How to fund rising fiscal spending?

Singapore

AS FINANCE Minister Heng Swee Keat prepares to present this year's Budget on Feb 18, all eyes are now turning to how he plans to pay for it.

Observers are torn on either a small surplus or small deficit for the closing fiscal year. As for the coming fiscal year, they await fresh details on big-ticket items such as the Merdeka Generation welfare package unveiled in the National Day Rally and infrastructure projects - but know that the bill must somehow be footed.

The current goods and services tax (GST) could still help to underpin the tax monies, they suggested, but the promised two-point hike is unlikely until after the next general election.

Meanwhile, funding through the net investment returns contribution (NIRC) is not expected to be tweaked much. This framework, now in its 10th year, lets the Government tap not just the net investment income from past reserves, but also up to half of long-term expected real returns - including capital gains - on relevant assets.

Mr Heng had last year guided for a post-NIRC overall deficit of S$600 million - a steep step down from 2017's bumper S$9.6 billion surplus.

Vishnu Varathan, head of economics and strategy at Mizuho Bank, told The Business Times that planned spending could cross last year's expenditure estimate of S$80 billion, to reach S$90.1 billion, and "will probably target a deficit to the tune of around 0.4 per cent to 0.5 per cent of GDP".

Kelvin Law, an assistant professor of accounting at Nanyang Technological University's Nanyang Business School, predicted that actual revenue for FY2018 would shrink "slightly" on lower gross domestic product (GDP) growth and the continuing US-China trade war which started in the second half of 2018.

Meanwhile, Fitch Solutions analysts forecast a primary surplus of 0.6 per cent of GDP, or some S$2.7 billion. The official estimate had been for a primary deficit of S$7.3 billion, but in their report, the Fitch team pointed to "the track record of the Government outperforming its estimates".

The GST will be a key piece of the funding equation. While Mr Heng has said the GST will go up to 9 per cent after 2021, Tay Hong Beng, head of tax for KPMG Singapore, told BT that one development to watch out for in Budget 2019 is whether the minister will be more specific about the timing.

Mizuho's Mr Varathan said a two-point GST increase could raise its share of revenue by four percentage points, from 15.6 per cent of Budget 2018 revenues, not counting NIRC. "But this is not for FY2019," he added.

As the workforce ages, there is an increasing focus on GST as a more stable source of revenue, said Harvey Koenig, enterprise incentives advisory partner at KPMG Singapore.

"GST is less affected by cyclical swings, compared with income taxes, and its tax base is less affected by an ageing population. The question then is whether this will lead to more expensive necessities . . . and how these hardships can be addressed effectively."

Still, Selena Ling, head of treasury research and strategy at OCBC Bank, noted: "Given that 2017 and 2018 GDP growth had surprised on the upside . . . we do not expect corporate and personal income tax contributions to moderate significantly."

She noted that income tax revenues for the first nine months of 2018 were up by some 30 per cent year on year, led by corporate filers.

Low Hwee Chua, regional managing partner for tax and legal at Deloitte, said that any other taxes introduced between now and the targeted GST increase "would largely be geared towards meeting specific policy objectives", such as the war on diabetes' sugar tax.

The same goes for other sin taxes, like the corporate carbon tax and higher cigarette excise duties, which were introduced in previous Budgets.

The carbon tax is not expected to add much to national coffers, based on an initial rate of S$5 a tonne, said Mr Low, while tobacco excise duties do not contribute significantly to the Budget even with a 10 per cent hike.

But, even as observers believe that most new taxes will not be so significant, a key exception could be extending GST to e-commerce goods.

Many had expected such a move last year, only for an e-services tax regime to be unveiled instead.

Economist Tan Khay Boon, who is a senior lecturer at SIM Global Education, told BT: "Cross-border e-commerce tax is possible, as e-commerce is replacing more and more brick-and-mortar retail business, but the international legal and technical aspects of such tax collection will need to be addressed first."

Mr Varathan, calling a cross-border e-commerce tax "very likely, and sooner rather than later", said it could add up to S$2.3 billion to GST revenues. The authorities collected S$11 billion in GST in FY2017 and budgeted for S$11.4 billion in FY2018.

While Dr Tay believes that revenues from government investments will become more important to the Budget, economic watchers doubted that its share of contributions would be moved up or down sharply.

OCBC's Ms Ling noted: "Increasing the NIRC is always an option, but this has to be weighed against the formula of how high a percentage of the returns are being drawn down."

Mizuho's Mr Varathan said rising global interest rates could mean higher rates of return on global investments, so the trajectory for NIRC returns "may not be under imminent threat of being undermined by the erosion in returns at the margin".

"The ability to maintain the current framework of payout based on returns, rather than drawing down principal, has its life prolonged, all else equal," he added.

As for other tax revenue sources, Ms Ling noted that stamp duty was up by 29 per cent year on year in the first nine months of 2018, "so the impact of the latest round of cooling measures may not be so apparent yet".

The Government launched snap curbs for the real estate sector last July, as the market started frothing.

Mr Varathan added that stamp duty hikes are not an ideal tool to buffer Budget revenues: "It is meant to be a lever to cool the markets; using it to regulate revenues will at best confuse the goals and, at worst, conflict with the objectives - the upshot being that some downside variability in this revenue source must be accounted for if the property market cools further."

"Wealth taxes" have been floated (recent calls in the United States to raise the marginal income tax rate to 70 per cent suggest that the idea is catching on), but KPMG tax head Tay Hong Beng said that they already exist in the form of property taxes and Certificates of Entitlements (COEs) for car ownership.

"Any significant upward adjustments on wealth tax rates could lead to a higher cost of living permeating through the economy," he said. "Also, unless the adjustments are substantial, they are unlikely to create a significant new source of tax revenue."

But Mr Varathan added that the renewed application of estate duties, which were scrapped in 2008, could eventually fuel between 3 per cent and 5 per cent of Budget revenues "as baby boomers get set to bequeath" and private home prices keep rising.