Budget 2021: S’pore to incur largest deficit of S$64.9b in FY2020, GST hike can’t be put off for too long, says DPM Heng

• The Budget deficit for the financial year ending March 2021 is set to be S$64.9 billion
• This represents about 13.9 per cent of Singapore’s total annual economic output
• It is the largest deficit in the country's history
• DPM Heng Swee Keat said the Goods and Services Tax will need to be increased “sooner rather than later”

SINGAPORE — The Government is expected to run up a deficit of S$64.9 billion in the financial year spanning April 2020 to March 2021. It is expected to be the biggest deficit the nation has recorded since independence.

This deficit amounts to about 13.9 per cent of Singapore’s gross domestic product (GDP) — a measure of economic output. Government revenues have been hit by the Covid-19 pandemic as massive sums had to be doled out to support households and businesses due to an ailing economy.

As the Government seeks to return to running balanced budgets and financing recurrent spending needs, Deputy Prime Minister Heng Swee Keat said on Tuesday (Feb 16) that it will have to raise the Goods and Services Tax (GST) rate sometime from 2022 to 2025, and make the move “sooner rather than later”.

The 2022 to 2025 timeframe had been given by the Government previously.

Besides raising GST, the Government is also looking to issue new bonds to finance long-term infrastructure projects.

Mr Heng, who is also Finance Minister, added that Singapore’s fiscal approach must strike a balance between addressing its immediate needs and meeting longer-term structural demands in a responsible manner. 

Running a fiscal deficit in the immediate term is necessary given the unprecedented damage caused by the Covid-19 crisis, he said. However, the fundamental drivers of Singapore’s fiscal trends, that is, higher healthcare and social spending as the population ages, have not changed.

“We must meet these structural needs in a disciplined and sustainable way… It was fiscal prudence and discipline that allowed us to accumulate our national reserves, which has enabled us to respond decisively to this crisis,” he said when delivering his annual Budget statement in Parliament.

HOW TO FUND SINGAPORE’S NEEDS

1. Drawing on past reserves

Given that the new term of government — which started after the General Election (GE) last July — is heading into its first fiscal year, there are no accumulated current reserves to fund the S$11 billion Covid-19 Resilience Package.

Out of the S$52 billion drawn from the past reserves last year to fight the pandemic, Mr Heng said that the Government is likely to utilise S$42.7 billion, with S$9.3 billion unused.

It is aiming to draw another S$1.7 billion from past reserves again and together with the S$9.3 billion unused funds, will prop up this year's S$11 billion package.

This means that the Government will have drawn a total of S$53.7 billion from past reserves over the financial years of 2020 and 2021.

Mr Heng said that President Halimah Yacob has given her in-principle support for the proposed drawdown from past reserves in the coming financial year.

Budget 2021’s S$11 billion deficit, relating to the period from April 2021 to March 2022, translates to about 2.2 per cent of Singapore’s GDP.

“This is the second consecutive financial year where we will be drawing on our past reserves. This is necessary, given the exceptional circumstances we are in.

“We are extremely fortunate to be able to tap our strategic assets and deploy the resources required to deal decisively with Covid-19 and the considerable uncertainties that lie ahead. We should never take our reserves for granted,” Mr Heng said.

2. Raising GST

Mr Heng said that Singapore’s fiscal situation is expected to be tighter.

Even before the pandemic struck, the Government was already expecting a structural increase in its recurrent spending needs, in areas such as healthcare.

Mr Heng first announced plans in 2018 that there was a need to increase GST from the current 7 per cent to 9 per cent sometime between 2021 and 2025, but the hike has been delayed due to Covid-19.

“However, we will not be able to put off the increase for too long. We will have to make the move sometime during 2022 to 2025, and sooner rather than later, subject to the economic outlook.” 

Singapore will not be able to meet its rising recurrent needs without a hike in GST otherwise.

“No finance minister likes to talk about tax increases, certainly not when the pandemic is still raging around the world,” he said.

“But we do this because we plan for the long term and do not shy away from explaining to fellow citizens why we need to make tough but necessary decisions to ensure that we have enough to provide for our nation’s future.”

Mr Heng reiterated that S$6 billion has been set aside to help cushion the impact of the increase for the majority of Singaporeans by at least five years.

He also announced that the Government will extend GST on imported low-value goods with effect from Jan 1, 2023.

This is to allow businesses here to compete effectively against overseas merchants, who will be subject to the same GST treatment as domestic ones.

3. Borrowing by issuing bonds

Following earlier announcements that the Government is looking at borrowing as an option to finance long-term infrastructure projects, Mr Heng announced that the Government is intending to issue new bonds.

Bonds are investment instruments where investors get a fixed rate of return over a set period. Government bonds are usually regarded as a popular, safe form of investment.

The bonds would be issued under a proposed Significant Infrastructure Government Loan Act, which will be tabled in Parliament later this year for debate.

As a safeguard, the authorities will set a S$90 billion borrowing limit under this draft law, based on the expected pipeline of major, long-term infrastructure projects over the next 15 years.

Mr Heng said that the new bonds would allow for a fair and efficient way of distributing fiscal responsibility across the generations.

The Government had previously issued bonds to develop the domestic bond market as well as meet the investment needs of the Central Provident Fund for Singaporeans’ retirement.

The proposed legislation would mean that the Government will be issuing bonds for the additional purpose of financing major, long-term infrastructure needs such as new train lines.

A BALANCED BUDGET

As the economy recovers, the Government expects to balance its Budget and that revenues will eventually support projected expenditure, Mr Heng said.

This, however, is based on the assumption that the global Covid-19 pandemic would come under control by next year.

“If the global public health and economic outlook worsen, we may not be able to do so… While we expect economic recovery in Singapore and globally, there is a wide cone of uncertainty.” he said.

“Even if the economic and fiscal situation turns out to be worse than expected, we must still press on to invest in new areas, so as to ride on the structural changes, transform and emerge stronger as an economy, and as a people”.

Mr Heng also said that the Government will seek the President Halimah's consideration for further use of the past reserves to support the economic investments if the public health and economic situation worsens.

In a Facebook post on Tuesday, Madam Halimah said that she had been briefed by Mr Heng and the Council of Presidential Advisers on the Government’s plans to draw another S$11 billion from the past reserves and that she had given her in-principle support to the proposal.

Though there have been encouraging developments, such as on the vaccine front, she said that “the battle against this Covid-induced crisis is not over” and that Budget 2021 is aimed at strengthening Singapore’s recovery in the short and medium term.

“The road ahead is going to be challenging and uncertain. We must remain resolute in our fight against Covid-19,” she wrote.

“At the same time, the post-Covid-19 world presents us with new opportunities in innovation and transformation. How we continue to respond to the crisis will determine our future. So let us stay the course and continue to chart a brighter common destiny together.”