Assoc Prof Jamus Jerome Lim (Sengkang): Mr Speaker, in my speech, I wish to explain why raising GST is a bad idea at this point in time, how it will also be bad for working families and what we can do as alternatives to raising GST to meet our fiscal needs.
Minister Wong began his speech by painting a cautiously optimistic picture of both Singapore’s as well as the global economy. We grew by 7.6% last year, exceeding even the upper bound of MTI’s forecast. Unemployment also plunged to 3.2%, close to pre-COVID-19 levels. And exports, the traditional engine of growth for our economy, expanded by around 12%. With growth, employment and trade figures strong, there is some justification for a renewed sense of confidence as we emerge from the pandemic.
But the economic picture is not all peaches and roses. In January, inflation clocked in at 4% compared to prices a year ago and the highest prices in almost a decade. Higher prices have been exacerbated by an overall increase in the cost of living in the city, which has already been rated as one of the most expensive in the world. And tailwinds from the generous fiscal stimulus as well as the favourable external environment will fade further. Growth, accordingly, is expected to fall to around half that of last year.
It therefore strikes me as premature to be contemplating any form of tightening in the stance of fiscal policy at this time. While the removal of wage support for all but the most hard hit sectors of the economy was prudent and economically sound, going in the other direction of making fiscal policies more contractionary takes a sensible argument to an absurd conclusion. Doing so would introduce unnecessary frictions into what is still a nascent recovery. It runs the risk of shooting ourselves in the foot, of scoring an own goal.
But this is precisely what will occur with an increase in our Goods and Services Tax. The example of Japan is prescient here. Japan applied consumption tax hikes – their equivalent of the GST – three times in recent history: first in 1997, then in 2014 and subsequently in 2019.
The first two times, GDP collapsed and the economy promptly went into a recession. Inflation also jumped. What is worst, the subsequent collapse in output meant that the tax increase itself failed to produce sufficient revenue to justify its increase. The most recent time was also accompanied by a recession, although this time, the effects were exacerbated by the onset of COVID-19.
While the most recent Omicron variant has turned out to be less detrimental to economic performance than earlier ones, this episode is a reminder to us that a GST hike would rob us of the precious opportunity to revive support for the economy if, knock on wood, some unforeseen Pi or Rho variant – and I understand I am showing off my very limited knowledge of the Greek alphabet here – were to emerge.
In Singapore, we last hiked GST in 2007. This did not trigger a recession the following year. The economy eked out a 1.1% growth rate in 2008. But it nevertheless represented a sharp drop in activity compared to 7.8% the year before.
Back then, we were helped by the fact that on both years, global growth remained in positive territory. This time round, the global environment may be less favourable. The International Monetary Fund forecasts a slowing of world GDP growth from an anticipated 4.4% this year, to just 2% in 2023 and 1.6% in 2024. Thus, global growth will be slowing just as the burden of an increase GST will be kicking in.
A hike in GST is unarguably a contractionary fiscal policy that could offset what had hitherto been a very healthy consumption and investment growth over 2021. The private sector, by anticipating the anticipated tax changes and the need to save more, could further scale back on spending today.
A GST hike is also particularly ill-timed because it holds the potential to stoke already elevated inflation. While the direction of inflation in the future is anybody’s guess – and economists have a particularly dismal track record of predicting price dynamics; one that would make a weather forecaster blush – it would not be surprising if inflation remains elevated through till year end: supply chain constraints have not resolved as quickly as previously anticipated; energy prices are high and could rise more in response to geopolitical tensions and the likelihood of global sanctions; labour markets are tightening, spurred by the global great resignation and lying flat movements. Indeed, MAS expects as much, having raised its latest forecast of inflation to the 2.5-3.5% range.
Moreover, this state of affairs may even become a more lasting fixture. There is a risk that inflation expectations have become unmoored from the traditional 2% health by advanced economies worldwide and is now permanently higher by up to half a percentage point, compared to prior the pandemic. And if this turns out to be the reality, then rolling out a GST hike at this time will only add fuel to the inflation flame, which is already starting to burn uncomfortably hot.
It is for this reason that any delay of the hike, were it to occur, is critical, as opposed to the historical pattern of rolling out increases in July. Doing so in a staggered fashion – 1% in 2023 and another in 2024 – will certainly cushion the impact. And this measured approach is echoed by economists and observers, and SMEs have also expressed their relief about the delay.
But the key question, Mr Speaker, here that remains is this: will the Government stand ready to potentially re-examine the timing with a view toward an even more significant delay should macroeconomic conditions remain unfavourable for a tax hike come 2023 and 2024?
