SINGAPORE (Feb 19): Ahead of the Budget Speech on Feb 19, the market is abuzz with speculation on which taxes will be raised and which will not.

Indeed, the government itself has been hammering home the point over the past year that taxes will need to rise to fund its sharply rising expenditures to reshape the economy, as well as soaring healthcare costs as Singapore’s population ages. The need for higher taxes was a key theme of last year’s Budget Speech and Prime Minister Lee Hsien Loong’s speech at the People’s Action Party convention in November.

By 2020, one in six Singapore citizens will be aged 65 years and above; by 2030 that figure is estimated to be one in four. In FY2017, budgeted healthcare spending increased 9% to $10.7 billion, making it the third-largest expenditure item after defence and education. In an interview with The Straits Times in January, Deputy Prime Minister Tharman Shanmugaratnam said, “Healthcare is the biggest challenge for the future of social spending. It’s the fundamental reason why we need to raise more revenues.”

Another challenge for Singapore is to transform its economy to ensure that the city state remains relevant in the digital age and as the rest of Asia develops. Higher government expenditure is likely to be required to support initiatives mooted by the Committee on the Future Economy, as well as the mega infrastructure projects that are underway, such as the Tuas megaport and Changi Airport’s Terminal 5.

So, what is the best way to increase tax revenues? Is a higher Goods and Services Tax the answer? Or, should the taxman go after the rich with taxes on wealth? Should Singapore be raising taxes at all, given the huge reserves it has accumulated over the decades?

A GST hike?

Nearly everybody is expecting a hike in GST, and by at least two percentage points. It is estimated that every percentage point hike in GST raises $1.6 billion to $1.8 billion in revenue.

As it is, GST is already a significant contributor to the government’s operating revenue. In FY2017, GST collection amounted to $11.1 billion, up from $10.3 billion the year before. That amounted to 24% of the total taxes collected.

However, although GST is said to be a form of taxation that is efficient to administer, the tax is itself regressive, hitting lower-income households harder. “GST is quite a blunt tool and it will hurt the lower income groups more,” says Credit Suisse economist Michael Wan. “They tend to spend more on food, staples and so on, and will be disproportionately impacted.” Wan adds that a GST hike could have negative impacts. Every percentage point increase will likely raise inflation by about 0.5% as well as cut private consumption by 0.3% to 0.5%.

There is also some concern about the impact that a higher GST might have on consumption spending. “Private consumption is still weak, and any premature hike in GST threatens to kill a recovery even before it can take hold,” warn economists from BofA Merrill Lynch. According to a survey by market research firm Blackbox Research, many people would rather the taxman target high-income earners first and polluters second.

While personal income taxes already have a progressive structure, there have been calls for higher-income groups to bear more of the tax burden through the creation of new tax brackets at the top end of the income spectrum. “There are still efficiency gains that can be achieved from corporate income taxes, and we do not rule out further increases in the top personal income tax rates,” says BofA Merrill Lynch in a Feb 5 report.

Wealth taxes

Yet, there has been talk of an even more severe targeting of higher-income groups, with taxes on wealth. Here, the options range from increasing annual property taxes to implementing a capital gains tax and reintroducing estate duties. Targeted wealth-related taxes would also serve to redistribute wealth and reduce inequality, economists say.

Critics of such taxes argue that they might drive away investment and jobs. Moreover, Singapore’s ambition of being a global wealth management centre would also be threatened. Investment advisers have pointed out that France recently had a direct wealth tax replaced. Of course, the counter-argument is that Singapore’s wealth management sector is about more than just low taxes; the country also offers political stability and rule of law.

The more cogent case against wealth taxes is that they can be difficult to implement and administer. Sanjay Uppal, CEO of financial management and advisory firm StraitsBridge Advisors, warns that it could, for instance, be onerous to determine an individual’s wealth. “How much will be spent on figuring it out, and how much will eventually be collected?”

