G. PRESERVING A FAIR AND SUSTAINABLE FISCAL SYSTEM
Our Future Expenditure Needs
G.1. We expect government expenditure to increase over the medium to long term. It will be driven mainly by three areas:
G.2. First, healthcare. I spoke earlier of our significant expansion in healthcare infrastructure, such as the increase in public hospital, community hospital, and nursing home capacity by 2020. We have also enhanced subsidies at Specialist Outpatient Clinics, and Intermediate and Long term Care. We will now be extending significant subsidies for low and middle-income Singaporeans for MediShield Life premiums. Operating expenditures will thus also increase as our population gets older and as healthcare consumption goes up.
G.3. While we had set aside monies last year to fund the full projected cost of the Pioneer Generation Package, the underlying healthcare subsidies received by all Singaporeans will need to be funded from annual budgets.
G.4. Altogether, healthcare spending is expected to rise from over $9 billion in 2015 to over $13 billion in 2020. It will continue to increase beyond this decade.
G.5. Second, improvements to our public transport. As the Senior Minister of State for Transport has just stated this afternoon, about $14 billion has been deployed to the public transport system over the past five years, and another $26 billion has been committed for the next five years.
G.6. Third, the development of Changi Airport T5. This will be a major outlay for this Government over the next 10 to 15 years. It is right and prudent to set aside monies today for this large investment, while we have the resources to do so.
G.7. We will therefore set up a new Changi Airport Development Fund (CADF) and make an initial injection of $3 billion into the fund. This can be topped up subsequently when our fiscal position allows.
G.8. Our spending on healthcare, public transport and Changi Airport will be complemented by other essential expenditures such as enhanced domestic security and the rejuvenation of our neighbourhoods. We are also spending more through education and SkillsFuture to build the human capabilities that we need for the future, and develop every Singaporean’s potential.
G.9. Together these initiatives will enhance the quality of life in Singapore and develop sustainable competitive strengths for our economy and jobs. We must ensure that we are able to finance these growing expenditures.
G.10. But equally important, we must ensure that we control costs in the years to come. Last year, I spoke about how the Government will seek to control healthcare costs. As we embark on large infrastructural projects, we are placing great emphasis on optimising project design and cost efficiency. Overall, we must spend judiciously, achieving value-for-money and providing subsidies to Singaporeans in a fair and targeted manner.
G.11. However, government spending will inevitably rise. We project overall spending to reach about 19% to 19.5% of GDP on average over the next five years. This is about 1% of GDP higher than the revenues we have today.
Including Temasek in the Net Investment Returns (NIR) Framework
G.12. It is therefore necessary that we take steps now to strengthen future revenues, to put Singapore on a firm fiscal footing for the rest of this decade.
G.13. The first enhancement we are making is within the NIR framework. The NIR framework was implemented in 2009. Under the framework, the Government is allowed to spend up to 50% of the expected long term real returns on its net assets managed by MAS and GIC. It was a significant change from the old Net Investment Income (NII) framework, under which the Government could only spend from actual investment income, comprising dividends and interest. In contrast, the new NIR framework allowed the Government to spend based on expected long-term returns, including both realised and unrealised capital gains.
G.14. The NIR framework was intended to be eventually applied to the expected returns of all three investment entities - GIC, MAS and Temasek. We proceeded with GIC and MAS first.
G.15. We had deferred Temasek’s inclusion in the NIR framework in 2008, and indicated that we would review this after some years. There were two reasons. First, there were no established methodologies for projecting the long-term expected real return on its portfolio, given its investment approach of taking concentrated stakes and making direct investments. Second, Temasek’s investment strategy was still evolving, having begun to invest in more geographies and sectors since 2002.
G.16. We are now ready for our spending rule to be based on the total expected returns of all three investment entities, including Temasek. We have worked with Temasek to develop an approach to project its expected long-term returns, taking into account the nature of its investment portfolio, although its equity-only portfolio will continue to be more volatile and subject to more pronounced investment cycles than the MAS and GIC portfolios. Including Temasek in this framework would enable us to spend based on its total expected returns, including realised and unrealised capital gains, and not just actual dividends paid by Temasek to the Government.
G.17. Our fiscal needs have also grown since 2008. When we amended the Constitution then, we were able to derive significantly more resources for our spending on investments in education, learning and training, as well as innovation and R&D for the future. It is now timely that we have this further enhancement to include the expected returns of Temasek in the NIR framework. The move will bolster our fiscal resources at a time when we have to fund long-term critical infrastructure and develop the human talent and capabilities to secure our future. It continues to ensure that we spend from our reserves in a sustainable manner, so as to benefit both current and future generations.
G.18. We aim to present a Constitutional Amendment Bill to Parliament later this year.
Personal Income Tax
G.19. On top of deriving these additional resources, we have to review our domestic taxes, so that we bolster our fiscal position for the medium to long term.
G.20. Our philosophy is, first, to sustain a vibrant economy that will help to improve Singaporeans’ lives. Keeping our economic vitality is central to our social strategies, so that we have fruits to redistribute and share to make an inclusive society.
G.21. Second, we should have a fair and equitable system of taxes and benefits. It means that everyone has to pay some tax, and everyone is hence contributing to the public services and the investments in our people, heartlands and economic future that we all benefit from. The majority of Singaporeans do not pay income tax, but they pay GST. However, while everyone contributes something for a better Singapore, those who are better-off should contribute more.
