Yahoo Finance What to expect from Singapore's Budget, from tax hikes to business relief
By Low De Wei
(Bloomberg) — Singapore is expected to announce tax increases in its budget Friday as officials seek to balance the books after two years of pandemic-induced deficits — even as challenges mount from rising inflation and a slowing economic recovery.
The return to a fiscally conservative stance is complicated by the largest price increases in years. Potential changes to policies on foreign labor and the tax code will be closely watched for how they impact Singapore’s competitiveness and address an acute labor shortage.
“Rising costs and uneven economic recovery will likely top the immediate economic challenges to be addressed in the upcoming budget,” said Sung-Eun Jung, a senior economist at Oxford Economics Ltd. “We expect more focus on medium-term fiscal sustainability in this budget, switching away from the crisis management mode over the last two years.”
The business hub is expected to target an overall budget surplus equivalent to 0.6% of gross domestic product for the 2022 financial year, which starts April 1, according to the median estimate of 15 economists surveyed by Bloomberg for the budget.
Finance Minister Lawrence Wong, who will be delivering his first budget after taking the portfolio last May, will have to weigh the need for revenue to fund social expenditures as the city-state’s population ages with the support that Covid-hit sectors still require.
Some fiscal breathing room may be at hand, with economists forecasting that better-than-expected tax revenues and strong economic growth last year will lead to a significant revision of a projected budget deficit in the 2021 budget, from 2.2% of GDP or S$11 billion, to 0.9%.
A surprise surplus for 2021 could also be in the offing, Barclays Plc economist Brian Tan wrote in a note last month, a reminder of the fiscal outperformance that was typical in Singapore before the pandemic.
“Assuming special transfers and net investment returns match earlier projections, we expect the government to run an overall budget surplus equivalent to 0.4% of GDP in FY2021,” he wrote.
Here’s a look at what could be included in the budget speech:
GST
Since Prime Minister Lee Hsien Loong said in a New Year’s message that the government had to “start moving” on potential tax hikes, government messaging has laid the groundwork for an imminent rise in the Goods and Services Tax to 9% from the current 7%.
Most economists expect this scenario, with 8 out of 15 surveyed by Bloomberg expecting a one-time increase in July this year, in line with previous moves. Another two expect an increase as soon as April.
“Fiscal considerations would favor an earlier one-off hike, given the overarching priority of returning to a balanced budget within this term of government,” Citigroup Inc. economist Wei Zheng Kit wrote in a note last week. The less-simple process of administering a phased increase and a political desire to avoid a tax hike too close to the next election also points to a July increase, he said.
Rising inflation may give policy makers pause though. A previous GST hike in 2007 pushed inflation to a decade-high, and the consumer price index is already at its fastest pace in years. Core prices are seen growing 2.7% this year, according to the median estimate in Bloomberg’s survey, which would be the highest reading since 2008.
HSBC Holdings Plc expects the GST hike to be implemented in stages in 2023 and 2024, given lingering Covid-19 risks. Selena Ling, head of treasury research and strategy at Oversea-Chinese Banking Corp., expects a staggered increase between this July and next.
“If you do it all at once it may be a little bit too much for consumers to stomach, because we have seen broad-based price increases as well,” she said.
To offset the GST increase, a S$6 billion cash pay-out package was announced in the 2020 budget to be distributed over the five years following an increase. Finance Minister Wong has also said more measures will be announced to address the rising cost of living, including permanent enhancement of a voucher policy providing cash, utilities and medical subsidies for lower-income households.
Wealth and Corporate Taxes
Singapore has been studying options to expand its system of wealth taxes, consulting the business elite on potential concerns over the past year. Only 7 of 13 economists expect new wealth-tax policies to be announced in the budget.
“Given the early stage of the review and the risk of over-tightening the fiscal stance with multiple tax hikes, we do not expect any concrete wealth taxes,” Mohamed Faiz Nagutha, a Singapore-based economist for Bank of America Corp., wrote in a research note last month.
In addition, multinational corporations that have enjoyed significant tax breaks over the years may be asked to level up, according to Irvin Seah, an economist with DBS Group Holdings Ltd. While Singapore’s corporate tax rate is above the minimum 15% set in a global accord last year, the Ministry of Finance has disclosed that a majority of the 1,800 firms that are eligible to be taxed pay a lower effective rate because of various forms of relief.
“A review of the tax incentives for MNCs will not only align Singapore tax policies to the global agreement, but it will also benefit the fiscal coffer,” Seah wrote Jan. 27. He added that other measures were also plausible, such as a reintroduction of estate duties and capital gains taxes.
Labour Shortfall
A plunge in Singapore’s foreign workforce during the pandemic has led to an acute labor crunch, with the ratio of job vacancies to unemployed last year jumping to 2.1, the highest level since 1997. Strict border restrictions and simmering local dissatisfaction about overseas labor have meant total manpower across all classes — from low-wage construction workers to high-earning expats — has not returned to pre-pandemic levels.
The government is under pressure to act as labor shortages cause construction delays and pose an inflationary risk. Economists at Maybank Investment Banking Group believe the government may further delay any tightening of limits on foreign workers, set to kick in next year, in sectors like manufacturing and construction.
Politicians will still want to safeguard the “Singaporean core” of workers, but a modified point system could be adopted to give companies more flexibility to attract foreign talent, especially in growth areas like digital services and infocomms, OCBC’s Ling wrote in a note last week.
“Singaporeans are not having more babies,” said Trinh Nguyen, senior economist for emerging Asia at Natixis. A laxer immigration policy is “necessary to solve the labor shortage as well as weakening domestic demand from an aging population,” she said.
Support for Business
With the economy expected to grow at a slower pace of 3%-5% this year and regional travel experiencing a tepid recovery, sectors that have yet to fully rebound from the pandemic could receive further support. In a Feb. 3 speech, Wong singled out industries like aviation and tourism for further aid.
Read more: Singapore, Hong Kong Left Behind as Global Travel Rebounds
“Singapore GDP remains well below trend, which indicates it is still in need of a helping hand from government,” said Sue Trinh, head of macro strategy for Asia at Manulife Investment Management. “We would like to see support to the labor market emphased, with a focus on wage and quality jobs growth.”
More targeted support such as rental waivers and relief could be extended to small businesses and food and beverage outlets, HSBC’s economists said.
Green Promises
A revised carbon tax rate for 2024 will be announced, with further clarity on what increases might be expected until the end of the decade.
Officials have acknowledged that the current levy of S$5 per ton of greenhouse gas is “too low,” as the city seeks to look beyond the fossil fuels that have been a bedrock of its economy for decades.
Economists surveyed by Bloomberg expect the tax to rise as high as S$25 to S$30 by the end of the decade, still below rates in other developed economies. A sharp increase could be “counter-productive in the short term and may even hinder broader economic progress, given the increased costs for both businesses and consumers that it would bring,” said Mark Addy, a Singapore-based partner at KPMG. Citigroup expects other initiatives to incentivise green borrowing and promote green and sustainable bonds to be announced.
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