Does Budget 2022 portend more taxes to come?

This article was contributed to and first published in The Business Times on 21 February 2022.

ONE of the questions surfacing since the Budget is how Singapore can better afford its own future.

It was obvious from Friday's Budget that Singapore, put simply, just does not generate enough revenue to cover the nation's additional spending needs. With one in four expected to be over 65 in 2030, costs, especially in healthcare and social care, will keep surging relentlessly.

Healthcare expenditure has already tripled from S$3.7 billion in 2010 to S$11.3 billion in 2019 and is expected to rise to about S$27 billion, or around 3.5 per cent of gross domestic product (GDP), by 2030. With this in mind, amid many people's chagrin, Friday's Budget introduced a slew of tax increases from personal income to property; goods and services to luxury cars.

While tax increases are never a pleasant topic for any government to broach, we would argue that, in this current environment it is fitting and necessary. And dare we ask, "Does it even go far enough?"

While healthcare and social needs are spiraling, the costs of keeping Singapore relevant and future-ready also need to be considered.

In his first Budget speech as Finance Minister, Lawrence Wong highlighted the urgent need to invest in the country's digital capabilities and push for "pervasive innovation across the economy".

It is crucial to understand that building a competitive Singapore means investing now. Hence there needs to be sustainable revenue sources for our recurring and escalating spending needs.

Balancing the scales

The current international pressures make balancing the books even more uncertain. After the G-7 countries announced a historic tax deal in June 2021, working out the exact effects on Singapore's coffers is almost a game of chess.

The historic tax deal is based around two pillars - Pillar One and Pillar Two. Pillar One applies to about 100 of the biggest and most profitable multinational enterprises and reshuffles part of their taxes to countries where they sell products and provide services but where they may not have a physical presence. Due to Singapore's small size and the extent of activities conducted here by these multinationals, the government has admitted that the country will lose tax revenue under Pillar 1.

Meanwhile, Pillar 2 introduces a global minimum tax such that multinationals with group revenues of 750 million euros (S$1.15 billion) or more must pay top-up taxes if they operate in any jurisdiction whose effective tax rate is less than 15per cent. In response, the government is considering the introduction of a minimum effective tax rate (METR).

But this is dependent on how other countries react to the rules and in this respect Singapore should not be a front runner or a laggard.

With the international push towards greater tax harmony, Singapore needs to find other avenues of attractiveness as an investment location aside from taxes and grants. That is why it is imperative that we invest in digitalisation and help enterprises anchor their futures.

Current estimates show that the three new initiatives - for personal income, property and luxury cars - will generate around S$600 million annually. But is this enough to cover the anticipated rise in government spending?

Even with the GST hikes, slated for 2023 and 2024, it has been reported that this will bring in only about 0.7 per cent of GDP in revenue annually - about S$3.5 billion - when the full hike is in place. Expenditure at present, excluding Covid-19 related expenses, stands at S$88 billion or 18 per cent of GDP. This is expected to rise to 20 per cent of GDP by 2030. The math is clear.

Given the above, does Budget 2022 portend more taxes to come?

If this is indeed the case, our guess is that estate duty will not be one of them. Not only will the effort needed to administer and collect be considerable; the amount of effort to collect such data just does not provide the right returns. From 2002 to 2008, estate duty made up less than 1 per cent of taxes collected.

Navigating higher taxes, especially after recording the fastest core inflation reading in seven years, is tricky, to say the least. At a time when rising energy costs and supply chain issues have pushed prices higher, any tax hike can be particularly worrying.

Yet some fiscal breathing room may be at hand. The city-state is forecast to grow 3 per cent to 5 per cent this year after expanding 7.6 per cent in 2021, marking the fastest full-year growth since 2010.

As we trudge on into our third year of the pandemic, with over US$16 trillion spent globally on Covid-19 measures, governments everywhere are scrambling to increase revenues.

And the blunt fact is that if we don't collect our fair share of taxes now to fund necessary investments, we will lose out on our future competitiveness. Overall, the tax burden in Singapore has been rather low and comparable within the region.

Perspectives need to shift in order to produce sustained and lasting outcomes. What is paramount is that Singapore balances its need for growth with its international appeal. And this requires everyone to play their part - those with more have the ability to give to the community and to those with less.

It may seem painful, but taxes are a necessary pinch to make sure Singapore remains at the top of its game, while making sure our future - be it in terms of education, health and defence - are secured.