Lots of innovation in Budget 2018, but bolder steps could have been taken

What to make of Budget 2018? In sum, it contained novel moves, suggesting the capacity for new thinking among Singapore’s 4G leadership, while also hewing closely to a historical pattern of fiscal allocation. But it is also notable for missing out on opportunities to reshape the fiscal landscape for the long run.

The lead-up to the Budget was dominated by anticipation of tax increases: What form would they take, and how big would the quantums be? In particular, speculation centred around an increase in the Goods and Services Tax (GST).

As it turned out, a future 2 per cent increase in the GST was announced, but the hike would only take effect between 2021 and 2025. The underlying message was not lost: A GST increase would be implemented only in the next term of government, and would be on the books of the next-generation leadership.

Charitably, an announcement with such a long lead time could be seen as prudent and planned. But it could also be considered unnecessary, coming as it does in a year when a record surplus of S$9.6 billion was accumulated.

The explanation for a future hike - expenditure pressures to come - could also be seen as confusing and distracting.

If expenditure pressures were so profound, why deliver an “SG Bonus” of S$700 million, which will only achieve a short-term boost to consumption? Why continue the Wage Credit Scheme for a further three years at a cost of S$1.8 billion? This is a scheme which arguably distorts the wage market.

When implemented in 2013, it was presented as a short-term measure, one part of a three-year “transition package”.

Five years later, it is being extended for a further three years.

This reflects a worrying tendency by the Government to present new stimulus interventions, variously disguised as worker and business support schemes, as short- term, only to gradually mainstream them into fiscal planning norms.

It would have been more innovative and bold if Finance Minister Heng Swee Keat had moved to initiate a relook at the Budget rules to allow for surpluses to be carried across terms of government to ensure that rising expenditures can be met with savings, instead of being forced to deploy expenditure, return surpluses to the people, or directing them to the reserves because the rules prevent carrying them over.

Such a fundamental change in how government manages the long-term fiscal landscape would be indicative of fiscal leadership under changing conditions.

To be sure, Mr Heng should be credited with the novel move to allow statutory boards and government-linked companies to tap the private market for infrastructure financing.

However, one cannot but feel that while welcome, this was a move that arrived late, missing, as it does, the opportunity to capitalise on a decade’s worth of low interest rates.

Nevertheless, there will be eager lenders. But as statutory boards, in particular, will be new to capital markets, the Ministry of Finance should ensure that technical expertise is on hand to efficiently and prudently handle transactions.

RIGHT-SIZING, AND RESHAPING, THE PUBLIC SECTOR

The announced merger of the Pioneer Generation Office and the Agency for Integrated Care, as well as the consolidation of social aged policies under the Ministry of Health, are good signs of rationalisation. However, these involve small numbers, and have no impact on the labour uptake by the public sector, which is the largest employer of residents.

Rather than deal with such moves as one-offs, this could have been an opportunity for Mr Heng to set the macro-direction to right-size and “right-shape” the public sector for the future.

When labour is scarce and technology is disruptive, the Government should be responding structurally across the board.

It is a notable irony that while technology and labour controls are targeted at constraining workforce growth in the private sector, thereby squeezing out productivity, these same factors lead only to workforce increases in the public sector as the government creates new departments, such as GovTech and the Smart Nation Office to drive initiatives while retaining all of its incumbent labour footprint.

The renewed commitment to cost efficiency in government through the previously announced 2 per cent downward adjustment in the budget caps and fine-tuning the block budget growth factor from 0.4 to 0.3 times of GDP are laudable. It is reassuring that Mr Heng continues to focus on cost of government.

However, here again, the moves were relatively gentle, and it would have been ideal if the Minister had indicated a target for the Budget to GDP range as a form of fiscal discipline for future fiscal planners.

This percentage has risen past the historical range of 15 to 17.5 per cent of GDP in the early 2000s to 19.5 per cent in this Budget.

Setting a guideline range as a measure of restraint would indicate cognisance of the danger of budget creep in the face of expenditure pressures becoming normalised and self-justifying.

Mr Heng said that Net Investment Returns Contribution (NIRC) is now the single largest source of fiscal supply. This constituted S$15.9 billion, or 20 per cent, of the S$80 billion budget.

He is right to warn of the need to avoid overdependency on the NIRC. The Government has incurred basic deficits for over a decade, and this has become fiscal norm, but it should challenge itself and ask if that is desirable in the long term.

The Budget also raised the top marginal buyer’s stamp duty from 3 to 4 per cent. This is effectively a wealth tax.

This shows that the Government is innovative, looking for better way to tax wealth, as opposed to consumption or income. Singapore has become very attractive to the world’s wealthy, and we have grown our own stock of super -rich individuals over several decades of growth during which returns to capital have been generous.

Many wealthy individuals do not support their lifestyles with income, even if high, but from investment returns.

Tax frameworks should have a deliberate biased focus on wealth, rather than income, to help address the already high and growing wealth inequality in the nation. Consumption should not be the first recourse - it is convenient, but also the most regressive.

While offset measures are in place, Mr Heng should have taken the opportunity to re-frame the Singapore tax and benefits model as being progressive in terms of not only income, but wealth, too.

It is hardly a bad thing to celebrate budget surpluses.

Budget 2018 also reflects continuity and reinforcement of economic and social strategies that are needed, and, in some cases, beginning to show results, such as productivity gains.

Nonetheless, Budget 2018 is an example of a good budget that could have been a great one, if the moves that were made were not just steps towards an innovative fiscal future, but a blueprint for one.

ABOUT THE AUTHOR:

Devadas Krishnadas is chief executive of Future-Moves Group, an international strategic consultancy and executive education provider based in Singapore.