Should the Government proceed with a tax hike at the pre-announced dates, will they complement the hike with a justification based on the contemporaneous economic situation?
But why raise GST at all? The reason provided by MOF is that our revenue needs have risen, especially with regard to providing healthcare in a rapidly ageing population. There is no doubt that we should do more to take care of the elderly among us – the Merdeka and Pioneer Generations that have contributed so much to bringing Singapore to where it is today. As well as generations that will enter their twilight years in the future.
My concern, Mr Speaker, is whether GST is the ideal instrument for doing so. On its face, GST fulfills many of the criteria economists traditionally look for, in optimal public finance. It is efficient because taxing all of consumption usually does not distort spending behaviour compared to taxing income or other taxes specific to certain goods and services. It is broad-based, meaning that it can raise significant revenue across a large population. And it is simple. Unlike income, we do not need to futz around with appropriate measurements and exemptions. You just pay a fixed fraction of what you buy, period.
While this is precisely why we do not rely on GST alone to raise income, there are also some problems. It is generally sound to diversify the Government’s revenue stream as opposed to relying on narrow forms of taxation, more recent research has questioned whether consumption taxes are truly more efficient, especially if we relax some of the standard assumptions. But perhaps, most importantly, most people believe that it is actually easier to ensure that income taxes are progressive, that is, those who are better able to afford a higher tax burden, pay more. The GST is a flat tax rate applied to all purchases of goods and services, which hits lower-income households disproportionately more. In and of itself, it is therefore, regressive.
The Government’s solution to addressing regressivity has been to pair GST with a voucher system, where cash rebates of a certain amount albeit not matched directly to actual spending, are issued to lower-income households. This transfer can indeed be progressive and it may be the case that the overall tax system, even after raising GST , will remain progressive. But an increase in GST will, in and of itself, reduce progressivity, which means we end up less progressive than compared to the status quo.
I therefore welcome the Ministry to clarify if the plan to raise GST while expanding the scope of the permanent GST Voucher Scheme would on net for the nation as a whole be more or less progressive, relative to a scenario of not increasing GST at all.
This is because we all understand that the generous $6.6 billion Assurance Package, while certainly welcome during the transitional period, will not last forever. After all, the earnings of lower-income groups have been eroded comparatively more as a result of the pandemic. Prices are rising everywhere and furthermore, support payments via the COVID-19 Recovery Grants will expire by year end.
I have focused much of my remarks on the importance of supporting the less fortunate, not just because of some heightened notion of equity. Many studies have pointed out pandemic-induced changes will have lasting effects on incomes, savings, educational attainment and other socio-economic outcomes for poorer households.
Mr Speaker, the poor were already relatively behind, prior to the pandemic. As a society, we can ill afford to have them fall further behind. It will be an affront to our sense of equality, of opportunity and genuine meritocracy as well as a stain on the morals and values we hold as a society.
Finally, it is worth recognising that the permanent GST-V Scheme leaves important gaps for certain groups that fall beyond the remit of the programme. Income threshold for qualifying for GST-V will exclude those above the 40% percentile of earners. This means that those earning more than around $2,800 a month – a decent but hardly comfortable salary – will face the full force of the GST increase once the transition period concludes. While cut-offs have to occur somewhere, it is worth remembering that many households in this income bracket are also in the sandwiched generation, who face expenses of supporting their aged and retired parents, as well as their young, school-going children.
One alternative – but admittedly more complicated – scheme for enhancing the progressivity of the GST is to consider GST where progressivity is built right in. This means the purchase of goods and services that the wealthy are much more likely to purchase – fancy cars, high-end properties, first class tickets and luxury experiences – be subject to a higher rate of taxation.
The Government has in this Budget and over the past year taken some significant steps in this direction. An increase in the Additional Buyer’s Stamp Duty by 5% and 10% for the second and third properties is welcome, if a little blunt, since it does not entail any associated minimum value, and PR and foreign purchasers, confront even steeper rates.
The Budget further sharply increases property taxes for homes with annual value exceeding $30,000. It remains to be evaluated whether these additional taxes successfully target the wealthy, or whether much like the ill-fated estate tax, they end up affecting mainly upper-middle and marginally higher-income households while the ultra-rich retained their ability to shield themselves from progressive taxation. It will also be valuable to revisit in a few years’ time whether such taxes move the needle in terms of freezing and reversing rising income and wealth inequality in Singapore.
The other question that inevitably arises is, are there no alternatives to a GST hike.
Mr Speaker, I will submit that there are. My colleagues at the Workers’ Party have in the spirit of providing credible alternatives work out several additional levers, where if deployed, could stave off stave off the need to increase GST. We have worked out the revenue possibilities for each of these levers which could amount to close to the $3.6 billion expected in revenue from a GST hike.
