A fiscally sound but politically risky Budget

By Chua Mui Hoong

This could have been a pure sugar Budget with its huge surplus and SG Bonus for all adult Singaporeans. Instead, Finance Minister Heng Swee Keat coated the sugar with a strong lacing of lemon.

The goods and services tax (GST) will be raised from 7 per cent to 9 per cent “sometime in the future from 2021 to 2025”. Some analysts had forecast a hike to 10 per cent over two years, so the impending hike is gentler and slower than expected. But it still carries quite a sting.

The delay in introducing the GST hike might be due to the unexpected injection of $4.9 billion from the Monetary Authority of Singapore’s (MAS) net profit, propelling the Budget into a healthy surplus of $9.6 billion when $1.91 billion was forecast.

The headline figures will cause many Singaporeans to ask: Why raise GST when Singapore’s Budget nearly always ends with a surplus?

The short answer is that long-term spending will go up, and more tax revenue sources need to be found.

The extra funds from MAS or the higher-than-expected revenue from stamp duties this year cannot be relied on always. A more permanent way to raise taxes has to be found – and the GST, currently at a relatively low 7 per cent, is a natural target.

Meanwhile, Singapore’s people and infrastructure are both ageing, and spending needs are rising. Healthcare spending will overtake education in the next decade. It has already more than doubled since FY2011, to $10.2 billion in FY2018.

Singapore aims to spend an extra $3.6 billion a year to raise healthcare spending from 2.2 per cent to 3 per cent of gross domestic product over the next decade. Where will that extra $3.6 billion or 0.8 percentage points of GDP come from? In part from the GST hike, expected to raise revenue by 0.7 per cent of GDP.

In fact, budgeting 3 per cent of GDP on healthcare is low by global standards. I think it is conservative, if Singaporeans want to pay less out of pocket and demand that a bigger share come from the state. Spending may go beyond 3 per cent of GDP – and that money has to be allocated for.

Already, Singapore is spending more than it collects in operating tax revenue each year. The books are balanced by adding half of investment income from past reserves, which raised about $14 billion in recent years. That is more than the contribution from either corporate or personal income taxes or the GST.

Raising the GST to 9 per cent will add about $3 billion to the coffers each year.

Every little bit will help.

The 2018 Budget is fiscally sound, putting the nation on a stronger footing for the future. But it is also politically risky.

Mr Heng, who delivered the Budget with aplomb, is tipped as first among equals in the next 4G, or fourth generation, of political leaders. He has ensured some political wiggle room by having a window for the GST hike.

Still, it takes a confident political leader to announce a major tax hike that may come in three years’ time – which will be just after the next election, expected around 2020. People will forget good news three years after an announcement, but the anticipation of pain tends to intensify as the dreaded start date approaches.

On the other hand, in committing to a hike to 9 per cent, the Government is also trying to make things more palatable. It is hard to predict the full political impact, but for now, it is a no-brainer that a GST hike will have a political cost.

That Mr Heng and his colleagues proceeded with the announcement anyway suggests they have confidence in their ability to explain why the move is necessary, as well as fiscal armour to cushion the impact via the usual vouchers and offsets.

Whether voters will buy the sugar-lemon pill remains to be seen. The GST hike will be a litmus test of the bond between the people and a future generation of leaders in the next few years.

The clear commitment to raise the GST suggests a continuation of two aspects of the Singapore political leadership. The first is that the future team of leaders will continue the fiscal prudence of the past, in case anyone doubted it.

The second is that the new team will not duck from unpopular decisions. Some may see the early announcement as indicative of the 4G leaders piggy-backing on the popularity of the current Prime Minister and his Cabinet, and relying on today’s leaders to win the ground.

But as Mr Heng is the one to announce the hikes, it is clear that it is a decision he and the future team of leaders will have to carry, not the current Cabinet. By announcing the hikes now, they have guaranteed that the GST will be a dominant issue in the next election.

But the GST hikes and Budget 2018 should not be viewed only through the political lens. More important is the fiscal viewpoint.

As Mr Heng took pains to stress, this year’s Budget aims to lay the foundation for the next decade. Raising the GST is part of that move.

