Laying the groundwork to meet S’pore’s greater needs in the long term

As Singapore’s fiscal position becomes more challenging, with expenditures exceeding revenues, it must continue to spend prudently and effectively, and grow its revenues sustainably, said Minister for Finance Heng Swee Keat as he wrapped up the Budget 2017 debate in Parliament yesterday. Below is an excerpt from his speech:

Just as we seek to protect our home and environment for our future generations, we must ensure that our finances are sustainable for the long term. Our expenditures have started to exceed our operating revenues since FY2015. The Government had in fact anticipated this and prepared early, by raising revenues ahead of our spending needs. Indeed, this is the approach this Government has always taken. We had therefore raised the Goods and Services Tax in 2007 and introduced the Net Investment Returns (NIR) framework in 2008.

In the last term of Government, we had also undertaken measures such as making our property tax rates more progressive and increasing the duties for betting, liquor and tobacco over time. In Budget 2015, we announced increases in top marginal rates for personal income tax and revisions to the NIR framework. These measures now serve us well to meet our spending needs through to the end of this decade. But beyond this decade, we can expect the fiscal situation to become more challenging, as expenditures exceed revenues in the longer term.

First, our economy is maturing. With slowing economic growth, our revenues will also grow more slowly. Second, our population is ageing rapidly, and we can expect rising expenditure needs, especially for healthcare. Third, our infrastructure needs are rising, as we seek to build new infrastructure and renew old ones to enhance our quality of life and Singapore’s economic competitiveness.

Going forward, we must continue to prepare for our greater needs in the long term by working on two fronts: Spending prudently and effectively, and growing our revenues fairly and sustainably.

Spending Prudently and Effectively

With higher spending needs, it is ever more critical to ensure that we spend within our means to get the outcomes we want. At the ministry level, we have designed our funding policies to drive agencies to operate efficiently and effectively. This year, we sought to further reinforce the importance of spending prudently and effectively, by applying a permanent 2 per cent downward adjustment to the budget caps of all Ministries and Organs of State.

This will free up resources that the Ministry of Finance can redeploy towards higher-priority requirements and projects that deliver value to citizens and businesses, such as initiatives by the Municipal Services Office. Within their adjusted budget caps, agencies will decide how to prioritise their programmes and projects, and review how they can achieve greater efficiency.

Fundamentally, we want to imbue these values of prudence and innovation in all officers in the public service: To always seek value for money and constantly strive to improve and innovate, so that we can do more — and do better — with less.

At the project level, we are tightening scrutiny of major infrastructure projects to ensure robustness of their business case and value-for-money.

We have a process today that puts large infrastructure projects (more than S$500 million), or those that are highly complex in nature, through a series of reviews before funding is approved. This process taps on a panel of senior public officers and industry practitioners, those with deep technical expertise and experience in major infrastructure development, with the aim of optimising the project’s overall design, use of space and cost-effectiveness.

At the programme level, we are designing our schemes so that subsidies are targeted at the right groups. As a general principle, we price services to recover full cost and discourage over-consumption. We then target subsidies appropriately at those in need, such as through GST Vouchers, Service and Conservancy Charges rebates, and Public Transport Vouchers. This is more progressive than under-pricing services, which implicitly subsidises all groups including the rich.

GROWING REVENUES FAIRLY AND SUSTAINABLY

Besides spending prudently and effectively, we will have to grow our revenues through new taxes or raising tax rates over time. This challenge of raising revenues for growing needs is not unique to Singapore.

If you look at many other countries, the need for more revenue to meet spending needs is a common theme that cuts across different systems. For example, Hong Kong announced at its recent budget that it would be setting up a tax policy unit to comprehensively review its tax system. One of its objectives would be, and I quote, to “explore broadening the tax base and increasing revenue, so as to ensure that adequate resources are available” to support sustainable development.

Members of Parliament Saktiandi Supaat and Yee Chia Hsing had asked how we intend to review our own tax system. I would like to assure them that we will ensure that our tax system continues to be both fair and sustainable.

First, our tax system must be fair and progressive across income groups. What this means is that those who are better off must contribute more. In recent Budgets, we have continued to make our personal income tax and property tax rates more progressive, even as we introduced or enhanced permanent schemes such as Silver Support and Workfare to provide more support to lower-income groups.

Second, a sustainable tax system is fundamentally one that rewards effort by individuals and enterprise by our companies. The only way to sustain a healthy revenue stream is to have a healthy and growing economy. In more recent years, more countries have lowered or announced their intention to lower corporate income tax rates.

The United Kingdom has lowered its corporate tax rate from 30 per cent to 20 per cent over the last 10 years, and plans to lower it further to 17 per cent by 2020. The new administration in the United States has also indicated plans to cut corporate tax rates.

We must ensure that Singapore continues to be an attractive place to work and do business, so that we have a thriving and vibrant economy.

Third, sustainability is also about striking the right balance between current and future generations. We have spent prudently, built up our reserves and tapped on their returns judiciously.

Ms Sylvia Lim (MP for Aljunied GRC) suggested using the proceeds from land sales. Now, the proceeds from land sales go into past reserves, and it is because of this prudence that we are able to build up our reserves, and we can use part of these returns for our expenditure.

So we must remain disciplined and prudent in spending the returns of our reserves, so that they remain a stable and sustainable source of revenue over the long term.

Any decision to raise taxes will not be taken lightly. We will study all options carefully.

While our finances today are sound, we must start planning early. This is the right and responsible way, rather than leaving problems to be dealt with by future governments when Singapore comes under fiscal strain.

Planning for the issue now will allow us to better ease in the needed measures, to give our people and businesses some time to adjust. We must plan for the long term, not five years, not 10 years, but big ambitious plans for decades ahead. Like the new airport, new towns each with distinctive features to attract families, new MRT lines. We are in a good position today, because we have planned early and invested in the long term.

This ability to plan and invest for the long term is a key strategic advantage. We must ensure that we continue to have this capacity to invest in critical programmes and infrastructure with long-term benefits, in a way that is equitable to both current and future generations.