By announcing the GST increase early, the Government is giving “ample notice” to citizens and businesses, and is being “honest and upfront” about Singapore’s national needs and setting out what needs to be done, Finance Minister Heng Swee Keat said in Parliament on Thursday (Mar 1).
Rounding off the Budget debate in Parliament, Mr Heng addressed questions from Members of Parliament on the timing of the GST increase.
He pointed out that in planning Singapore’s finances, the Government takes the “long view”, where it seeks to understand major trends holistically, and how they might affect Singaporeans.
“We seek to understand major trends holistically, and how they might affect Singaporeans,” he said. “We assess carefully what we need to do in response, and how we should find the resources to support our plans.
“This is how we had determined that we will need to raise GST sometime in the period from 2021 to 2025.”
Mr Heng added that just as the decision to raise GST was not made lightly, the Government will exercise care in deciding the timing of its implementation. “Before we move to raise the GST, we will carefully assess the prevailing economic conditions as well as our needs at that point.”
RAISING TAXES: FUNDING “BROAD-BASED, RECURRENT NEEDS”
In explaining the rationale for the increase, Mr Heng also pointed out that the Government should not shy away from addressing the need for taxes, where it sees areas of collective need that can be better met by Government provision. This, he said, includes areas like healthcare, supporting the elderly and retirees, investing in people through preschools and SkillsFuture, and strengthening Singapore’s security.
“Many members in this House have fought for the Government to do more in these areas,” he said. “But we should also consider the costs and how to fund them.
“Looking ahead, we have needs that occur year after year. The responsible way for us to fund such spending is to raise taxes.”
Each generation, he said, should strive to pay for its own spending through sustainable means, instead of drawing down more than is prudent from the reserves, or by borrowing and passing on the cost of current spending to future generations.
“In particular, for the broad-based needs that I have mentioned, a broad-based tax like the GST is appropriate.”
Mr Heng also addressed questions on how the GST increase is sized, relative to Singapore’s needs.
He explained that the 2 percentage point increase in GST rate is expected to raise revenues worth about 0.7 per cent of GDP per annum. This estimated amount is before the amount needed to fund the enhanced GST Voucher is accounted for.
But expenditure drivers like healthcare, security and preschools already exceed this amount, he said. “These are serious commitments that we must budget for, and there are risks that overall spending could rise further.”
“So the 2 percentage point GST increase will not fully cover our expenditure needs, but only make the fiscal gap more manageable, in conjunction with other measures to manage expenditure,” he explained. “It is thus the prudent and responsible approach to raise GST in good time, instead of hoping for expenditure to fall.”
He added that the Government is mindful of the impact of tax changes on households, particularly the lower-income ones, and will help them to adjust while maintaining a “fair and progressive system of taxes and transfers.”
Mr Heng also pointed out that when looking at the overall balance of taxes and transfers, lower- and middle-income households receive significantly more benefits from transfers than what they pay in taxes.
The middle-income group, he said, gets S$2 in benefits for every dollar of tax they pay, while the lower-income group gets about S$4.
He added that when GST is raised, the permanent GST Voucher scheme will also be enhanced, to provide more help to lower-income households and seniors. “We will also implement a transitional offset package, with lower- and middle-income households receiving more support, to help them adjust.”
FUTURE GST RATE OF 9 PER CENT “NOT HIGH BY INTERNATIONAL STANDARDS”
Mr Heng also stressed that the GST increase is not expected to impact Singapore’s competitiveness significantly, noting that the future GST rate of 9 per cent is “not high by international standards”.
“The OECD average is 19 per cent,” he said. “So our new rate is less than half of that. Among countries in the region, many others have GST standard rates that exceed 9 per cent, he said.
Some countries are also contemplating raising GST, he added, pointing out that Japan plans to raise its consumption tax rate from 8 per cent to 10 per cent in October 2019.
“In summary, we have taken a principled approach to meet the general population’s future needs through a broad-based GST increase, while ensuring that our overall system of taxes and transfers remains fair and progressive, and is supportive of growth.”