Higher taxes loom for the next two years in Singapore

Goods and Services Tax (GST) will rise by 2 ppt to cover primary deficit which is expected to hit $3.5b.

After the government hinted at the need to raise taxes, DBS forecasted the Goods and Services Tax (GST) to be raised by 2 ppt to cover primary and basic deficits.

It said in an analysis that Singapore registered three consecutive years of a deficit in the primary balance.

The primary deficit for 2017 is expected to hit $3.5b, which is 1.3% of the GDP and could be the deepest on record. This explains the need to find new sources of revenue.

Moreover, social expenditure will need to rise at a faster pace as the population continues to age. Higher expenditure will challenge the fiscal position unless more revenue can be generated, especially given the Net Investment Returns Contribution limitations.

This also explains why the government had to price scarce resources more efficiently, tap on new sources of tax revenues, and reduce operating expenditure. Beyond that, hikes in tax rates will be inevitable.

Of the three key major tax options, the Goods and Services Tax (GST) is most likely to be raised in Budget 2018.

"Rising the GST rate is perhaps the most direct and effective tool in terms of raising tax revenue," DBS economist Irvin Seah said.

A 1 ppt GST hike can raise tax revenue by $1.6b to $1.8b, which is equivalent to 0.4% of the nominal GDP.

DBS said the GST rate will be raised by 2 ppt because this has been the norm in the past two cycles.

The possible GST hike will likely be implemented in a staggered manner with the increases to be done within two years.

"This will lessen the impact on households and if combined with an effective offset package, will minimise pain to certain segments of the society," Seah said.

Here's more from DBS:

We estimated that inflation will likely rise 1.0-1.5% YoY in the following year for every percentage-point hike in the GST rate. Balancing of fiscal and monetary policies will also be in focus as the Monetary Authority of Singapore (MAS) is expected to return to an exchange rate appreciation stance in 2018.

A GST hike, along with the tightening in monetary policy, could well weigh on consumption and growth. However, as with most policy changes, the impact is usually transient, which will be diluted by base effect 12 months later.

Along with the GST hike, an offset package will likely be introduced to cushion the impact on consumers, particularly on lower-income households. A GST offset package of at least S$4b could be announced, which will more than cover the projected amount of tax revenue that could be derived from the 2%-pt tax hike.