Will the GST rate hike exacerbate Singapore inflation?

The headline and core inflation climbed to multi-year highs in May 2022.

After the headline and core inflation hit multi-year highs in May, investors have been wary about the implementation of the goods and services tax (GST) rate hike in 2023 and 2024. But according to RHB, the forthcoming increase is nothing to worry about.

In a report, RHB allayed investors' fear of worsening inflation risks saying higher GST rates will only have a "diminutive impact" on consumer expenditure and its overall growth.

"Empirical evidence suggests that retail sales saw little negative impact from a GST rate increase," said RHB senior economist Barnabas Gan.

READ MORE: Gov’t to push through with GST increase despite rising inflation

The expert added that the current pace of the headline and core CPI inflation will likely slow in 2H22 given the likely stabilisation, and eventual correction of global commodity prices.

As for imported inflation, RHB said it should be cushioned by the steepening of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) in October 2022.

A gift more than a curse

Rather than exacerbating Singapore's economic situation, RHB said GST rates could benefit the country's medium-to-long-term outlook.

READ MORE: Why GST hike should push through despite rising goods prices

"We estimate that every 1% increase in GST rate will increase government revenue by S$1.8 billion (or 0.3% of GDP) annually," said Gan. 

"Higher GST rates should help inject a small budget surplus at 1.0% of GDP in FY2023," the expert added.

Whilst minuscule, RHB said the added revenue from GST will "help strengthen Singapore’s social safety nets, enhance competitiveness, and create new capabilities in a highly digitalised global economy. "