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Singapore still cautious on spending as structural costs rise

Kok Xinghui
Kok Xinghui3/4/2019 08:00 AM GMT+08  • 5 min read
Singapore still cautious on spending as structural costs rise
SINGAPORE (Mar 4): Singapore may have accumulated huge surpluses during the current term of government, but that does not indicate an upcoming spending spree. The surpluses will also not be used to stall an impending Goods and Services Tax (GST) hike due
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SINGAPORE (Mar 4): Singapore may have accumulated huge surpluses during the current term of government, but that does not indicate an upcoming spending spree. The surpluses will also not be used to stall an impending Goods and Services Tax (GST) hike due to happen from 2021 to 2025.

On Feb 28, in rounding up parliamentary debate on the broad fiscal principles of this year’s Budget, Finance Minister Heng Swee Keat explained that the planned increase in the GST is necessary, and reiterated the government stance on saving for a rainy day. Heng noted that while the government still had not decided on when the GST hike will happen, it would “exercise care when doing so”.

Heng was responding to a suggestion by Member of Parliament (MP) Foo Mee Har to postpone the “unpopular” GST hike and use the estimated surplus of $15 billion for fiscal wiggle room. Foo was among 55 MPs who, over three days, aired views and suggestions on the Budget, ranging from borrowing to fund infrastructure spending to climate change laws.

“The decision to raise GST was not made lightly,” Heng said. “As the government, it is our responsibility to anticipate and plan ahead for future needs. When doing so, we need to distinguish between one-off factors and underlying structural increases.” This GST hike, he added, goes towards structural increases such as in healthcare spending, preschool education and security.

Structural spending, such as that on healthcare, is also to be taken differently from spending on one-off packages, such as the Merdeka Generation Package. Heng noted that subsidies for patient bills through existing permanent schemes alone are expected to cost the government $6.1 billion this year. “This does not even include spending to enhance our healthcare facilities and to research more effective treatments,” he said. “The base of our healthcare spending is rising.”

Pointing to an Organisation for Economic Co-operation and Development paper, Heng noted that governments must raise primary revenues so they can fund rising costs without increasing public debt. OECD had estimated that governments will need additional revenues of 6.5 percentage points of GDP by 2060. The planned GST hike in Singapore will raise 0.7 percentage points of GDP.

Meanwhile, the current surplus is “unexpected”. Heng attributed most of it to “the volatilities and uncertainties in revenues and expenditures”. For example, the government had expected property stamp duty collections to be lower in FY2018 because of the additional curbs it had introduced in a bid to moderate the rise in property prices. “But the property market defied our expectations,” Heng said.

There were also surprises on the expenditure front, such as the two-year suspension of the KL-Singapore High Speed Rail project. “Forecasting is an inherently difficult exercise,” Heng said.

The finance minister also explained that the government does not spend all of the current surpluses. The Constitution mandates that the government of the day balance its numbers during its term. Budget surpluses are accumulated as current reserves and, if unused by the end of each term of the government, will be transferred into past reserves.

“We should not have the mentality of trying to spend everything that we have, before the end of each term of government,” Heng said. He pointed out how, during the 2008 global financial crisis, savings accumulated through the government’s term funded three-quarters of the $20.5 billion Resilience Package. The rest of the bill was paid for by past reserves.

“Many things could have gone wrong. We not only rode through the crisis well, but emerged stronger,” he added. “Having our reserves as a strategic asset played a key role in this. Let us not squander this strategic advantage that we have.”

The strength of the reserves also means Singaporeans have a comparatively light tax burden. Without the Net Investment Returns Contribution, which allows for up to 50% of long-term projected returns from the reserves to be used to fund the Budget, “we would have had to double our personal income tax collection or our GST collection to raise the same amount of revenues”, Heng asserted.

Indeed, it is the responsibility of the government to plan for Singapore’s long-term needs, particularly as it faces a host of challenges, many of which are beyond the city state’s control. “We plan for the long term, because we plan for Singapore to be here in the long term,” he said.

Heng explained that Singapore’s plan spans years, involving building infrastructure, preparing for climate change and charting economic growth. As such, national Budgets, released annually, should not be looked at in isolation. “One Budget builds on the foundation of earlier Budgets. We have a multi-year plan, which tackles the priorities as systemically as we can.”

The reserves are key to this long-term planning because it protects the economy, worth nearly $500 billion a year, and acts as a strategic defence “to deter parties who wish to undermine the interests of Singapore and Singaporeans”.

In that vein, the way to take care of Singaporeans for the longer term is not through “a Robin Hood style of social transfers” but through education, upgrading and reskilling workers, and generating opportunities in the economy. At the same time, there is support for those who fall behind, with the “ultimate objective [being] to give them the confidence and dignity to succeed for themselves as far as possible”.

Political observer Felix Tan, an associate lecturer at SIM Global Education, agrees that the Budget should not be looked at in isolation and that Singapore’s ability to plan for future needs was commendable.

The only item on Tan’s wish list involves having funds allocated to training people to avoid human error, particularly in cybersecurity. Pointing to recent lapses such as the SingHealth hack, he says: “No matter how great your finances are and how your fiscal policies might be, at the end of the day, there is going to be some human error [that causes problems]. How, then, does the Budget cover these issues that might arise?”

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