SINGAPORE – In his Budget round-up speech on Friday (Feb 28), Deputy Prime Minister Heng Swee Keat set out in detail why the planned goods and services (GST) tax hike cannot be delayed or dropped entirely.
First, the money is needed to fund upcoming spending, he said, especially in the area of healthcare, as Singapore’s ageing population means demand for it will grow.
Such spending benefits all Singaporeans, so it is fair that everyone bears some part of the costs, Mr Heng said.
“This is about all of us taking shared responsibility to pay for our needs and our society’s needs, and sharing in the effort to provide for them,” he added.
At the same time, the $6 billion Assurance Package and permanent GST voucher scheme ensures that lower-income households will pay less than those who are well-off.
He added that GST is only one way to meet Singapore’s needs, and that the Government will continue to adjust income and wealth taxes to raise revenue.
This is the full text of what Mr Heng said about the GST hike, which will take place between 2022 to 2025:
“Nobody likes taxes, not even ministers for finance. As a government, our approach is to tax lightly, so that people can keep most of what they earn, and so that they can decide how best to spend it for themselves and for their families.
But there are many critical, national needs that are better met by government provision, through taxes.
These include building up healthcare facilities and services, and providing subsidies to ensure that our healthcare needs are well taken care of. These include important priorities like mental health, which Ms Anthea Ong spoke about passionately, and which will be discussed further during the COS (the debates on each ministry’s budget). I agree with her that good mental health is a foundation for well-being and resilience, and we have already started including this as part of our work on Human Potential that I have added to our national R&D budget.
These include developing good and affordable pre-school services and education, to give all children, including our children with special needs, a good start in life and the best chance for success, regardless of background. These include building up the SAF and Home Team to protect our way of life in an era of emerging external, digital, and terrorist threats.
These are all issues that many of us in this House care deeply about, and made eloquent pitches for the Government to spend more on.
There must also be a role for the Government to redistribute resources, in the right way, so that everyone shares in the fruits of progress. Our way is to do this through schemes that enhance the capability of our people – through investments in education, healthcare, and the provision of housing, as well as schemes to mitigate inequality, like Workfare and Silver Support.
The big shift in public expenditure in the next decade will be in healthcare spending. It will grow significantly as our population ages… Over the past two decades, our healthcare expenditure has grown rapidly. In 2000, Government spending on healthcare was about 0.7 per cent of GDP. By 2015, it had tripled to about 2.1 per cent of our GDP.
This additional spending has gone towards significant improvements in healthcare accessibility and affordability. We have introduced new schemes such as MediShield Life, and expanded Chas (Community Health Assist Scheme) to cover all Singaporeans for many chronic conditions. Since 2010, we have opened or expanded eight hospitals. We have built two new polyclinics and redeveloped three existing ones.
The spending is not just about infrastructure. For every hospital, the capital expenditure that we put in, the operating expenditure is even more. Healthcare spending is not just about treating the sick. It is also about giving our seniors a better quality of life.
The number of cataract operations per year on seniors increased from around 10,000 in 2000, to almost 30,000 last year. Such procedures were less common in the past, because people did not live as long as they do today to need them.
And because of advances in medical sciences, previously incurable diseases, like cancer, can be better managed, and patients can continue to live for more years with good quality of life. The number of citizens aged 80 and above has almost doubled, from 63,000 in 2009 to 112,000 in 2019, and will increase further.
Going forward, healthcare spending will continue to grow significantly. So while this is a very good thing that our people are living longer, we must be prepared that we will have to spend more on healthcare.
We expect public healthcare spending to grow by around one percentage point of GDP over the 15 years from 2015 to 2030. This is, in fact, less than the average increase projected in the OECD (Organisation for Economic Cooperation and Development) countries, partly because of our efforts to keep healthcare costs sustainable, and because Singaporeans have increasingly adopted healthier lifestyles. But our healthcare spending may rise by more than this one percentage point, if medical costs rise throughout the world, and we do not bring problems like obesity and diabetes under control.
As Mr Lim Biow Chuan said, Singaporeans must understand that increased spending on healthcare must come from somewhere.
Some have wondered if we can spend less, or spend more efficiently. Indeed, it is not just about how much we spend, but how well we spend. Today, we achieve good outcomes at a lower cost than many other countries.
In health, we have the highest life expectancy in the world – almost 85 years – but still spend less of our GDP compared to other countries… In fact, former World Bank President Jim Yong Kim said that it was “stunning” that Singapore had achieved its current outcomes despite relatively low spending.
Similarly, for education, our 15-year-olds do well in international indices of educational achievement, like the Pisa test, despite Singapore spending less than other countries. We are able to achieve this only because of a whole-of-society effort.
