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Is S$500 billion in aggregate reserves enough or does Singapore need higher taxes?

Singapore has one of the highest savings rates in the world but an ageing population presents its own challenges and raising taxes is one way to mitigate the situation

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Singapore’s aggregate reserves is a state secret, however, analysts’ estimates place it at well over S$500 billion (US$370 billion).

Maybank Kim Eng economist Chua Hak Bin says: “It is quite remarkable that Singapore, with one of the highest saving rates in the world (at 48 per cent of gross domestic product) and fiscal reserves, still needs to increase taxes.”

A tax increase has been touted by experts as the most logical and sustainable response to Singapore’s growing spending needs.

In particular, the challenges of an ageing population will become increasingly acute in the coming years.

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Singapore, one of the fastest-ageing countries in the world, will have one in five people aged 65 and older by 2030.

Other countries mitigate these challenges by borrowing, but the Singapore government does not borrow for spending. Instead, securities are issued for reasons unrelated to the government’s fiscal needs.

Other options the government has explored include taxes on e-commerce spending, as well as wealth taxes.

But each tax comes with its own set of drawbacks.

Higher corporate taxes, for instance, would put a dent in Singapore’s economic competitiveness and the country’s ability to attract foreign investment.

Wealth taxes, on the other hand, which might range from additional property taxes to capital gains tax or even re-introducing estate taxes, could affect Singapore’s status as a major wealth management and financial hub.

Higher GST would affect lower-income households disproportionately and could also weigh on consumer sentiment and economic growth.

This means tax hikes alone will not guarantee the long-term health of the government coffers.

From some quarters, there was a question of whether it might be appropriate from a generational equity standpoint to consider drawing down on the accumulated surpluses instead of increasing taxes on current and future generations of taxpayers.

The counter-argument to this has been reiterated many times, most recently by Finance Minister Heng Swee Keat who said the reserves give Singapore long-term economic stability and also firepower to weather crises such as global financial crises.

He also noted that the reserves have been accumulated over many years as a result of prudent spending by past generations, and suggestions to tap it for Singapore’s growing spending needs should not be taken lightly.

Ultimately, the decision to tap more of the earnings from the reserves comes down to balancing the needs of current and future generations.

This in return throws up philosophical questions with no easy answers — What is Singapore saving for? And how big do the reserves actually should be?

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