Singapore Can Thank the Bond Market for Avoiding a Tax Increase
(Bloomberg Gadfly) -- Singaporeans have dodged the bullet of higher consumption taxes, at least for the next three years. They should thank their new BFF -- the bond market.
Finance Minister Heng Swee Keat left the goods and services tax, last raised to 7 percent in 2007, unchanged on Monday. Most commentators, including yours truly, had expected an increase after Prime Minister Lee Hsien Loong spoke last November of higher levies as ''not a matter of whether, but when.''
Instead, Heng said the GST would go up by 2 percentage points between 2021 and 2025; probably in the earlier part of that four-year window. Within a decade, the graying city-state may have to lift spending on healthcare to 3 percent of GDP from 2.2 percent now. Raising the GST will take care of most of that extra hit, buttressing Singapore’s triple-A sovereign rating.
So why delay the tax hike? One reason may be last year’s bumper S$9.6 billion ($7.3 billion) fiscal surplus, which is S$7.7 billion more than originally estimated. Such a windfall means it's hard to justify asking consumers to make sacrifices immediately. Besides, like in other developed countries, real wage growth is anemic. Now may not be a good time to administer bitter medicine.
A sensible way to raise long-term funds without burdening consumers just yet is to take advantage of rich, aging Singaporeans' need for yield — before their private bankers get them to place foolishly risky bets in an uncertain environment for global asset prices. Heng's sensible plan involves letting statutory boards and state-owned infrastructure firms sell government-guaranteed bonds.
Singapore abhors financing current expenditures by borrowing. But durable assets such as a fifth terminal at Changi Airport or high-speed train links with Malaysia will have future payoffs. This will be coupon clippers' delight; investors will get a richer menu of risk-free investment options from a government that doesn't need to sell securities to keep the lights on.
Singapore and Hong Kong, Asia’s two city economies, take policy cues from each other. The Chinese territory, which will present its budget on Feb. 28, has no GST. Yet Hong Kong has no dearth of revenue. If anything, Chief Executive Carrie Lam is facing popular pressure to eliminate structural fiscal surpluses. So Singapore is being wise to wait a few years to make a better case for why it needs more money.
One part of Singapore's budget surplus last fiscal year came from stamp duties on property transactions. But that’s more of a cyclical boon from a housing market revival than a structural improvement. A small increase in buyers' stamp duties from Tuesday is less of a revenue-garnering measure, and more an attempt perhaps to cool developers' ardor for buying out old condominiums so they can tear them down and build new ones.
Singapore's ever-prudent government will use S$5 billion of last year's S$7.7 billion excess to pre-fund an expansion of the city's subway network. A further S$2 billion will be spent on caring for the elderly. Only S$700 million will be returned to Singaporeans as spending money.
That’s just S$300 for lower-income-earning adults. But for citizens to be getting cash from their government when they were expecting to be taxed more is a nice Chinese New Year double bonus. Not many countries in the world can boast of such happy outcomes.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.
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