The budget discussion in Parliament this month is expected to feature two much anticipated issues, namely ‘The Introduction of a Wealth Tax’ and ‘The Increase of GST from 7% to 9%.’ While the Government has maintained that the GST hike cannot be put off any longer, there are many unanswered questions as to the necessity and timing of this hike.
Why the hike?
The reason given for the hike is to fund more healthcare expenses and social services. While the intention is good, are there not better ways to fund such expenditure?
Let’s look at our annual income or returns from our reserves for a start. The current system allows for half of the investment returns on net assets from our reserves be used to supplement the budget. This is called the ‘net investment returns contribution’ or NIRC. For FY 2021, the NIRC is estimated at almost $20B, accounting for around 18% of our budget. So why shouldn’t we look at increasing the NIRC contribution instead of hiking GST during this difficult time? Would it not make more sense to free up a higher percentage or even all the interest earnings for a few years? We build reserves to help tide over rainy days. And we are now in a thunderstorm! Besides, we are not even tapping on our reserves, only leveraging on the interest earned.
Other than returns on reserves, there is also the government land sales of around $12B. Land sale on a leasehold basis constitutes a source of renewable revenue. We should seriously consider including this figure as another source of funding in the budget.
On the need to spend more, it is also imperative to scrutinize the expenditure side of the equation. If we need to spend more in one area, we should first look at where and how we can spend less. At the same time, there should be a need to tighten financial discipline and cut down on wasteful spending in government agencies and projects. Many of the grandeur showcase projects are nice to have but not essential for the well-being of our people.
This pandemic has overturned many assumptions including justification for many planned projects. It is timely to reprioritize or redirect spending and remove excesses where relevant.
From the budget planning perspective, it is also timely to move away from current budgeting practices and adopt zero-base budgeting to better control spending. Zero-base budgeting enforces the discipline to justify spending with an annual clean slate instead of using the previous year’s spending as a starting point to justify budget increases. The many lapses and wastage identified each year by the Auditor-General on the major weaknesses in the current system is a case in point.
One key area in reducing expenditure besides controlling careless spending in the public sector is to drive costs down through productivity. Our productivity efforts over the years have been disappointing. We have not achieved much in terms of productivity gains or making productivity a way of life. Up until now, it has been more of lip service than earnest pursuit of genuine productivity. There must be concrete efforts to drive productivity in the government sectors to do more with less, notwithstanding automation or digitalisation.
It is incomprehensible to justify a GST hike when many Singaporeans are still reeling from the pandemic hardship. It is akin to adding oil to fire. Inflation is rising in tandem with cost of living, despite dubious claim that the lower income group is least affected by rising cost of goods and services. The prices of everything from food to utilities, transport and energy have shot up. And inflation is expected to worsen with global shortage of goods and disruptions to the logistics chain. Slapping an increase through a GST hike can only worsen matters.
From the standpoint of economic growth, higher prices triggered by the planned GST increase will dampen spending, which in turn weakens instead of strengthen our economic recovery.
Even if GST hike were inevitable, can it not be deferred until there are clearer signs of economic recovery and stabilisation of the pandemic situation? It should be a last resort after considering other alternatives. Businesses and individuals need all the help they can get at this critical time.
In a nutshell, the case for increasing GST is hardly convincing. Even worse is to implement this at a time when rising cost of living is already putting a heavy burden on our people. Other viable alternatives should be considered. To focus on increasing revenue collection through the GST route without reining in expenditure and profligate spending, misses the forest for the trees.
The mentality of taking easy options must change. When funds are easily available through raising taxes and levies, there is little motivation to explore other options like reducing spending, cost control, cutting wastage and raising productivity. A responsible government must have the gumption to make tough choices. Also, the virtue of frugality should not be ignored!
Good policies should not create new problems. The use of coupons and subsidies to help mitigate the impact of the hike does not offer substantial relief to those in the lower income group. Rather than using short-term offsets, the GST should instead be restructured to help this group. Making GST a more progressive tax as opposed to a regressive one makes much more sense. If there are plans to introduce a wealth tax, then why not exempt essential goods and services from GST for a start and go for a higher tax for luxury consumption?
The Minister for Finance has indicated that Singaporeans will get help to manage rising cost of living. But isn’t holding off any tax increase for now a sure way to manage rising costs? And this is entirely within the control of the government.
At the end of the day, it’s all about choices and trade-offs. Hiking GST at this difficult time is a poor choice, especially when there are other alternatives available.
Singaporeans deserve better!