This article was contributed to us by Gerald Wong, Founder & CEO of Beansprout.
When Finance Minister Lawrence Wong delivered Singapore’s Budget 2022 statement, all eyes and ears were on the much talked about increase in goods and services tax (GST).
After all, the government had announced back in 2018 that the GST would be raised from 7 per cent to 9 per cent “sometime between 2021 and 2025”.
Earlier this year, Prime Minister Lee Hsien Loong indicated in his New Year message that the government will “start moving” on the GST hike as Singapore emerges from the Covid-19 pandemic, raising expectations that the hike was coming soon.
The government announced an increase in the GST in two steps, first to 8% on 1 January 2023, and a further increase to 9% on 1 January 2024.
Taking A Trip Down Memory Lane On Previous GST Hikes
The GST was introduced in 1994 at a rate of 3 percent, as a broad-based tax paid on goods and services consumed domestically. The intention was to boost Singapore’s competitiveness by shifting the government’s revenue source away from direct taxes such as individual and corporate income taxes.
Subsequently, the GST rate was raised from 3 per cent to 5 per cent in a staggered manner over 2003 and 2004. The rate was further raised to 7 per cent in 2007. Since then, there has been no further increase in the GST rate.
Eyeing That Rolex Or Chanel? Buy It Now!
What would consumers do when the items they are looking to buy will cost them 2% more next month? Quite naturally, they would bring forward their purchases.
Read Also: Why Are Rolex Watches So Expensive?
This trend of purchasing in advance has been noticeable each time there has been a GST hike in Singapore in the past. In 2007, an increase in the GST to 7 per cent in July saw an 8 per cent spike in the retail sales in June compared to the month before.
The spike was particularly evident in big ticket purchases such as motor vehicles and watches, where the impact of the GST is more significant. After all, a 2 per cent tax on a $10,000 watch ($200) is going to matter a lot more than a $10 meal. Furthermore, big ticket purchases such as luxury watches, cars and furniture are items for which we can easily bring our purchase timeline forward. It’s not like you can eat chicken rice meant for next month, today.
Reflecting this, watches and jewellery saw an astonishing 33% increase in retail sales in June 2007 compared to the month before.
However, we should not extrapolate this increase into the future, as sales will typically come down after the GST increase. Following the GST increase, overall retail sales fell by 14% in July 2007 compared to the month before. As for watches and jewellery, sales were down by a whopping 26% in July compared to the month before!
GST Hike Will Increase Inflation
While there is never a “good time” to raise taxes, a hike is generally seen to be more acceptable during a period of economic growth and renewed consumer spending.
Singapore’s economy is expected to recover as we emerge from the pandemic, but the overall macro-economic picture this time is complicated by growing inflation concerns.
After all, inflation has been red hot globally, and Singapore has not been spared by rising prices of goods. The headline inflation rate reached 4 per cent in December 2021 compared a year ago, the highest level in close to a decade. If you are the one paying for the pump petrol for your family car or electricity bills for your household, the sharp spike in the cost of these daily expenses would have been noticeable in recent months.
These price pressures are unlikely to ease anytime soon, as the Monetary Authority of Singapore expects core inflation in Singapore to be 2 to 3 per cent this year. It remains to be seen whether inflation would ease by the time the GST hike comes through in January 2023.
HSBC estimates that a 1 percentage point GST hike would add 0.5-0.7 percentage points to headline inflation in 2023 and 2024. Hence a 2 percentage point hike in the GST could push headline inflation up by another 1 per cent or more.
How Should We Think About Our Investments?
From what we have seen in previous episodes in GST hikes, the short-term increase in retail sales prior to the actual increase in taxes is usually not sustainable. Consumption typically declines after the GST is increased, especially as big ticket purchases are brought forward in anticipation of the tax hike. In other words, consumer demand is brought forward, as opposed to increasing.
Likewise, when deciding whether to invest in a particular stock, we should make informed choices based on the fundamentals of the company rather than short-term fads. Check out our analysis on Meta (formerly known as Facebook), and Sea (parent of Shopee)
Remember that when we buy a stock, we are buying into a piece of ownership of the company. As such, we would ideally want the increase in sales and profit to be sustainable in the long term.
Stay Invested To Be Ahead Of Inflation
The best way to protect yourself against inflation, is to generate a return on your savings that exceeds the pace of the price increases. Otherwise, you might be able to purchase fewer things over time with every single dollar that you have.
With the announced GST increase, your purchasing power could be even further reduced. This highlights the importance of investing and being able to earn a return to cushion against inflation in the long run.
Gerald Wong, CFA, is the Founder and CEO of Beansprout, Singapore’s next-generation investment advisory platform licensed by the MAS. He has more than 13 years of experience in investment advisory, and was previously the Head of Singapore Securities Research at Credit Suisse. Gerald believes in empowering investors to make smarter decisions by providing them with customized insights, and has been actively involved in raising awareness of the Singapore equity market. He runs a Beansprout Telegram Chat Group where he shares his market insights with passionate investors.
The post How Would The GST Hike Affect Consumer Spending & Your Investments? appeared first on DollarsAndSense.sg.