The other important innovation also aims to put future Budgets on a firm, and more sustainable, footing. This is the move for statutory boards and government-owned companies to borrow for critical national infrastructure projects and for the Government to guarantee some of those loans.

Statutory boards like HDB have long borrowed or issued bonds for projects, so that alone is not novel. What is different is to guarantee the loans. This will require the concurrence of the elected president and his advisers, as it means committing the Government to use its reserves to guarantee loans that may stretch into decades.

This is a practical measure to smoothen cash flow. An infrastructure project like an airport terminal requires huge sums to be spent upfront, but can generate revenue later.

Rather than spend huge sums to build it and draw down on today’s surpluses, the Government allows the agency to borrow from the market, and uses its reserves to guarantee the loan to get lower interest rates. Future revenue from the project, such as an airport terminal, can then be used for interest payments on the loan.

As Mr Heng notes, such a borrowing arrangement will “help distribute the share of funding more equitably across generations”. You do not use up today’s money to pay for something that will generate revenue in 20 years’ time. You borrow today for that long-term project, and use future revenue to pay off the loan.

As Singapore ages, issues of equity and fairness – across income and social groups, and across generations – will become potential causes of conflict. This Budget tries to prepare for that more uncertain future by putting in place two major planks in the fiscal system: A GST hike, and a way to use reserves to facilitate borrowing for long-term infrastructure projects.



  1. $2.6 billion in and $100 million out. then why the premium is so high
    should reduce the premium to help.mote to the scheme rather than making such an enormous profit. shit

  2. Aging population? Come on lets get back to the 60-70s. Who is that so called elite to say STOP at 2? Who? If not this, we would have this aging issue right? So 70% pls wake your brain up n think. No leaders will proclaim themselves as elites and are able to foresee the future. 1 example is far too many!

  3. Same old story year in year out… save save save for future generations, for future needs, for rainy weather etc.. meanwhile hoarding billions billions billions.
    Meanwhile, the poor, the aged, the sick, the unemployed are suffering from higher cost of living, higher medical costs, higher housing costs, higher utilities costs… what are the surplus billions for?
    YetThe damn #@#@#%$#s\ff#####ing government will not hesitate to spend lavishly on concrete icons like Jewel!

  4. Again keep on talking only ! Including those 30 plus at forums. When news of raising tax, what a big noise coming, worried about income tax raise. Now that it is GST, again the same x noise. Whether it is regressive, please read all the economic research on it. Look also at what’s done around the world. How to determine whether it is regressive or not. Don’t just talk. Interview economists before writing or commenting. Don’t armchair

  5. Actually, the impending gst hike in 2021 and its announcement now rather than later, are both PAP’s response to its hands being tied and a play of its deft hands on influencing the population’s psyche.

    The PAP government cannot raise taxes prior to the next GE simply because doing so will renege on its GE 2015 election campaign promise of not raising taxes in the current term.

    And announcing it now rather than during the next GE hustings will take the sting off any opposition’s attempt to turn tax issues into a significant election issue.

    It is also surely not a coincidence that PAP government has announced the 2021 GST hike together with the one-off bonus.

    Hands tied, huge budget surplus at its disposal, the PAP government has timed its move perfectly.

    Such mastery.

  6. $10B surplus. If that was put in a FD for 1 year. I think the interest alone should be able to cover the bonus given out. Net loss to government is almost negligible.

  7. Let’s see how many vendors will increase their prices with this news of pending GST increase(s)…then increase them AGAIN when the GST actually increases citing their “actual” cost increase

  8. Please retrench the ministers and there are too many kueh lapis ministers
    Ang Boa for age 21 onwards is a very clear sign to bribe the voters who have the sovereign rights to fire them like Aljunied GRC has fired George Yeo Yong Boon, even though he is very talented but residents have no choice as we need to be justified!
    Raising the retirement age, but our government did not set an example to hire those above 60 years old and they expect the private sectors to hire senior citizens
    How about setting a policy on minimum wage for citizens born in Singapore ???

  9. Surplus is to fill up their pockets and to gamble globally. If really care for citizens, all this surplus has to be return or share back EQUALLY OR FAIRLY. Not earning $100,give back $1. $99 keep.

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