So we all heaved a sigh of relief that the Goods and Services Tax isn’t going up this year, or the next year or the year after. If you think about it, it would be quite silly for the G to raise the tax from the current 7 per cent when it’s just announced a massive surplus of $9.6 billion. Finance Minister Heng Swee Keat was quick to say that this surplus wasn’t a “structural’’ thing, that is, don’t expect a repeat performance every year. But it’s still so way ahead of its own projections of $1.9 billion that people will think that his ministry is very bad at forecasting or wonder if all those trial balloons about having to expand revenue streams is just so much hot air.
Then comes the SG bonus or between $100 and $300 for every adult Singaporean. You would think that a G which keeps harping about not having enough money for the future would stash this $700 million away. It’s small beer, sure, compared to the rest of the money that is going into a rail fund and to pay for Eldershield premiums. But, hey, we’ve been brought up to believe that every penny counts.
So a GST rise too soon is out of the question. If the G had gone ahead with it, you can bet that the opposition politicians will make hay of it – for breaking a promise to defer a tax rise for this decade. In fact, the time frame we’ve been given is between 2021 and 2025.
Which G in the world announces higher taxes four years in advance? They are usually secret stuff, done quickly to prevent any escape from the tax net or impact on the markets.
Does this mean that people have some wriggle room to lobby against the tax before the deadline? And how would the G cope then with such “populist’’ pressures? It is an extremely confident Government which can make plans for the next Government. Because it assumes that the ruling party will continue to be in power after the general election due by January 2021. And we don’t even know who might be leading that future Government, because the People’s Action Party 4G leaders haven’t decided.
So what will happen between now and 2021? You can bet your last dollar that you will hear these arguments:
- Just use the reserves lah. Got more than $1 trillion right? After all, the President is a former PAP MP.
- Raise the 50 per cent cap on using net investment returns; you’ve got enough MPs to muster a constitutional change.
- You added Temasek into NIR framework in 2015, cannot add another government company ah?
- Why only such a small increase on buyer’s stamp duty for people who can afford $1-million properties? Raise it further or hike up marginal income tax to get the rich to re-distribute money.
- Cut your own ministerial salaries and we can build a hospital or two.
- Already going to have carbon tax and some kind of Netflix tax. Not enough ah?
- Never mind about the GST offset package, don’t you know GST is a regressive tax? The poor will get poorer.
I suppose it’s natural. No one wants to pay more tax – or we think somebody else should pay it. Which only makes you wonder why the G wants to open a window for such attacks. The cynical would say that this is so that it can decide later NOT to raise tax and win the kudos of the people. No one really wants this particular promise kept anyway. The empathetic would say the G is giving us all time to get used to the idea and even somehow prepare ourselves (quickly go buy everything you need now!)
What is clear is that the G has some explaining to do because some of its actions and concepts seem contradictory to the layman, including myself. I ask that economists excuse me my ignorance if I put the issue this way:
We’ve always been taught to be prudent with money. The elected president is in place to make sure a government cannot anyhow, to use the popular phrase, “raid the reserves’’. (Not that we know how much we really have for that extremely rainy day). So the idea was that a government can only spend the interest from the reserves. This is how any conservative investor would behave – keep the capital protected or even guaranteed and only spend the interest income or dividend. People can grasp this idea.
Then this net investment income framework was changed in 2008 to net investment returns. So some financial gurus will calculate what is the expected long-term returns on assets from Government Investment Corporation and Monetary Authority of Singapore. These are stable entities which don’t do risky things. We hope that those gurus got their numbers right because how far into the long-term can they see? And is the president equipped with enough financial advisors to give her/his assent/dissent to the rate? But never mind. The numbers are too mind-boggling for the layman.
Then Temasek, a rather more active player, was thrown into the mix in 2015. The reason it was late in the list – it’s more difficult to come up with a way to calculate the return rate, said then Finance Minister Tharman Shanmugaratnam. It can’t escape some people’s attention that its addition was fortuitous because we would have been hard put to finance our expenditure in 2016.
I think the G would have to go back to brass tacks and explain the reserves from Ground Zero. It’s got beyond what people can grasp.
The conservative will ask: So we are actually just predicting what the long-term rate will be and then skim off half? (The G has said that is a much better way of smoothening out how much it can use every year, then having to depend on interest earned year by year. So there’s a point there.)
The less conservative will ask: Just raise the cap a bit and we get more money immediately. There’s, after all, still the rest of the money to add to the reserves. (It’s a point that’s gaining traction and even proposed by economists. The G will need to come up with a better answer on why it considers 50 per cent a magic number. And not 55 or 60, as academic Donald Low has pointed out.
Then there is the question of why the marginal income tax rate was not raised for high-income earners or some sort of wealth tax imposed to help reduce income inequality. After all, so many rich – and foreign – people settle here because they pay lower taxes than in their homeland. Singapore has even been mis-labelled a tax haven!
I figure a full answer on what high income earners give in return to society is very much needed. And it has to go beyond how they create new jobs, fund new ventures and give Singapore a cosmopolitan cast essential for a global financial centre. My hope is that the G doesn’t answer by saying that they would all be scared away if more was asked of them. This won’t be unlike the argument that we’d be raiding the nest egg if we went 100 per cent of NIR, which no one is asking for.
Here’s another concept that would be difficult for the layman to grasp: statutory boards and government-linked companies borrowing to pay for infrastructure projects. (The media can’t seem to decide if this is new or not since HDB already issues bonds to build homes.) The G paints this as an equitable way to even out who pays for projects like rail lines and airport terminals. It’s not the current generation but today’s young people who would reap the benefits – and pay for it themselves when the time comes to collect. Other governments elsewhere do it but here, in Singapore, we’ve always been told to spend within our means because we don’t know what the future holds. And not to borrow from loan sharks.
I am, of course, simplifying and magnifying some of the above but I don’t think I am exaggerating the amount of political work the G would have to do to explain Singapore’s financial position and why GST has to go up.
I can anticipate some of the responses: That the G could have just let the GST be (see points 1 and 2). But it chose to be honest with the people at the expense of losing political capital. Honesty, however, must be accompanied by more information and explanation to the people, lest they only grasp headlines and miss the context.
I suppose this is where the 4G leaders will be tested on their mettle since it is likely that they will lead the next election campaign. We’ll probably be hearing more about “trust’’ – that the G is doing the right thing.
But trust cannot be blind.