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Singapore Budget 2018: On the cusp of higher taxes?

Singapore's FY2017 Budget surplus of S$5.82 billion (1.4 per cent of GDP) and our estimate of an FY2018 surplus of S$5.4 billion (1.3 per cent of GDP) suggest that there is no immediate urgency to tweak the tax regime to boost tax receipts. But the golden rule of balancing the books through each term of government still applies.

AFTER a week of exaggerated market volatility, it seems rather mundane to talk about taxes, but the truth is that taxation affects a much wider swathe of the population.

Singapore's FY2017 Budget surplus of S$5.82 billion (1.4 per cent of GDP) and our estimate of an FY2018 surplus of S$5.4 billion (1.3 per cent of GDP) suggest that there is no immediate urgency to tweak the tax regime to boost tax receipts. But the golden rule of balancing the books through each term of government still applies.

The starting point of any discussion about taxes has to be government expenditures. While total revenue has grown by a compound annual growth rate (CAGR) of 11.3 per cent from 2007 to 2016, expenditures have grown even faster at 16.6 per cent CAGR over the same period.

The fastest-growing operating expenditure items over the last decade were infocomm and media (68 per cent CAGR), manpower (51.2 per cent CAGR) and health (32.3 per cent CAGR). The growth in the top three tax revenue contributors - namely corporate income tax, personal income tax and Goods and Services Tax (GST) - pale somewhat in comparison at 8 per cent, 13.1 per cent and 12.4 per cent CAGR for the last decade.

To recap, Singapore's recent Budgets have catered for big-ticket items, setting aside S$4.5 billion for the Industry Transformation Programme in FY2016, S$5 billion for the SkillsFuture Programme, S$1.1 billion for the Special Employment Credit, S$4.7 billion for MediShield Life, S$8 billion for the Pioneer Generation Package and S$3.6 billion for the Wage Credit Scheme, among others. Let's not forget the Resilience Package in January 2009 after the Global Financial Crisis, which cost $20.5 billion and required the President's concurrence to draw down from reserves.

Upcoming infrastructure projects that will require substantial investment include Changi Airport's Terminal 5, transforming Tuas into a mega sea port, almost doubling the train network by 2030, and constructing the high-speed rail between Jurong East and Kuala Lumpur. These investments are costly but crucial, the Ministry of Finance argues, and would serve to boost the economy, create jobs and raise Singaporeans' quality of life.

As a result, Singapore's government expenditure has increased from 11.9 per cent of GDP back in 2007 to 17.1 per cent by 2016. Interestingly, this is still significantly below the Nordic countries whose government expenditures average around 50 per cent of GDP, but is closer to Japan (18.1 per cent of GDP) and slightly higher than our Asean neighbours such as Malaysia (16.6 per cent of GDP) and Thailand (15.3 per cent of GDP).

Perhaps more tellingly, our government expenditure growth of 7.7 per cent CAGR from 2012 to 2016 makes Singapore the fastest growing ahead of the Philippines, Indonesia, South Korea, Taiwan, Thailand and Malaysia.

Given our ageing demographic challenges, as well as the need to continually upgrade the economic infrastructure in the Singapore economy, the revenue pressures may continue to rise over time.

Nonetheless, there is still the need to maintain, if not sharpen, Singapore's global tax competitiveness while maintaining a progressive and business-friendly tax regime domestically.

Let us focus on the elephant in the room, which is GST. There has been much market speculation about impending GST hikes. The rationale is as follows: It's been more than a decade since the GST was raised from 5 per cent to 7 per cent in July 2007. The prior moves were to 4 per cent in 2003 and 5 per cent in 2004.

Given the current climate where the US has just slashed its corporate income tax from 35 per cent to 22 per cent, it may be directionally wrong to hike corporate tax rates at this juncture. Moreover, adjustments to the top personal income tax brackets were just effected from Year of Assessment 2017. By default, this could leave the GST as a prime candidate to be adjusted at the upcoming 2018 Budget.

The low-lying fruit is to actually tax e-commerce. Senior Minister of State for Law and Finance Indranee Rajah has said the Singapore government is studying the best way to implement an e-commerce tax: "It's certainly something we would like to do, but we have to be careful about how we do it".

Given that Singapore's e-commerce sales could hit S$10 billion by 2020, according to BMI Research, it looks like almost a done deal to tax e-commerce as soon as possible.

Of greater interest is the overall GST rate. Singapore's GST, at 7 per cent, is relatively low compared to 8 per cent in Japan and 10 per cent in South Korea, Australia and Indonesia. Therefore, a 1-2 percentage point hike in GST in the coming years is conceivable.

Assuming a tapered and gradual increase of 1 percentage point this year and another 1 percentage point next year, each 1 percentage point hike would potentially lift tax revenue by around S$1.7 billion. This potentially means that GST revenue could contribute around 20 per cent of total tax receipts, up from 16.1 per cent in FY2017, if the tax hikes materialise. This is not insignificant.

But a GST hike would also impact inflation, potentially lifting the 2018 headline inflation forecast from 0.8 per cent to around 1.8 per cent year-on-year.

Coupled with the recovery in crude oil prices and stabilisation in the domestic labour market, incipient inflation pressures in the pipeline could warrant the Monetary Authority of Singapore pre-emptively tightening its monetary policy from its currently neutral stance earlier rather than later.

The offset would be that a broader tax revenue base would allow for compensating GST relief measures such as GST vouchers for lower-income households in order to counter the regressive nature of higher GST. This would probably make the somewhat bitter pill slightly more palatable to swallow for the man on the street.

But the most convincing argument would be to simply point at the bigger picture. Any short-term pain from higher GST would allow for more policy flexibility in ensuring Singapore's economic competitiveness and sustainable growth in the medium term.

The writer is head of treasury research & strategy at OCBC Bank.

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