Singapore’s Good and Services Tax may rise by 2%, according to a report released today by DBS. According to DBS Senior Economist Irvin Seah, this projected rise in the GST will come at a time when Singapore has “registered three consecutive years (including FY17) of deficit in the primary balance, which is unprecedented.”
“Continuously widening deficits are not sustainable. This explains the need to find new sources of revenue and/or lower spending.
“The fiscal policy will become even more challenging as the population continues to age. This means social expenditure will need to rise at an even faster pace than in recent years. And there is also the need to continue to invest in infrastructure and human capital to sustain Singapore’s long-term competitiveness.
“Higher expenditure will challenge the fiscal position unless more revenue can be generated, especially given the Net Investment Returns Contribution limitations. This also explains why the government had to price scarce resources more efficiently (e.g. water price hikes), tap on new sources of tax revenues, as well as reduce operating expenditure. Beyond that, hikes in tax rates will be inevitable.”
Asserting that a GST hike is inevitable given the economic situation Singapore is presently in, Seah forecast that the chances are high that the GST will be increase by 2% at Budget 2018. This has been the norm over the past 2 cycles, he added.
The economist also postulated that the GST increase may be implemented in a staggered manner, likely over a term of two years:
“While GDP growth in recent quarters has been encouraging, the economy has just emerged from two consecutive years of slow growth. And pockets of uncertainties remain in the external environment, which could pose risks to Singapore’s economic performance in 2018. Moreover, though the labour market has bottomed, a more pronounced recovery remains visibly lacking. The job vacancy to unemployed person ratio remains below one, meaning that there are still more unemployed persons than job vacancies available in the labour market. Hence, introducing a sharp GST hike at this moment could result in a double whammy for some workers/households.
“To balance the fiscal need and the economic conditions at present, the forthcoming GST hike will likely be implemented in a staggered manner, with the 2%-pt increase to be introduced over a two-year period. This will lessen the impact on households and if combined with an effective offset package, will minimise pain to certain segments of the society.”
Seah further forecast that the GST hike could be coupled with a tightening in monetary policy by the Monetary Authority of Singapore (MAS) next year, along with an offset package of at least $4 billion “to cushion the impact on consumers, particularly on lower-income households.”
Such an offset package is expected to more than cover the projected amount of tax revenue derived from the GST hike, according to Seah.
Read the full DBS report here.