No good time to raise GST, but 2022 provides window of opportunity politically and economically: Analysts

SINGAPORE — Raising the Goods and Services Tax (GST) in 2022 will allow sufficient time ahead of the next General Election (GE) to strengthen Singapore's fiscal position and narrow the budget deficit of the current term of Government, and it is also opportune to do so given that the economy is on more stable footing, said some political analysts and economists.

Given the uncertainties brought about by Covid-19, they also noted that delaying the GST increase further could mean having to roll it out when conditions are even less ideal, such as the emergence of more variants of the coronavirus and economic headwinds.

The experts were commenting on Prime Minister Lee Hsien Loong's remarks in his New Year message on Friday (Dec 31), where he said among other things that with Singapore's economy emerging from the Covid-19 crisis, the Government has to "start moving" on the planned increase in the GST.

Mr Lee added that the Budget statement on Feb 18 would, therefore, lay the basis for "sound and sustainable government finances for the next stage of Singapore’s development". 

Political analyst Eugene Tan from the Singapore Management University said that while there is never a good time for any new tax increase, “the fiscal position of the Government is probably quite dire”, having drawn down on its past reserves owing to the Covid-19 pandemic that first hit Singapore in early 2020.

Since the pandemic struck, the Government has — on top of its usual spending — committed nearly S$100 billion through five Budgets to tide Singaporeans and businesses over the Covid-19 crisis. 

The Government was expected to incur a record deficit of S$64.9 billion in the financial year between April 2020 and March 2021. For the financial year between April 2021 and March 2022, the projected budget deficit is S$11 billion. 

“The post-pandemic recovery will increase demands on the government coffers, and they have no present reserves to draw on,” Assoc Prof Tan said.

As such, he believes that the Government is of the view that it has to “bite the bullet” and introduce the GST increase as early as April, when the new financial year starts.

“To go into the subsequent years with a budget deficit, or to introduce (the GST increase) closer to the 2025 General Election, that's going to become a political flashpoint,” he said.

“It’s not very good to go into the next election without having a balanced budget.”

Plans to raise the GST from 7 to 9 per cent between 2021 and 2025 were first announced in 2018 by then Finance Minister Heng Swee Keat, who is now Deputy Prime Minister. The proposed increase was later pushed back to between 2022 and 2025 because of the pandemic.

TIMING OF GST INCREASES AND ELECTIONS 

When the GST was introduced in 1994, the rate was 3 per cent. This was increased to 4 per cent in 2003 and 5 per cent in 2004. It was last raised to 7 per cent in 2007. 

In each instance, the GST hike was introduced between two and four years before the GEs in 1997, 2006 and 2011.

The next GE is due by 2025. There is also the next Presidential Election, due by 2023, where the ruling People's Action Party would traditionally endorse a candidate.  

Earlier, some economists had described it as "political challenging" and a "huge political task" to raise the GST and suggested that such a move would need to be done sufficiently ahead of a GE to minimise any blowback.  

Since the GST increase was mooted in 2018, experts have been divided on whether it could be staggered. 

Assoc Prof Tan believes it could be, in order to help Singaporeans and businesses manage the GST increase “in light of the challenging economic situation amid the unpredictable arc of the economy”. He suggested that the GST could be raised initially by 0.5 to 1 percentage point, with the rest of the increase coming a year or two later.

“Such an implementation will require a lower outlay for the comprehensive scheme of offsets that will accompany the GST increase,” said Assoc Prof Tan.

Still, if the GST increase is indeed rolled out in 2022, he said that the onus is on the Government to communicate to the public how the taxes, while difficult to stomach, “will ultimately in the course of the next few years work out for the better for the country”.

Said Assoc Prof Tan: “The Government will have to show by the time they go to the election that all of this has materialised."

URGENT NEED TO REPLENISH COFFERS

Dr Felix Tan, a political analyst from the Nanyang Technological University, played down the timing of the elections as a factor in the timing of the planned GST increase, noting that the public has been expecting the move for some time. 

Nevertheless, he said that it would still have an impact on many, particularly those suffering from the economic consequences of Covid-19, such as job losses.

“The Government should take that into consideration. Are there any other ways they can help those who might not be able to afford the GST increase or are still going through a difficult patch?” said Dr Tan.

Mr Heng reiterated during Budget 2021 that S$6 billion has been set aside to help cushion the impact of the increase on the majority of Singaporeans for at least five years.

Ms Selena Ling, head of treasury research and strategy at OCBC bank, said the Government would likely extend the GST voucher and other financial assistance to offset the impact of the GST increase on low-income families to ensure that they are not worse off.

Still, she pointed out that there is an “urgent need to replenish and buffer the recent drawdown”.

CIMB Private Banking economist Song Seng Wun said that from a fiscal planning standpoint, Singapore’s economy is on a “far more stable footing now than the last two years”.

Ms Ling added that the projected economic growth forecast for 2022 is around the trend growth of 3 to 5 per cent, which she described as “normalisation after three volatile years”.

Mr Song said that while Singapore’s net investment returns contributions make up the country’s biggest source of income, there is a need to ensure a more even contribution from various sources. “Otherwise, it would not be economically sustainable,” he said.

In any case, Ms Ling said that even if the Government were to postpone the GST increase till 2023, “it is difficult to predict whether another new variant or a new trigger for another crisis may emerge”.

Beyond that, there are also evergreen social needs and infrastructural spending to take care of, amid Singapore’s ageing population and the effects of climate change, Ms Ling added. 

“The knee-jerk reaction (towards the GST increase) may be there because headline inflation is already at a multi-year high due to rising energy prices and global supply chain bottlenecks,” she said. 

“The question is whether the labour market returns to its pre-Covid levels and wage increases sufficiently cover the price increases.”