On the Government’s part, we have carefully designed our education and healthcare systems, to deliver good services, in a cost-effective manner. We have dedicated and passionate educators who believe in developing every child to their fullest potential. We have committed healthcare professionals who believe in delivering the best care to all Singaporeans.
There is strong support for Singaporean families from community groups and social service agencies. And Singaporeans themselves play an important role, in taking responsibility for their own learning and health.
We are always looking for ways to improve outcomes in a cost-effective manner. Minister Lawrence Wong will elaborate on some of these efforts during MOF’s COS.
But efficiency savings will never be enough to fully offset the growth in healthcare spending as the population ages and medical sciences improve. Efficiency savings can only mitigate it. To believe otherwise is wishful thinking.
Ms Foo Mee Har shared that some Singaporeans have questioned the need to raise revenues to meet the expenditures I mentioned, pointing at surpluses seen in this term of government.
But our healthcare spending needs are not one-off needs. They are recurrent needs – meaning that these needs will be there year after year. In fact, growing year after year.
We need to fund them using recurrent revenues, not one-off surpluses seen in this term of Government, which arose from an unexpected rally in global financial markets, and the unexpected buoyancy in the property market.
We cannot hope to keep on being so pleasantly surprised. Things can very quickly swing in the opposite direction, as we have seen from the Covid-19 outbreak. The outbreak reminds us why we need to plan ahead to raise revenues. We must ensure that we have enough resources to meet our people’s needs, driven by structural factors. Otherwise, we will find ourselves short and have to raise taxes or cut spending in difficult times, precisely when businesses and people need a boost.
Planning ahead entails being honest with ourselves and with citizens, and having the discipline to raise revenues in a timely manner.
Yet even among those who agree in principle on the need to raise taxes, some have asked: “Why GST?”
As I have explained before, a broad-based tax like the GST is an appropriate and responsible way to pay for major societal needs like healthcare spending. Such spending benefits all Singaporeans, and so it is fair for everyone to bear some part of the costs.
This is about all of us taking shared responsibility to pay for our needs and our society’s needs, and sharing in the effort to provide for them. It is at the same time a Singapore-style GST that comes with offsets to ensure that those with lower incomes pay much less than those who are well off.
In fact, at the individual level, many Singaporeans are willing to chip in to meet these needs.
In my conversations with my constituents, I have asked if they would be willing to contribute just 20 cents more out of $10 that they spend a day, if this would help to ensure that their healthcare needs and those of their parents were adequately taken care of. Many were willing to accept this small cost for peace of mind.
The compact does not change when we project it to the national level. This is ultimately about us collectively chipping in to look after the healthcare needs of our families. Each generation must pay for its own spending.
Ms Foo Mee Har and some others have asked if we should raise income and wealth taxes, instead of GST. In fact, we have been doing so in recent years.
In 2010, we made our property tax regime progressive, by introducing higher tax rates on owner-occupied residential properties with higher Annual Values. We enhanced the progressivity of our property tax system in 2013, with higher property tax rates for higher-value homes and non-owner occupied residential properties.
In 2015, we raised the top marginal personal income tax rate from 20 per cent to 22 per cent. The following year, we introduced a cap on personal income tax relief to make our regime more progressive.
In 2018, we raised the Buyer’s Stamp Duty rate for residential properties in excess of $1 million in value.
In all this time, when we were raising income and wealth taxes to support the country’s growing expenditure, the GST rate remained at 7 per cent. The last time we raised it was in 2007, more than 10 years ago.
But we should bear in mind that there is a limit to raising income taxes. If we keep raising income taxes, it will eventually hurt middle-class Singaporeans, who presently pay very light income taxes. It will also risk losing our ability to attract talent and keep our own talents.
As Ms Tin Pei Ling said, “talents beget talents, there is a virtuous cycle to this”. It is important to have a critical mass of talent in Singapore to create jobs and economic vibrancy, which will benefit Singaporeans.
That said, as important as raising the GST is, it is only one way to meet our revenue needs. An increase of two percentage points in the GST rate will provide us with additional revenue of almost 0.7 per cent of GDP per year. But the increase in annual government healthcare spending alone that I mentioned already exceeds this amount of additional revenue.
So we will continue to adjust our income and wealth taxes, to raise revenue in a progressive and fair manner.
As Ms Foo Mee Har pointed out, we should keep international tax developments in mind as we review these taxes. Likewise, we have to bear such developments in mind for corporate income tax.
