Singapore can pay for higher social spending without hiking income taxes for the time being: analysts

SINGAPORE’S ambitious social agenda can continue to be funded without drastic new tax moves – at least in the near future, watchers have told The Business Times. But if new policies require more revenue, possible sources include further goods and services tax (GST) hikes and property-related taxes.

Budget 2023 – which beefs up support for parents, seniors, and lower-income workers – is expected to run a deficit of about S$0.4 billion, or 0.1 per cent of gross domestic product (GDP).

Watchers do not expect personal and corporate income tax hikes to be announced in 2024, especially given last year’s personal income tax increases and the two-step hike in the GST rate.

Citing the modest size of the Budget deficit, Tan Ching Khee, tax services partner at Ernst & Young Solutions, remarked that “the current higher spending needs appear to be sufficiently met” by tax and investment income.

Similarly, Deloitte tax partner Chua Kong Ping expects that tax measures in Budget 2022 and Budget 2023 “will help to balance the rising government spending in the medium term”.

David Sandison, practice leader and tax head at Grant Thornton, does not expect either personal or corporate income tax rate to be raised in the next few years, until after the foreign investment effect of global tax changes – in line with the global Base Erosion and Profit Shifting 2.0 initiative – is clearer.

Singapore’s approach is that “growing the pie, and taking the same proportionate slice of it, is far preferable to taking an increasingly larger slice from a pie that is shrinking”, he said.

Still, Singapore is constitutionally required to deliver a balanced Budget over each term of government, and “the structural increase of social spending does make it more challenging” to meet this goal, UOB senior economist Alvin Liew and economist Ho Woei Chen said in a joint e-mail to BT.

Tax sources to tap

Corporate income tax is the largest source of tax revenue for Singapore, but watchers see limited room for raising the rate.

Said Chua: “It is unlikely that corporate tax rates will be raised to fund increased government spending because Singapore has traditionally used tax incentives as one of the methods to develop new sectors and attract foreign investment into Singapore.”

Sandison said that “increasing corporate rates would also go against a strong and successful historical trend of rate reductions”, especially as there has been “no apparent shortage of tax revenues” at 17 per cent.

Instead, the government may turn to other taxes to raise more revenue – with expanded wealth-related taxes being an increasingly attractive option.

The Budget featured some such measures for high-end properties and cars, though HSBC analysts framed these latest changes as “largely tweaks”, in a note on Tuesday (Feb 14).

Budget 2023 raised the marginal Buyer’s Stamp Duty for higher-value properties, in a move expected to yield S$500 million more in revenue each year, and increased the Additional Registration Fee on cars with an Open Market Value above S$40,000.

HSBC economist Yun Liu told BT that she expects Singapore to continue taxing property and luxury cars as a form of wealth tax. Still, Liew and Ho from UOB said that additional revenue from wealth-related taxes is “likely to be smaller and more volatile”.

Separately, the excise duty on tobacco products went up by 15 per cent. But Chua noted that the estimated additional S$100 million in annual revenue represents just 0.1 per cent of projected operating revenue – making this more of a signal to consumers than a significant source of funds.

The need for fresh sources of revenue may become more pressing. As Finance Minister Lawrence Wong noted in his Budget speech, current expenditure projections “have not taken into account additional policy moves that the government may make in the future”.

“If there are any such further increases in spending, they will need to be funded by additional revenues to ensure a balanced budget over the medium term,” he said.

Chua warned that potential increases in spending would be difficult to fund with current operating revenue and the net investment returns contribution from national investments.

In that case, “the possibility of the government having to raise the GST rate above 9 per cent beyond 2024 cannot be ruled out, though we believe this is unlikely in the near term”, he said.

The UOB team agreed that the next GST rate increase will not be so soon, but added that it could be raised to 10 per cent before 2030 “as spending trends higher and outpaces the revenue growth from the current sources”.

They wrote: “Hiking the GST rate will have less impact on Singapore’s competitiveness in attracting investments and talents than if the corporate or personal income tax rates were to be raised.”

Analysts are also keeping an eye on the possibility of a capital gains tax on property sales.

“This could be at a special introductory flat rate – but only on second properties,” said Sandison, who suggested that such a tax might be introduced after the next general election, which must be held by November 2025. “Not only does this tax wealth... but it protects people who are buying a place to live in, rather than park money.”

Even as social spending grows, policymakers are adjusting the scope of the tax system to improve equity. Notably, the Working Mother’s Child Relief (WMCR) is shifting to a fixed-dollar sum, from a share of earned income before. The change will benefit lower- to middle-income working mothers.

“Previously, the more you earned, the bigger the absolute benefit,” Sandison noted. “The changes help level the playing field between income levels. It also reduces the overall burden on government.”

Deloitte’s Chua added that the changes to the WMCR may be “minor in comparison to the overall fiscal position”, but represent a policy focus on achieving “better social outcomes with less spending”.