The Limits of Social Spending

By Abdul Shariff Aboo Kassim

Singapore’s changing economic and demographic landscapes are contributing to the complexity of Singaporeans’ social needs.

The city-state’s economic transformation – from one that is dependent on foreign direct investment and capital and labour inputs to one that is driven by productivity and innovation, local enterprises and private initiatives – has caused significant shifts in the skill sets valued in the job market. Moreover, the emerging geopolitical and economic risks, and the onset of disruptive technologies are set to undermine job security.

Employability would thus be increasingly dependent on remaining relevant through skills upgrading or acquiring new skills altogether to move from a sunset industry to a sunrise one. Invariably, there will be groups who will progress slower than others as they face steeper learning curves or struggle to adapt to new labour market conditions, thus making them vulnerable socioeconomically.

The challenges of entering a new economic phase are compounded by problems that are long foreseen: Singapore’s aging population and declining birth rates, and the infrastructure to accommodate immigration to make up for these, which brings with it financial and social costs.

The above are examples of developments that put upward pressure on social spending. Finance Minister Heng Swee Keat revealed in March 2017 that the Government’s social expenditure in areas such as housing, healthcare, education and community development almost tripled, hitting S$34 billion in financial year 2016, up from S$12.7 billion a decade earlier. The rising social spending prompted analysts to question whether it is sustainable under the current tax regime, arguing that more taxes would be needed to fund social spending.

An article published on government website, Factually, on 13 August 2015, titled “Why doesn’t the Government increase social spending?” clarified that “any increase in spending will have to be funded by taxpayers. Instead, our approach targets help where it is needed, without imposing a heavy tax burden on all”. It added that the lower tax burden enables Singaporeans to take home more of their paycheck every month, and save more.

During Economic Society of Singapore’s SG50 Distinguished Lecture on 14 August 2015, Deputy Prime Minister and then-Finance Minister Tharman Shanmugaratnam shed more light on this, explaining that support for the low- and middle-income groups are calibrated such that it is applied in areas which help them most. This has enabled Singapore to maintain low-taxes, as opposed to Scandinavian countries – often cited as models of progressive and advanced social policies – which impose significantly higher taxes. Mr Tharman shared that Denmark’s and Finland’s total tax burden as a percentage of GDP are 49% and 44% respectively, compared to Singapore’s 16%.

However, on 19 November 2017, speaking at the People’s Action Party’s annual convention, Prime Minister Lee Hsien Loong alluded to Mr Heng’s Budget speech in February 2017, during which the latter indicated that rapidly rising spending on healthcare and infrastructure has to be supported with “new taxes” or “higher tax rates”.

The position on social spending taken by the government just two years earlier left Singaporeans somewhat unprepared for the eventuality that taxes may be increased. Foreseeing disquiet among Singaporeans, Mr Lee said that, “well before that time comes, we have to plan ahead, explain to Singaporeans what the money is needed for, and how the money we earn and we spend will benefit everyone, young and old”.

It is unclear, at the time this article is being written, what are the taxes that would be raised or when they would be implemented. Senior Minister of State for Finance Indranee Rajah echoed Mr Lee’s concern about Singaporeans’ readiness for tax hikes. According to an interview with The Sunday Times (26 November 2017), she shared that the Government will take into account factors such as setting aside enough time for people to absorb the news, and ensuring the poor and needy have enough buffer against the impact.

Speculations among economists are rife that Goods and Services Tax (GST), last raised in 2007 from 5% to 7%, is likely to be the one. The reason is that, considering the need for Singapore’s economy to stay competitive, corporate tax is likely to remain untouched. Broad-based hikes in personal income tax rates are also unlikely as it is the Government’s plan to keep taxes progressive.

GST accounted for 15.8% of Government’s operating revenue in financial year 2016, the largest after corporate income tax (19.6%). The share of personal income tax is 15.3% of the total operating revenue.