G.22. Third, we have to keep the tax burden on the middle-income low, so that they get to keep what they earn, as much as possible. In several advanced countries, taxes on the middle-income are much higher than in Singapore, in order to fund higher social benefits: not just for the lower-income but often for everyone else including the upper-middle income and the rich. Our philosophy is to keep the burden on the middle-income low, and target benefits at the most important needs of the poor and middle-income groups. Taken overall, this is a better deal for middle-income households.
G.23. Hence, we have designed our system such that we have lower overall taxes than most countries, but nevertheless maintain a highly progressive regime. The higher-income group makes a significant net contribution into the system, which enables the lower-income group in turn to get significantly more benefits than the taxes they pay. In other words, when we add up all our taxes – GST, income, property and other taxes – and compare them to benefits received, the low income group gets more benefits than the taxes they pay, while the high income tax pays more taxes than benefits received.
G.24. I have spoken in the past few years about the need to build up our revenues, but to do so in a way which keeps our system of taxes and benefits as a whole progressive.
G.25. Our first move was to make our property tax regime more progressive. In Budget 2010, we moved from a flat owner-occupier tax rate for residential properties and introduced progressive tax rates which tax properties with higher annual values more. In Budget 2013, to further increase progressivity, we added more tiers of tax rates and we also introduced progressive tax rates for non-owner occupied residential properties. These changes were made over two years, with the latest tax rate schedule taking effect from 1 January 2015.
G.26. I will now make a further adjustment in our tax system, which is to raise the personal income tax rates of our top income earners. It will take effect in YA 2017.
G.27. We have a competitive personal income tax regime, much lower than most countries. It is also, as I have explained, a progressive system. The top 10% of our taxpayers pay slightly over 80% of personal income taxes.
G.28. Nevertheless, we have been making our income tax regime more progressive in recent years. In Budget 2011, we reduced taxes significantly for the middle-income, without changing the tax rates for high-income earners. We have also introduced and enhanced negative income taxesfor our lower-income groups. Workfare was introduced in 2007 and enhanced in 2012. Likewise, this year we will be introducing Silver Support for those in retirement who had low incomes.
G.29. It is fair that this enhanced support for those with low incomes should come chiefly from revenues contributed by the high-income group. Those with higher incomes have also been seeing stronger growth in incomes than the average Singaporean in recent years.
G.30. We have considered this carefully, and concluded that there is a need to increase slightly our top marginal income tax rate.
G.31. I will raise the marginal tax rates that affect the top 5% of our income earners. I will raise the top marginal rate by two percentage points, from 20% to 22% for the highest income earners, with a chargeable income above $320,000. I will also make smaller adjustments that will raise income tax for the others in the top 5%. It will apply starting with income earned in 2016, and on taxes to be paid in 2017.
G.32. This tax increase for high-income earners will enhance progressivity and strengthen future revenues. This is a calibrated move. We have assessed that it should not significantly dent Singapore’s competitiveness.
G.33. We cannot take tax competitiveness lightly. The international competition for talent is real, for both Singaporeans and foreigners. Many Singaporean professionals are in fact working abroad, such as in Hong Kong. Of course, tax rates are not the only way we stay competitive. Singapore has other key strengths including our culturally diverse and cohesive society, a family-friendly environment, clean air especially compared to other Asian cities, and a world-class healthcare system.
G.34. But it would be naive to think that we can keep raising tax rates without affecting our competitiveness. We must remain an attractive place for world-class teams to be in Singapore with Singaporeans at the core, and to keep our place in the world. This will keep our economy vibrant, and retain talent, so that all can contribute to building a better Singapore.
G.35. Let me now illustrate the impact of the tax changes. It will affect the top 5%, who earn at least $160,000, but the increases being larger for the highest income earners. This is because our marginal income tax rates rise significantly towards the top end of incomes.
a. For someone earning $250,000 a year, his effective tax rate will increase from 8.3% to 8.5%, with additional tax payable of $400.
b. A higher-income earner with income of $800,000 will see his effective tax rate increase from 16.0% to 17.4%, with additional tax payable of about $11,000.
c. A top income earner with income of $1.5 million will see his effective tax rate increase from 17.9% to 19.5%, which leads to an increase in tax of about $25,000. (Refer to Annex A-6 for the full schedule.)
G.36. The change to the top PIT rates is expected to raise additional revenue of $400 million a year when it comes into effect.
G.37. When we put it all together, this change – which takes effect in 2017 – as well as including Temasek in the NIR framework, will provide additional revenues equal to about 1% of GDP annually for the Budget over the next 5 years.
G.38. Based on current projections, the revenue measures we have undertaken will provide sufficiently for the increased spending needs we have planned for till the end of this decade. This must remain our approach - ensuring that we always have the resources to meet our commitments.
FY15 Budget Position
G.39. For FY2015, the Overall Budget Balance is projected to be a deficit of $6.7 billion (1.7% of GDP). However, this deficit comes about mainly because of the $6 billion we are setting aside for future investments: in particular, $3 billion into the Changi Airport Development Fund, and significant top-ups for the Special Employment Credit Fund, National Productivity Fund, and the National Research Fund. If we were to exclude these funds set aside for future investments, the Budget for FY2015 will in fact be quite close to balance.
G.40. We have sufficient surpluses from previous years of this term of Government to enable us to invest ahead and fund the overall deficit in FY2015. There is no draw on past reserves.
Last updated on 23 Feb 2015