As Mr Cedric Foo and Mr Henry Kwek noted, there are ongoing international discussions to revise tax rules under the Base Erosion and Profit Shifting project. Hub economies with small markets like Singapore stand to lose corporate income tax revenue if the new rules are adopted. This is because the new rules allocate taxes to where the customers are, rather than where the underlying economic activity is conducted.
Businesses are highly mobile in today’s global economy. Companies, especially multinationals, have the flexibility to relocate their businesses out of Singapore to elsewhere. Singaporeans may lose their jobs… We therefore need to strike a fine balance between our corporate income tax rate and economic competitiveness.
Ultimately, how much we spend determines how much we collectively have to pay in the form of taxes. This chart shows the standard GST or value added tax rates that other jurisdictions adopt, compared with our future rate of 9 per cent.
Among the Nordics, for example, the Value Added Tax rates are as high as 25 per cent. They also have top personal income tax rates as high as over 50 per cent. They have accepted higher taxes as the price for their higher social spending.
Even as we seek to keep the GST rate low, we have to make trade-offs as we increase our spending for our healthcare and other needs. After raising the GST to 9 per cent, it will still be lower than the average rate in Asia, and less than half of the average rate in OECD countries today.
Many countries in the region and elsewhere have standard GST rates that exceed 9 per cent. Even Saudi Arabia, a country with huge oil reserves, is carefully planning ahead, and introduced a 5 per cent Value Added Tax from 2018.
Now let me address concerns raised about the impact of the GST hike on the lower-income, and its impact on cost of living.
In designing our fiscal system, we have always sought to achieve a fair and progressive balance, where the better-off contribute more, and the lower-income receive more support. This overall philosophy is a key consideration in how we design the GST, and how we will implement the GST hike.
This is why I have announced an Assurance Package to cushion the increase for all Singaporeans, when the revised GST rate kicks in by 2025. This provides a bigger and thicker cushion to the lower- and middle-income, including many seniors.
The package effectively delays the impact of the GST increase for the majority of Singaporean households for at least five years. For lower-income Singaporeans, the offset will be even higher – and hence, there is effectively no increase for them for 10 years.
There have been questions over the logic of raising GST and providing a $6 billion Assurance Package for GST, and whether we can just delay or not even increase the GST rate at all. Delaying the GST increase is not the same as raising the GST and providing offsets. This is because of the design of our system, and the resulting incidence of the GST burden.
Today, we flow part of the GST revenue back in the form of a GST Voucher that gives more to those who need it most, particularly the lower-income and retiree households. This is a permanent part of our system, and will be enhanced when the GST hike takes place.
The GST Voucher reduces the net GST borne by lower- and middle-income households. Net GST is the amount of GST borne by each household, after accounting for the GST Voucher they receive.
With the GST Voucher, the bottom 40 per cent of resident households are estimated to account for less than 10 per cent of the net GST borne by all households and individuals. On the other hand, a significant part of the net GST is borne by foreigners and higher-income households.
Mr Liang Eng Hwa asked what proportion of the GST is borne by this group. Foreigners residing in Singapore, tourists, and the top 20 per cent of resident households are estimated to account for over 60 per cent of the net GST borne by all households and individuals. This is after taking into account GST refunded under the Tourist Refund Scheme for goods bought here for consumption abroad.
This is partly because foreigners do not benefit from the GST Voucher and offsets, which are available only to Singaporean households. When we eventually increase the GST rate to 9 per cent, foreigners pay the higher rate immediately. In contrast, Singaporeans receive offsets to cushion the impact, through both the permanent GST Voucher and the Assurance Package.
All in, the GST increase, implemented together with the Assurance Package will achieve different objectives. Most importantly, we delay the impact of the increase on most Singaporeans, by five years or more, and even longer for the lower income. We can start collecting revenue from foreigners residing in Singapore and tourists. And our businesses make the changes to their IT systems only once.
The GST is only one part of our fiscal system. When you look at the system of taxes and benefits as a whole, it is a progressive one.
Those who are better off contribute more. The top 10 per cent of taxpayers pay about 80 per cent of our personal income tax revenue… lower- and middle-income households receive proportionately more benefits than the taxes they pay, whereas higher income groups contribute a far higher share of taxes than the share of benefits they receive.
Let me summarise what I have explained in three points:
First, we care for fellow Singaporeans and want to support them, especially in healthcare. To fund this spending, we need to raise the GST.
Second, we all take collective responsibility to look after one another. Raising the GST, a broad-based tax, to meet a broad-based need is a sustainable approach.
Third, we ensure that we are fair when the GST is raised. Through the Assurance Package, we will effectively delay the increase for almost all Singaporeans by at least five years; and over and above the transitional support, the permanent GST Voucher will further help the lower- and middle-income.”
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