Looking ahead to Singapore’s 2018 budget

What will the 2018 budget have in store for Singapore?

By Oliver Ward

The 2018 budget announcement approaches. The words of Prime Minister Lee Hsien Loong will be in the forefront of Singaporeans’ minds. Raising taxes “is not a matter of whether, but when,” he said last November.

On February 19th, Finance Minister Heng Swee Keat will give the Singapore 2018 Budget Statement. Households and businesses across Singapore are anxious to hear what is in store.

Where will the money go in 2018?

Heng Swee Keat has already hinted at where the budget for 2018 will go. He has mentioned that spending on security will be a “very major item. Back in 2011, the government spent S$14.8 billion (US$11.2 billion) on national security. This increased to S$19.5 billion (US$14.8 billion) in 2016. Mr Heng expects this figure to rise over the next ten years.

Heng has refused to disclose how much will be allocated to security in the 2018 budget. But there are several expensive security projects already underway for 2018.

Source: ST

The government has to address the expiring Productivity and Innovation Credit (PIC) scheme

The government will need to replace the PIC scheme to keep Singapore as a research and development (R&D) hub. The scheme gives small and medium businesses a tax deduction for R&D initiatives. This includes the purchase of digital equipment and worker training.

The PIC scheme will expire at the end of this financial year. It has been the top government scheme. 85.4% of Singaporean businesses used the scheme. Expect the 2018 budget to include tax incentives to replace it.

Spending on healthcare and the elderly will also likely increase

The shifting demographic profile of Singaporeans may also influence the 2018 budget. There are currently around 500,000 people aged over 65 in Singapore. By 2030, this will rise to 900,000. The rising number of seniors will put more strain on healthcare services. The government has time to address the issue, but 2018 might be the best time to do it.

2018 will be the year for a tax increase

The government will need to find extra money to spend on security and healthcare. Looking at the estimated 2017 revenue, finding this extra money will not be easy.

Source: Singapore Budget

In 2017, net investment returns contributions (NIRC) were the largest revenue generator. However, the Singaporean government cannot generate more income from NIRC. It can only take half of the expected long-term returns from its invested reserves. It already extracts almost the maximum allowance. It also cannot raise this allowance. Raising the spending cap will impact Singapore’s ability to balance future budgets. The government would be spending tomorrow’s money today.

This means the extra revenue has to come from increased taxes. 2018 represents Lee’s best opportunity to increase taxes. Lee is in the middle of an election cycle. The next general election is not until 2021. A tax increase in 2019 or 2020 could affect public happiness going into a general election.

Also, the Singaporean leadership will soon transition to the next generation. It would make sense for Lee Hsien Loong to address unpopular matters before then.

Which tax is the most likely to increase?

Corporate income tax was the next highest revenue generator in 2017. It would be an easy tax to increase. It currently sits at 17%. Increasing it by just 1% to 18% would generate an extra S$802 million (US$607.9 million).

However, it is highly unlikely the government would raise corporate income tax. The last time it did was more than two decades ago. Singapore enjoys one of the lowest corporate income tax rates in ASEAN. It uses it to remain competitive and entice companies to the country. Lee would not want to risk foreign investment by raising the corporate tax rate.

Source: Deloitte

The Minister for National Development, Lawrence Wong also remarked that the 2018 budget would encourage businesses to grow. A rise in corporate income tax would not fit with these remarks.

The government could raise income tax rates for extra revenue. But it only recently increased income tax. The 2015 budget increased income tax rates for the top 5% of earners. This only came into effect last year. It also had little effect on revenue. Tax collections for 2017 increased by just S$261 million (US$197.9 million). It is unlikely the government would raise it again so soon when the reward was so marginal.

Goods and services tax (GST) would be the most logical increase

An increase in GST is the most likely scenario. GST is low for the region. An increase would bring in substantial revenue. Each percentage point increase would provide and extra S$1.6 billion (US$1.2 billion) annually. It has also remained at the same rate since 2007.

Source: EY

However, raising the GST rate will hit lower-income families the hardest. As a result, the government will need to pay out GST vouchers to lower income households.

There may also be some new taxes on the horizon

The government may also look to open new avenues of revenue. An e-commerce tax could be one such avenue. Consumers in Singapore do not pay GST on goods purchased from overseas valued at less than S$400 (US$303). This exemption could be removed.

The government could introduce levies on sugar or carbon emissions. It could experiment with a wealth tax. A wealth tax would most likely tax an individual’s assets rather than finances. Property and luxury possessions would be included.

This multi-pronged approach would be the most logical course of action. Singapore will need to unlock more streams of revenue in the coming years. 2018 is Lee’s best chance of increasing taxes. Expect an increase in GST, combined with several new taxes to boost revenue. The good news is, once 2018 is over, taxes should not increase until after the 2021 election at the earliest.