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$6.4b Budget surplus poser: Was GST hike needed last year?

The question may be visited during the Budget debate

(SINGAPORE) The $6.4 billion bumper Budget surplus racked up in FY2007 has begged the question – was there a need to raise the Goods and Services Tax (GST) by two percentage points last July, if at all?

The issue has surfaced in Budget talk public and private this week, and will likely be touched on in Parliament when it convenes next week for the Budget debate. Given the surprise haul – against a $0.7 billion deficit originally projected – and the usual misgivings the public would have about any tax increase, it’s a question to be expected.

While the buoyant economy and runaway property market last year did cue, by recent weeks, expectations of a Budget bounty, the $6.4 billion surplus still exceeded analysts’ projections by at least $1 billion.

From another perspective, though, the latest surplus amounts to less than 3 per cent of GDP, and is – in absolute terms and relative to GDP – nowhere near the highs notched up during Singapore’s track record of straight strong surpluses in the 1990s.

Still, the question remains – was it necessary to hike the GST rate to 7 per cent last July amid then ‘boom-time’ conditions? Could not government spending on various social and infrastructure programmes be funded from operating inflows and reserves?

Prime Minister Lee Hsien Loong explained the backdrop to funding government spending in a speech in Parliament in November 2006, when he first served notice of an impending GST hike to 7 per cent.

In essence: Government spending can only be partly funded by investment income from the reserves (with the nest-egg left intact to grow). The rest of the expenditure must be met by other revenue, mainly tax. And with countries slashing corporate tax rates over the years in a global race to compete for investments, Singapore cannot increase direct taxes to raise revenue. Instead, with an eye on competitiveness,

Singapore’s corporate tax rate has been progressively lowered over the years, most recently by two points to 18 per cent from Year of Assessment 2008 in the 2007 Budget.

And it could go down further – as, too, could the personal income tax rate, left untouched this year. In the latest Budget statement, the Finance Minister held out hope, saying: ‘We will reassess our options on corporate and personal income tax and lower rates further should it become necessary.’

As direct taxes get cut, indirect taxes must rise to make up for the revenue shortfall. The GST hike was part and parcel of a fiscal restructuring from direct to indirect taxation, with the impact of its hits softened, if not entirely absorbed, by a package of offsets.

Still, the question might persist: What revenue shortfall in a boom year?

Well, leaving aside its staunchly conservative stance, the government could not have foreseen the property market boom when it decided early last year on the July 2007 date for raising the GST. The market had not quite stirred, let alone exploded. At that point, the Singapore economy was expected to grow 4.5 to 6.5 per cent in 2007. But GDP growth for the year came in at 7.7 per cent.

As it turned out, the biggest boosts to the coffers in FY2007 – stamp duty and property-related revenue – were $3.4 billion above projections. But stamp duty, which amounted to $3.8 billion, did not even figure as a separate item in the revenue table of early estimates in the FY2007 Budget – it was probably lumped under ‘other taxes’.

 

Source:

$6.4b Budget surplus poser: Was GST

hike needed last year?

The question may be visited during the Budget debate

By ANNA TEO

(SINGAPORE) The $6.4 billion bumper Budget surplus racked up in

FY2007 has begged the question – was there a need to raise the Goods

and Services Tax (GST) by two percentage points last July, if at all?

The issue has surfaced in Budget talk public and private this week, and

will likely be touched on in Parliament when it convenes next week for

the Budget debate. Given the surprise haul – against a $0.7 billion deficit

originally projected – and the usual misgivings the public would have

about any tax increase, it’s a question to be expected.

While the buoyant economy and runaway property market last year did

cue, by recent weeks, expectations of a Budget bounty, the $6.4 billion

surplus still exceeded analysts’ projections by at least $1 billion.

From another perspective, though, the latest surplus amounts to less

than 3 per cent of GDP, and is – in absolute terms and relative to GDP –

nowhere near the highs notched up during Singapore’s track record of

straight strong surpluses in the 1990s.

Still, the question remains – was it necessary to hike the GST rate to 7

per cent last July amid then ‘boom-time’ conditions? Could not

government spending on various social and infrastructure programmes

be funded from operating inflows and reserves?

Prime Minister Lee Hsien Loong explained the backdrop to funding

government spending in a speech in Parliament in November 2006,

when he first served notice of an impending GST hike to 7 per cent.

In essence: Government spending can only be partly funded by

investment income from the reserves (with the nest-egg left intact to

grow). The rest of the expenditure must be met by other revenue, mainly

tax. And with countries slashing corporate tax rates over the years in a

global race to compete for investments, Singapore cannot increase

direct taxes to raise revenue. Instead, with an eye on competitiveness,

Story Print Friendly Page Page 1 of 2

http://www.businesstimes.com.sg/sub/storyprintfriendly/0,4582,268583,00.html? 22/2/2008

Singapore’s corporate tax rate has been progressively lowered over the

years, most recently by two points to 18 per cent from Year of

Assessment 2008 in the 2007 Budget.

And it could go down further – as, too, could the personal income tax

rate, left untouched this year. In the latest Budget statement, the

Finance Minister held out hope, saying: ‘We will reassess our options on

corporate and personal income tax and lower rates further should it

become necessary.’

As direct taxes get cut, indirect taxes must rise to make up for the

revenue shortfall. The GST hike was part and parcel of a fiscal

restructuring from direct to indirect taxation, with the impact of its hits

softened, if not entirely absorbed, by a package of offsets.

Still, the question might persist: What revenue shortfall in a boom year?

Well, leaving aside its staunchly conservative stance, the government

could not have foreseen the property market boom when it decided early

last year on the July 2007 date for raising the GST. The market had not

quite stirred, let alone exploded. At that point, the Singapore economy

was expected to grow 4.5 to 6.5 per cent in 2007. But GDP growth for

the year came in at 7.7 per cent.

As it turned out, the biggest boosts to the coffers in FY2007 – stamp duty

and property-related revenue – were $3.4 billion above projections. But

stamp duty, which amounted to $3.8 billion, did not even figure as a

separate item in the revenue table of early estimates in the FY2007

Budget – it was probably lumped under ‘other taxes’.

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