Question

Singapore PM Lee Hsien Loong announced in a speech (Links to an external site.)Links to an external site. late last year that "raising taxes is not a matter of whether, but when".

1.Explain with the help of data in a graph how Singapore's fiscal position has evolved and how it might evolve over the next 5 years. State clearly what your data source(s) and assumptions.

2. To what degree do you agree that taxes need to be raised in Singapore in the future? (Remember to consider both sides of the argument for full marks.)

Answer 1

1) Over the last three decades, the development expenditure of the Singapore Government has accounted for around one-third of government expenditure on average. The key areas of expenditure are on education, public housing, health care and national security since, the government is committed to building and maintaining world-class economic infrastructure and services. The main source of funding for the government has been its tax policy structure which has also been able to enhance its economic competitiveness and attract foreign investments. Singapore’s fiscal policy is directed primarily at promoting long-term economic growth, rather than cyclical adjustment or distributing income. The fiscal plan of the Singapore government goes well beyond immediate short-term challenges. The fiscal policy strategizes to prepare and gear up the country to meet the challenges and seize the opportunities arising from three major shifts in the decade ahead: the increasing popularity of the Asia- Pacific region in the global market; rise of new technologies; and a fast ageing society. Thus, Singapore’s fiscal policy has been remarkably successful over the years because of which it has been able to enjoy consistent budget surpluses. This has contributed to a level of high savings rate that allows it to achieve one of the highest investment rates in the world, thus accumulating high level of foreign reserves. Since, it does not have to incur much foreign debt, the investor has become more confident about the Singapore market and it has provided the economy with a buffer against adverse economic shocks. The combination of fair tax policies and prudent expenditure programs have complemented the monetary policy in promoting sustained and non-inflationary economic growth. The latest Budget seeks to enable Singapore firms to be innovative, build capabilities including digital skills, and to find business partners here and abroad. Singapore is on a sound fiscal footing. Its FY2017 budget is projected to report a $9.6 billion surplus, which is $7.7 billion higher than earlier projected. The officials predict that this upward trend is likely to be the same through the decade to 2020, due to prudent planning and changes to strengthen the revenue flows.

2) The Goods and Services tax collection accounts for about a quarter of the country's total tax collection.Thus, there may not be need for the government to increase the GST rate in the short term. However, in the long term, in order to balance fiscal spending against sources of revenue the government might need to revise the rate structure.