Yet, there are some solutions to these issues. Some analysts suggest that wealth taxes could be imposed at the point when assets are monetised or transferred. And, the imposition of wider wealth taxes could be matched with adjustments to other taxes, which could reduce the risk of driving investment out of Singapore.

Wan of Credit Suisse suggests that higher taxes on owning property could be matched with reduced taxes on transactions. “You could see the government potentially reducing these transaction prices and raising property taxes, so you don’t add too many restrictions to the market, and you raise more taxes as property values rise.”

The reserve option

One other way of funding soaring spending on healthcare and social spending is to tap reserves built up over past decades. “If the government feels that, based on current revenue projections, it is not able to fund increased social spending and is looking for new sources of revenue, then its first consideration should be whether reserves should be tapped,” says Donald Low, associate dean at the Lee Kuan Yew School of Public Policy.

In a chapter in a book he co-authored, Hard Choices, published in 2014, Low argues that it is the baby boom generation — the group of people now entering or in retirement and at whom increased healthcare and social spending is targeted — that contributed the most to the accumulation of national reserves. “A significant part of our reserves is the result of fiscal surpluses generated in the 1980s and 1990s — the period when the baby boom generation was most economically productive,” he wrote. “Now that the generation that contributed the most to our reserves is entering retirement, it is only fair from an intergenerational perspective that the state reverses part of that transfer.

“To impose the fiscal burden of looking after the needs of the baby boomers onto subsequent generations in the form of higher taxes while continuing to accumulate reserves is not only unequitable but also inefficient… because continuing with a strategy of growing our reserves regardless of context implies a negative discount rate — that is, we favour the interests of a future generation more than those of the current generation… which has immediate needs.”

Singapore has, in fact, been tapping more of the investment returns of its reserves in recent years. In FY2016, Temasek Holdings was included under the so-called Net Investment Returns framework, which allows the government to spend up to 50% of its expected long-term returns. That year, NIR Contribution amounted to $14.37 billion and helped turn a $5.59 billion basic deficit to an overall surplus of $5.18 billion. The NIRC was the single largest contributor to the government coffers in both FY2016 and FY2017.

The NIR framework was implemented in 2009 to include expected long-term real returns on the government’s net assets managed by GIC and the Monetary Authority of Singapore. It was a major change from the previous Net Investment Income framework, under which the government could only spend investment income comprising dividends and interest.

Yet, should Singapore not be careful about using its reserves to fund the Budget? Should we not hold on to it for that proverbial rainy day? “But isn’t it the case that future generations are likely to be richer, for one, and, with [total fertility rate] at 1.2, the future generation is going to be a smaller generation [too]?” Low retorts. “So, we’re saving for a future generation that’s likely to be richer and almost certainly a smaller cohort than the baby boom generation. That seems like a regressive transfer of resources.”

He adds, “I think we have a social obligation to reduce inequality. In Singapore’s context, given that the baby boom generation helped to accumulate a large part of our reserves, one way of reducing inequality would be to tap the reserves to fund their needs. Another would be to introduce or increase existing wealth taxes.”

Still, other analysts do not expect the government to make more changes to the NIR framework, at least for now. “I think it’s good policy to use the good times to save up for the future,” says Wan.

Whatever the case, it does appear that managing Singapore’s budget is going to become more complicated in the future. One guiding principle is unlikely to change though — that of trying to ensure that the system is equitable. “That means those who are better off pay more of the taxes and get less benefits. Those with lower incomes pay some taxes — because everyone must contribute — but they get more of the benefits,” Tharman said in the January interview with The Straits Times. “It is the overall combination of taxes and benefits that matters in achieving a fair system.”

This story appears the latest issue of The Edge Singapore (week of Feb 19), available at newsstands now or subscribe below. Look out for news coverage of Singapore’s FY18 Budget Statement by Minister for Finance Heng Swee Keat from 3.30pm on Monday.