Singapore to tax and spend through global headwinds

Singapore to tax and spend through global headwinds

SINGAPORE – Finance Minister Lawrence Wong expects “positive but slower” growth in Singapore this year due to high inflation and a slowing global economy, headwinds the city-state hopes to address through an expansionary budget designed to help households and businesses.

Unveiling a S$104 billion (US$78.4 billion) spending plan in parliament on February 14, Wong said Singaporeans will have to brace themselves for “a period of relatively higher inflation” that would remain elevated in the city-state at least for the first half of this year.

Singapore’s headline inflation rate reached a more than decade-high of 6.1% in 2022, up significantly from 2.3% a year earlier.

Wong, who is also deputy premier and heir apparent to Prime Minister Lee Hsien Loong, stressed that while the economy has recovered to pre-pandemic levels, the country’s fiscal position remains tight, compelling the government to step up efforts to trim its budget deficit and raise revenue while pursuing a more targeted approach to aiding lower-income earners.

In what he previously described as his “Valentine’s Day present” to Singaporeans, Wong announced a slew of assistance measures including a S$3 billion ($2.26 billion) boost in subsidies to lower-income households to offset a higher goods-and-services tax (GST). He also announced higher taxes for multinational companies and on high-value properties and cars.

Despite galloping inflation, Singapore raised its GST from 7% to 8% in January, the first hike since 2007. Wong reiterated in his first budget address since last year being designated Singapore’s leader-in-waiting the government’s plan to hike the GST again to 9% in January 2024, to shore up revenues and finance higher government spending.

The Finance Ministry published a report last week that projected government spending would reach between 19% to 20% of gross domestic product (GDP) by 2026 to 2030, up from around 18.5% at present.

The report projected rising healthcare costs for Singapore’s rapidly aging population and infrastructure upgrades would drive future national expenditures.  

Singapore’s Finance Minister Lawrence Wong is navigating choppy economic waters. Image: Wikimedia

A higher GST and other tax changes were therefore “necessary to close the funding gap,” said the ministry. Wong, however, said government aid totaling S$9.6 billion ($7.2 billion) after a S$3 billion top-up would offset all the spending increases lower-income households face due to inflation and the GST hike while “substantially covering” higher costs for middle-income households.

“The enhancements and generous handouts to the lower income and working middle class will help cushion and dull the impact from the higher GST in the lead up to the next general election, which is due by November 2025,” said senior economists Chua Hak Bin and Lee Ju Ye of Maybank Kim Eng Research in a research note reviewed by Asia Times.

The GST’s implementation, widely viewed as a political bitter pill, had initially been planned for 2021 but was delayed for two years due to the Covid-19 pandemic. Experts and observers generally agree that any further deferment of the planned increase to 9% in 2024 is unlikely, even if economic conditions in 2023 are difficult.

“It does not appear likely that the GST hike will be deferred – and should the economic situation prove more challenging than anticipated, the government has many tools available – other than deferring the GST increase – to deal with that scenario,” said Cheryl Chan, senior vice-president for capital markets at digital securities exchange ADDX.

The budget, which includes various support measures for mothers, young families and retirees, is narrower than last year’s S$107 billion ($80 billion) plan but marks Singapore’s second consecutive deficit.

Authorities expect a deficit of S$2 billion instead of the initially forecasted deficit of S$3 billion, or 0.5% of GDP, for 2022 and a narrower deficit of S$0.4 billion, or 0.1% of GDP, for 2023.

Wong remarked that the city-state’s fiscal position is “appropriate for the projected economic conditions this year,” citing risks to growth including worsening tensions between the United States and China, the potential for an escalation of the war in Ukraine, the possibility of a new Covid-19 variant and slowing major economies that could tip the world into recession.

“Whether or when these events will happen cannot be predicted with certainty. But we must prepare ourselves for these risks and be ready to respond to them,” said Wong during his budget address. “We will therefore develop drawer plans so that we have the ability and resources to take swift action should these downside scenarios materialize.”

Singapore’s bellwether economy is projected to grow as slow as 0.5% to 2.5% this year. The economy expanded 3.6% in 2022, well below a revised 8.9% recorded for 2021. The city-state’s 2023 core inflation, which excludes private road transport and accommodation costs, is forecast at 3.5% to 4.5%, while headline inflation is expected to remain elevated at 5.5% to 6.5%.

Prices are on the rise in the import-dependent city-state. Image: Facebook

“We do not have much influence over this global inflation picture. But our best strategy to cope with inflation is to make ourselves more productive and competitive – so that our workers earn more,” said Wong, who unveiled a S$4 billion top-up toward national productivity and tax deductions for research and development, along with funding to help local companies build their capabilities.

Aligning itself with the Organization for Economic Cooperation and Development’s (OECD) international framework for reforming tax rules, Singapore will also implement a domestic top-up tax raising its effective tax rate for multinationals to 15% starting in 2025, Wong said. The framework aims to ensure that large companies pay a minimum level of tax in each jurisdiction where they operate.

Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, said the budget “definitely helps with the cost of living issues while not abandoning the need for fiscal prudence – the latter is reflected in a modest deficit position planned… and emphasized in the adjustments in so-called wealth taxes as well as the emphasis on reserves as insurance.”

Describing Singapore’s financial reserves as a “key strategic asset,” Wong said state funds drawn for pandemic-related support measures over the last three years allowed the country to respond quickly without falling into debt, in contrast to other governments that “largely financed their additional spending by borrowing which will eventually have to be repaid by future generations.”

Wong said the total expected draw on Singapore’s past reserves, which estimates put at over S$1 trillion (US$750 billion) though the holdings are not publicly disclosed to guard against speculation, stood at S$40 billion ($29.9 billion) for the three financial years of 2020 to 2022, much less than the S$52 billion (US$38.9 billion) initially sought at the pandemic’s onset.

A general view shows Boat Quay in Singapore on May 19, 2021, as the country increased restrictions over concerns about a rise in the number of Covid-19 cases. Photo: AFP / Roslan Rahman

Singapore last tapped its national reserves in 2009 to support the economy through the global financial crisis with a drawdown of S$4 billion, which Wong noted was returned after two years. Today, the city-state is “in a different position” and is therefore “highly unlikely” to be able to put back what was drawn from its reserves, Wong said.

The government is constitutionally required to keep a balanced budget over its term of office, which ends in 2025, meaning that any deficits in one year must be balanced by surpluses. Despite two consecutive budget deficits, economists expect the current administration to make up for the shortfall within the next two budgets, particularly with increased revenue from tax hikes.

“It may be somewhat challenging to balance the budget over the current term of government since another year of deficit is planned for financial year 2023. Although the past reserves drawdown need not be returned, there is still a sizeable shortfall for the last few years. So, the onus may be on [the] financial year 2024 budget,” OCBC’s Ling told Asia Times.

Follow Nile Bowie on Twitter at @NileBowie