One lever which we call, say, the corporate tax lever accepts the broad premise of the OECD-led effort to implement a global minimum corporate tax rate of 15% known as BEPS. We assume a reasonable loss of corporate and personal income taxes arising from the agreement of 20% and 10% respectively and full compliance of the corporate tax rate to the new global minimum for multinational corporations, which amounts to about the two-thirds increase in the effective rate from current levels. However, we allow small and medium enterprises to retain their current 3% effective rate. This could generate $3.45 billion.
Another lever which we call the wealth tax lever puts asset taxation at the front and centre of revenue generation. We adopt the Government’s current threshold of 10 years required for land leases to be classified as permanent above which land sales receipt must be fully channelled into reserves and extract just the first nine years for recurrent expenditure, while redirecting the remainder into reserves. We also incorporate the Government’s proposed property tax changes expected to generate an additional $380 million. And finally, we follow the net wealth tiers that had been previously proposed in this House to derive revenue from this channel under very modest recovery assumptions and this could generate $3.7 billion.
A third lever, which is the reserves contribution lever, the Workers’ Party had spoken at length about this possibility before. To reiterate, we can reduce the share of reserves interest income that we send straight back to reserves currently held at 50%, to a lower but absolutely still respectable 40%. Importantly, this does not constitute a draw on the reserves stock. The level of reserves will not go down, but merely represents a reduction in the rate of accumulation of reserves and this alone could generate $4.31 billion.
The final level, which we call the externalities lever, entails increasing so-called sin taxes – those levied on gambling, alcohol and tobacco – as well as carbon-generating activities for which we apply an increase to $80 dollars a tonne but channel only half the revenues towards mitigating the transition and encouraging the adoption of green technologies. We limit the increases in each of these channels to no more than 28%, which is what the GST increase will entail. And these additional increases will then allow us to increase the effective corporate tax rate to just 8% and this would generate $3.65 billion.
Of course, I would be the first to admit that the Government, with its army of Ministry analysts and superior access to data and information, would be able to fault some or all of the assumptions underlying these scenarios.
What then is the purpose of this exercise? First, it is to put on the table the tantalising possibility that we can in fact choose not to raise GST by adjusting some of the levers available to us. We have deliberately worked out the math behind each of these alternatives such that any single one of these levers will be sufficient to meet the revenue needs that raising GST will offer.
Second, we will also show that even when we mix and match among the proposals to craft a revenue mix that we can accept – after all the math suggests that any single one of the levers will be sufficient to fill the GST hole, much less alternative permutations and combinations of them.
And third, and perhaps most importantly, is to underscore our desire to engage in good faith debate on whether there are genuine options available to us in meeting the revenue hole, other than raising GST. The most thing for us is to cease stating “I wish”, but to start stating “I will”. We must instead consider nothing impossible and treat possibilities as probabilities.
Allow me to end with a few quick reflections on several aspects of this year’s Budget.
In last year’s Committee of Supply debate, I flagged the importance of elevating our national R&D expenditures to a share closer to that of most innovative nations in the world. I am happy to hear that the Government will continue to increase public R&D spending but I will only add three points.
First, more can be done given how we still lag the OECD average for total R&D spending; although, of course, we need to ensure that our outcomes match our inputs. Second, we should ideally direct this towards downstream activities that the part of R&D and, hence, the stated goal of elevating local firm R&D is the right one. And third, the guiding principles of the BEPS agreement means that one acceptable way to lower the effective tax rate for our SMEs and to continue attracting foreign investment is to do so through R&D tax credits.
I am, likewise, heartened to hear of the continued efforts to improve the lot of our low-wage workers. The Workers’ Party has repeatedly called for a roll-out of the minimum wage for Singaporeans and the Local Qualifying Salary (LQS) effectively institutes such a floor for a significant majority of Singaporeans.
Progressive Wage Model (PWM) is being rolled out to additional sectors, but I am left to wonder if the Ministry has evaluated how many workers would still remain uncovered by either the LQS or PWM stipulations. If there is room to increase the LQS to an amount of $1,600, which roughly corresponds to a take-home salary of $1,300.
Finally, I believe that the Small Business Recovery Grant targeted at SMEs in the sectors hardest hit by COVID-19 is a good example of how fiscal policies should be timely targeted and temporary. Simplifying the qualification process for this application, however, would surely be welcome.
Mr Speaker, there is much to like in this Budget which has embedded many elements that I believe will help us improve both efficiency as well as equity in our economy. But stubborn reliance on raising the GST in spite of alternative, more progressive forms of revenue generation is the fundamental reason why I cannot lend my support.
28 February 2022