Why Singapore Should Raise GST To 9% As Early As Possible

If there is one thing that sets Singapore apart from any country in the world, it is the way it is funded. No other nation has accomplished so much, having so little.

The small city-state is known for its low-tax, business-friendly environment, but few wonder how this is possible.

The common idea adopted by free market fanatics is that a favorable tax environment stimulates business activity and provides increased inputs to the national budget even at lower tax rates, but this is only partially true in that case.

Indeed, businesses do very well in Singapore, but the country is also surprisingly generous to its audiences. It subsidizes all important areas of human life: housing, health, education, public transport, while benefiting from an advanced army at the same time.

The only reason it can afford so much is its decades-long prudent policy of not spending beyond its means and setting aside budget surpluses in national reserves which are continually invested.

Today, half of the long-term expected returns from these reserves can be put back into the budget each year.

Contribution to net return on investments
Image credit: Ministry of Finance

Introduced in 2008, the contribution to net return on investment (NIRC) has now grown so much that it is the main source of revenue for the budget in 2021.

It accounts for a whopping 20 percent of all inflows – or S $ 19.56 billion – of the S $ 96.16 billion the government has available to the government this year.

In other words, it is greater than any single tax source.

If the NIRC did not exist, the government would have to more than double corporate tax rates, or triple the personal income tax rates, or triple the GST rate to 20%. 100 or more, that is, no one would try to avoid those high obligations (which is likely when taxes get too high).

Thanks to its sound financial management, Singapore does not have to consider raising its GST to 20 percent, which would be similar to VAT rates in Europe.

Instead, it brings it to just a modest 9%, down from 7% currently.

But why does the government not even have to raise the GST in the first place?

Singapore may be very well governed, but it is not immune to demographic changes.

Its society is aging and the proportion of older people will only increase, increasing the pressure on the provision of health services and financial assistance in retirement.

There are also significant infrastructure investment needs in the coming decades, such as new MRT lines, the continued expansion of the port, Changi Airport, the development of new housing estates and the redevelopment of aging cities of HDB – all as the working-age population gradually shrinks in the 21st century.

For Singapore to stay as rich as it is, it needs to find more money. It can do this by raising taxes or by drawing on reserves. The latter, however, is much more expensive.

The Covid-19 pandemic has only accelerated this need, driving an estimated S $ 50 billion hole in reserves, which now need to be fixed.

Indeed, a significant drop would hurt future NIRC returns, losing the country billions of dollars in annual revenue in an already uncertain future.

gst singapore
Image Credit: Joshua Lee via Mothership

Let’s put it in perspective. Increasing the GST from 7 to 9 percent is expected to initially provide an additional $ 3.2 billion to the budget.

If Singapore chose to dip more into its reserves (as some have proposed) instead of raising the tax, it would gradually eat away at the base of its future returns on investment.

We know that GIC is earning about 5.5% annual return over a 20-year period, which means it almost triples the money it manages every two decades.

Using this as a benchmark, we can calculate that every S $ 3.2 billion taken out of reserves to avoid a GST hike could cost the country nearly S $ 10 billion after 20 years and S $ 16 billion after 30. years. It is for each year.

* $ 3.2 billion invested at an annual rate of 5.5% becomes respectively 9.33 and 15.98 billion dollars after 20 and 30 years

Cumulatively, the loss of reserves after 30 years could reach nearly S $ 400 billion if economic growth is taken into account. This is how much lower national reserves would be by 2050 if the GST were not increased (this is the impact of compound interest on Singapore’s reserve investments).

For reference, building a single MRT line costs around S $ 20-25 billion.

Isn’t the GST regressive and hurting the poor more?

At this point, some people may raise a frequently mentioned problem: the GST is regressive in nature. This means that the rich pay a proportionately smaller share of their income than the poor.

This is true, but it is also very misleading as most of the money would still be paid by the rich, who spend much more than any average person.

Yes, in proportion to their income, the percentage would be smaller. However, it is not a tax on income, but on consumption.

Every time they buy a new car, a luxury handbag, or book a suite at a five-star hotel, they are putting thousands of dollars into the budget with just one purchase – more than any average resident over the course. of a year.

gst voucher singapore
Image Credit: Gov.sg

At the same time, the government has the means to give tax breaks to the needy in the form of GST vouchers, which reduces the burden on the poorest in a targeted manner.

Pay less today to avoid paying more in the future

No one likes to raise taxes, but in the exceptional case of Singapore, increasing the sales tax should actually have wide public support.

There are two reasons for this:

  1. It’s still pretty low compared to rates around the world.
  2. The sooner it is lifted, the faster the country’s reserves can grow (or recover in post-Covid reality), protecting everyone from a much bigger tax hike later. There’s a reason VAT rates in Europe and most OECD countries are around or above 20 percent (and have continued to rise in recent years), and I don’t think so. not that anyone in Singapore would want to find themselves in a similar situation.
OECD tax database - OECD
Canada levies additional taxes at state level / Source: OECD

The priority is to protect and even increase reserves, as the NIRC is expected to continue providing an increasing share of revenue to the national budget.

As long as this pace is maintained, taxation should remain stable in the future, even as society ages.

This is unlike any other country in the world, where taxes are typically raised in desperate attempts to fill the holes caused by budget deficits and are used to finance current spending.

In Singapore, a higher GST helps protect national reserves, allowing their faster accumulation and profitable investment over the long term so that they can continue to generate progressively higher returns – and the country continues to benefit from its environment. low tax regardless of demographic changes and the future economy. and political challenges.

Featured Image Credit: Paul Wan & Co.

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Jothi Venkat

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