Raise GST or use more from returns from investments?

By February 23, 2018Current

TL;DR – Why not just use more from our Net Income Returns?

One of the most interesting announcements that Minister Heng made in this year’s Budget is that GST will be raised from 7% to 9% some time between 2021 and 2025. It’s unusual for a government to announce “bad” news like that so far in advance considering that it’s likely some people will be unhappy and end up voting against the government.

Indranee Rajah, Senior Minister of State (SMS) for Finance, explained that this will give businesses and Singaporeans a chance to prepare for any changes and plan their finances. The Government also wanted to be upfront and transparent with Singaporeans, and to let them know what the future landscape will look like.

Why not use more from NIR?

But of course, it still begs the question of whether we even need to raise GST. Aren’t there other ways? Economist and Associate Dean of the Lee Kuan Yew School of Public Policy (LKYSPP) suggested that we can use a greater proportion of our Net Income Returns (NIR). Currently we use 50% of our NIR. Our NIRC now funds a significant portion of our Budget. For example, it contributes 17% of our 2016 Budget:

Singapore’s Revenue for 2016

Mr Low suggested that we can use 60% instead. He said:

“If the spending limit was raised to 60 percent, presumably the NIRC this year would be just over $19 billion. The additional $3 billion every year, increasing at the rate at which the reserves are growing, is almost exactly what the 2 percentage point increase in GST would yield—in perpetuity.”

But the assumptions may not hold

So why don’t we just raise the NIRC? SMS Indranee explained that the suggestion to use a greater proportion of our NIR instead of raising GST will only work if we make 4 assumptions:

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ASSUMPTION 1: An additional 10% of NIR (from 50% to 60%) will always give you the same amount as a 2% GST increase

ASSUMPTION 2: The amount of returns generated by our reserves will always be the same. However,  even with the NIR framework (which essentially smooths out volatility by taking a longer term expected return), long term investment returns can still vary or fall. Just look at the volatility in the stock recently, where the US stock markets plunged and the Dow Jones saw the largest one-day point drop ever. So we can never eliminate investment risk.

ASSUMPTION 3: We will never have to draw on the principal amount of reserves on which the returns are generated. But we had to draw on the principal back in 2009 during the global financial crisis.

ASSUMPTION 4: We can get the same returns on a principal amount that is growing at a slower rate. Again, not a safe assumption. When we use more, we save less, which in turn means less is reinvested. That means we will have less to spend over the long term. This is short term gain, at the expense of future gain.

SMS Indranee emphasised:

“The greater the percentage of NIR we use, the more the risks are magnified.”

So, to prevent over-relying on the NIR, we have to ensure a continuing and sustainable source of revenue to fund our future needs. Hence the need to raise GST.

Patience is a virtue then?

Mr Low agreed that whether using more from the NIR or raising GST depends on how much you value the present relative to the future, i.e. your discount rate. He explained:

“The more you value the present, the higher your discount rate and the more you will favour accumulating at a slower rate. You will thus support a higher spending limit. Conversely, if you’re very patient and you value the future more, you will have a lower discount rate and you will not support my suggestion.”

It seems that our government are more patient, and favour accumulating our wealth at a faster rate and hence chose not to use a bigger proportion of the NIR.

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Minister Heng said:

“We looked at all the different taxes that we could change, even non-tax measures that we could take. Each of these has its pluses and minuses and when we looked at the overall scheme of things, we decided that at this stage the GST is still the most appropriate.”

Of course, it is important to bear in mind the purpose of raising GST. SMS Indranee highlighted that when the GST is raised, it will be used for the benefit of Singaporeans, who will receive it back in the form of healthcare, infrastructure, security and education. That’s something that Mr Low pointed out too. He argued that increases in GST need to be justified in terms of a social protection system that is more broad-based, and even universal in some important respects.

There’s still a few more years before GST is expected to be raised.

Let’s see how the government articulates a social policy vision, and a new social compact, that would perhaps persuade the majority of Singaporeans to accept a tax increase.
 

 

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Jake Koh

Author Jake Koh

Recovering sushi addict, I'm a man of mystery and power, whose power is exceeded only by his mystery.

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