A layperson may wonder if raising taxes is the only way to finance increasing social spending. The Net Investment Returns Contribution (NIRC) framework allows the Government to spend up to 50% of the expected long-term real returns (including capital gains) from the net assets invested by the Government Investment Corporation (GIC), the Monetary Authority of Singapore and Temasek Holdings. However, given the rate at which Government’s expenditure is outstripping its revenue – contributed to a large extent by an aging population, growing complexity of social needs and the need to develop Singapore’s infrastructure to cope with an expanding population – even this is deemed insufficient to ensure that future generations remain on a sustainable fiscal trajectory.

Singapore’s tax policies have come under scrutiny in the past, with critics seeing the republic as a tax haven or being too conservative with public spending. Oxfam International’s press release on 12 December 2016 ranked Singapore fifth in its list of “world’s worst tax haven”. The list is compiled by “assessing the extent to which countries employ the most damaging tax policies”, such as the slashing of corporate taxes as countries compete for investment. The consequence is that governments then try to balance their books by reducing public spending, for instance on healthcare and education, or by raising taxes such as value-added tax (VAT) – in Singapore’s case, GST – which it argues falls disproportionately on the poor. It described such an approach as “a reckless competition” and a “race to the bottom on corporate tax” as it aggravates social problems such as inequality and poverty.

On the issue of social spending, former Government Investment Corporation (GIC) chief economist Yeoh Lam Keong, in a Facebook post on 23 November 2017, highlighted the Government’s focus on maintaining high levels of fiscal savings for the benefit of future generations as a problem. He pointed out that Singapore’s social spending levels are much lower than OECD averages as a share of GDP for healthcare, education and social protection and questioned the need for a conservative stance on the NIRC. He argued that the 50% spending rule for NIRC is a “questionable division of investment income from official reserves and shows a strangely skewed social time preference”. A more reasonable time preference, in his view, would be to use more of the investment income for the pressing problems of the present generation, such as inadequate retirement finances, lack of universal long term or primary chronic healthcare, underspending in primary and secondary education relative to OECD norms, inadequately funded industrial policy and an underperforming public transport system. Taxes, in his view, should be raised only if found to be necessary after such measures have been adopted.

The Government has disputed Oxfam’s report, arguing that Singapore is able to keep the headline corporate tax rate competitive at 17% because it is fiscally prudent and have a diversified tax base. The Ministry of Finance elucidated that tax policies are designed to support substantive economic activities in order to create skilled jobs and build new and enduring capabilities in Singapore.

Local experts, like Mr Chester Wee of Ernst & Young Solutions, was quoted by The Straits Times (14 December 2016) as saying that “Singapore’s tax incentive programmes come with strict substance-based conditions such as headcount requirements, local business spending and value-added activities”.

On the needs of current and future generations, and NIRC, Mr Heng, in his round-up speech at the end of the Budget debate in March 2017, reiterated the Government’s responsibility to ensure sustainability by striking the right balance between current and future generations. It has spent prudently to build its reserves, and tapped on their returns judiciously. Thus, it is imperative that it remains disciplined and prudent in spending the returns of its reserves so that they continue to be a stable and sustainable source of revenue over the long term.

The prospects of paying higher GST appear inevitable. There are concerns for groups that will be affected adversely by it, mainly those from lower socioeconomic backgrounds.  Budget 2017 announced a slew of support measures to help households cope with rising living expenses amid the economic slowdown. For example, 1.3 million eligible Singaporeans were then expected to benefit from a one-off GST voucher – Cash Special Payment of up to $200. It was an addition to the regular GST Voucher – Cash.

Going forward, as the government continues to make Singapore competitive and balance government spending for current and future generations, it is essential that policies remain inclusive in the face of changing demographics, slower economic growth and increasingly complex social landscape. It is hoped that Singapore Budget 2018 will announce measures the Government will undertake to cater to the financial needs of those most affected by higher taxes.