GST should be raised to 12%?

On 6 August 2015, the Ministry of Finance took a rare step in refuting claims “the Government planning to raise the GST after the next General Elections”. Singapore government slammed online websites for spreading baseless claims that the GST would be raised from 7%. Personal finance website, Dollar And Sense, also rubbished the notion that GST would be raised to 10% on 22 September 2015.

Well, they could be wrong as PM Lee Hsien Loong recently dropped big hint that there could be impending tax hike due to increased government spending.

In my perspective, I feel that there could be a grave need for the GST to be raised to 12%. Yes, it is 12%. Why so? Am I crazy? After all, it had been 10 years since GST had been raised from 5% to 7%. That GST hike had been perceived to inflate the cost of living and many people feel that the tax is regressive because the poor would be affected the most.

Before dismissing this article, it is important to look at the big picture and understand the macroeconomic dynamics. In doing so, Singaporeans can then better understand the insights of our leaders before jumping to conclusions.

Great Financial Crisis

In the history of Singapore, the government had only drawdown our national reserves once. Yes, only once since we achieved independence in 1965 and that was during the height of the Great Financial Crisis in 2009. That was a chaotic period of time as major global financial institutions were on the brink of collapse.

Arising from this, there were concerns of a long and deep recession, prompting the government to announce that up to $150 billion of past reserves had been set aside to guarantee deposits in Singapore until the end of 2010.

However, that $150 billion did not constitute an actual drawdown on the reserves, as the original plan was that the funds would be used only if a depository financial institution failed. But that nightmare scenario did not occur in Singapore. Nevertheless, the situation took a turn for the worse and in January 2009, the government finally sought President Nathan’s approval to drawdown S$4.9 billion from past reserves to fund two one-off projects to boost the economy – the Jobs Credit scheme and the Special Risk-Sharing Initiative (SRI).

The unprecedented move to use our past reserves was a defining event in Singapore history. On looking back, the government had to resort to such drastic measure because of the frightening financial storm. But what many Singaporeans are unaware of was the creation of a new policy that changed the way how Singapore manage its economy forever – the Net Investment Returns (NIR).

Past reserves

Prior to FY2009, there was only the Net Investment Income (NII) which refers broadly to the actual dividends, interest and other income received from investing our reserves. Our government has used this component of the reserves to fund various Selective En-bloc Redevelopment Scheme (SERS) and other land acquisition projects since 2002.

The government’ stance is that such uses cannot be construed as “drawdown” because these projects are actually transferring our national assets to another form of tangible asset. In my opinion, this strategy is sound because fiat currency has decreasing purchasing power. Storing too much of our national wealth in currency could have long-term risk. So investing in renewal of property and expanding our land are brilliant moves by our leaders.

The government moved to the Net Investment Return (NIR) framework in 2008 in order to “enhance revenues and ensure a fair balance between the needs of current and future generations”.  Under this new framework, we can spend up to 50% of the long-term expected real returns.

Together, both NII and NIR form the Net Investment Returns Contributions (NIRC), which supplements our annual Budget. The NIRC is estimated to be $14.1 billion in Financial Year (FY) 2017, or 17% of our budget.

Growing our economy

At this moment, you must be wondering why on earth am I bringing up the issue of national reserves when the topic is on GST? Well, this is because perennially, GST forms the second highest contributions for our budgetary income. In FY2016, $11.1 billion of GST was collected. The other main sources of revenue are corporate ($13.6 billion collected in FY2016) and individual income taxes ($10.5 billion collected in FY2016). It is inconceivable for the government to increase the personal income tax because it has been raised for the higher tier income-earners. Being pro-enterprise, it is also unlikely that the government would increase corporate tax either because doing so would hurt foreign investments and incur wrath from business owners.

Thus, the government is left with no choice but to raise GST. Singaporeans may argue that the GST, corporate and individual tax income look substantial, but do you know that we had a budget deficit of $4.88 billion in FY2015? This is even after NIRC of $9.9 billion had come to the rescue. This means that Singapore had spent more than what we had earned for FY2015.

However, government spending is needed as we need to invest in mega infrastructure, invest in our people and build up the new economy. All these projects require money and data revealed that there was only so much that our reserves can help to buffer the budget deficit. In short, the returns from our reserve would have limited impact against rising government spending.

Building for the future

Increasing GST is obviously an unpopular move. Being a middle-income earner, of course my family would be affected. But I always tell that myself that the tax increase is inevitable. Just think about this, can we afford to keep having budget deficit like what we experienced in FY2015? Bear in mind that when we have budget deficit, we would set aside lower amount of reserves for future generations. Furthermore, unlike other countries, we do not have natural resources to fall back on. Our national reserves are our main strategic resource.

Another popular argument is that we should slow down and not invest in our economy. But then, can we afford to do so? Being a small nation, our only proposition to the rest of the world is to stay relevant. If Changi Airport and PSA are no longer competitive, then we are really doomed because these are our strategic assets that set us apart from the rest of our competitors. It is a jungle out there and competition is extremely stiff. It is naïve to think that we can afford to slow down and then restart growth engine in 5 years. That was why government needs to spend on Changi Airport Terminal 5 and Tuas Mega Port.

And then there is the issue of ageing problem in Singapore. We need to build more public hospitals to meet the needs of an ageing population. Although Khoo Teck Puat Hospital and Ng Teng Fong General Hospital had been built in recent years, more public hospitals are anticipated. Of course, building and operating public hospitals incur a lot of money but it is inevitable. We all grow old one day, don’t we? Do we want to face the hospital bed crunch like we did in yesteryear and then start to think about building new hospitals?

Another key area that is hungry for government funding is the investment in human capital. Our economy is in the midst of restructuring as we endure the Fourth Industrial Revolution. This means that our workforce needs to be retrained on new knowledge in areas like cyber security and data analytics. SkillsFuture is needed to equip our workforce with capabilities to stay ahead in the new economy. Without such tools, Singaporeans will not be able to build for the future.

Raising the GST to 8 or 9% is unlikely to have significant impact on our revenue and with increased government spending on mega infrastructure, there is a solid basis for GST to be 12% in order to achieve a sustainable budget going forward.

What can you do?

Convincing Singaporeans on the need for tax hike is one thing. Of more importance is mastering the know-how on how to stay afloat against the backdrop of higher cost of living. Earlier this year, I have shared with readers on how to build wealth. Basically the idea is to stop tracking your savings, start tracking your income and focus on growing. As a commoner, you would not be able to change tax policy and you can only achieve so much if you scrimp and save. But you can certainly take actions to grow your wealth and build wealth. To achieve this, you must have a growth mindset.

Life is tough in Singapore and you have been working hard for money. To stay ahead, you must have a growth mindset. Nobody likes to pay for more taxes but very often, changes are needed to achieve progression in life. And changes have to start from yourself. The old way of saving for raining day at all cost may not be relevant in today context. You need to save some monies, invest some of your monies and spend some monies to gain new skills.

If Singapore hopes to remain competitive and stay relevant to the world, then we must make the hard decision to pay now. Delaying the tax hike is akin to kicking the can down the road, thereby impacting the next generation. In the end, our children might have to suffer the consequences. For sure, the low-income families would be affected by the tax hike but I reckon we just have to bite the bullet and push on. There are no easy solutions but collectively, I believe Singaporeans should be able to pull through.

My friend, please join me in my wealth journey by subscribing to this blog. Over the years, I have shared my personal insights and experiences. I hope that readers have benefitted from my articles. In return, all I ask for is your support. Together, we can build a better tomorrow.

Magically yours,

SG Wealth Builder