After the last General Election in July 2020, he said that both gross domestic product growth and the unemployment rate will have to return to their trend rate of about 2 to 2.5 per cent before the hike takes place.

This normalisation has occurred, he said, noting that real GDP had recovered to pre-Covid levels as of the third quarter of the year.

Given that the last GST hike was announced in Budget 2007 for implementation that same year in July, Seah expects to see a similar timeline.

The government might delay the hike if there is both slower-than-expected growth and higher-than-expected inflation, but not if only one of those risks materialises, he added.

Other economists, however, think that the government may not want to run the risk of hurting the recovery.

UOB senior economist Alvin Liew thinks it is unlikely the hike will happen in 2022 "due to Covid-19 recovery considerations, especially for the in-person services industries". Still, he expects it to come "well before end-2025, perhaps in 2023".

Maybank Kim Eng senior economist Chua Hak Bin has not factored in a GST hike for 2022 either.

With inflation already rising, and a 2 percentage-point hike could drive headline inflation to above 5 per cent by end-2022, he said: "Raising GST next year will only fuel cost pressures and risk a higher pass-through to final consumer prices."

Meanwhile, the recovery for consumer-facing sectors has been sluggish, lagging that of manufacturing and exports, he added. A GST hike "will only deal another crippling blow to the already struggling F&B, retail, hospitality and travel sectors".

Furthermore, the government can afford to defer this, he said: "Better-than-expected fiscal revenue may buy more time and allow the government to defer the GST hike to a later year."

He noted that corporate and personal income tax collection, as well as GST revenue, have been "well ahead" of budget forecasts for the first 6 months of the fiscal year.

For greater lead time, the hike could be announced in Budget 2022 but implemented in 2023 - with OCBC chief economist Selena Ling seeing "a high chance" of this.

The eventual implementation could be either an all-at-once hike, or a two-step hike of 1 percentage point each in 2023 and 2024, she added.

She similarly expects a carbon tax hike to be announced in Budget 2022, but take effect in 2023 at the earliest.

Amendment note: An earlier version of this story attributed tax revenue data to the Department of Statistics (Singstat). Singstat has clarified that the data is from the Accountant-General's Department but on Singstat's website. The story has been amended accordingly.