Singapore Budget 2022: Will a higher GST change your weekend plans?

By Barnabas Gan

SINGAPORE — It is finally the weekend. After lunch at the shopping mall, you head for a foot massage. The meal costs about S$40 and massage S$35. After service charge and a seven per cent goods and services tax (GST), the total cost comes up to S$84 in two hours.

Fast forward to 1 July 2022. Assuming Singapore’s GST is now two per cent higher at nine per cent. The same meal and massage will cost you about S$86. The increase in cost seems negligible, or is it? While the date of the GST increase is still uncertain, this is a future that is fast becoming a reality.

Why should you pay nine per cent GST?

In 2020, Singapore entered the pandemic with considerable policy buffers and healthy frameworks. These included a very strong foreign reserve position and credible monetary policy, coupled with fiscal prudence and strong compliance with the balanced budget rule.

Even as the economy contracted 5.4 per cent in 2020, the rebound to a Gross Domestic Product (GDP) growth of 7.2 per cent in 2021 illustrated that Singapore will recover despite COVID-19-related drags. Singapore has one of the highest vaccination rates in the world. As at 1 February 2022, 92 per cent of Singapore’s eligible population received the full COVID-19 vaccination regime. This is a crucial indicator as Singapore reopens the economy.

However, Singapore urgently needs to build up a resilient tax revenue base to finance its social and economic programmes. The country clocked a record budget deficit of S$54.4 billion in 2020. This will be the biggest combined deficit in the first two years of the Government’s five-year terms since 1996.

In fact, tax receipts have not been enough to cover total expenditure in five out of the last six fiscal years. Singapore has reportedly drawn on past reserves equivalent to about 20 years of financial surpluses in just two years to combat COVID-19.

As such, the Government may introduce a two per cent increase in GST as early as July 2022. This is expected to add about S$1.8 billion in revenue in 2022 and S$3.6 billion annually, or close to 0.7 per cent of Singapore’s GDP.

As building Singapore’s foundation for sustainable finances will be a key focus of the Budget 2022, we may likely see an overall budget surplus of S$0.2 billion in 2022, the first positive balance since 2019.

Precious resources for precious needs

Singapore, like many developed economies, has an ageing population and healthcare costs are set to increase. The country will also continue to spend heavily on defence and education, as these remain top priorities for a successful economy.

In 2022, a sizeable expenditure will likely be dedicated to healthcare (18.3 per cent), defence (16.5 per cent), education (13.9 per cent) and trade and industry (8.8 per cent). Help for COVID-19 battered sectors such as retail, hospitality and transport could still be on the cards as they remain vulnerable to an unanticipated surge in COVID-19-related risks. Additional revenue will be needed to meet these essential demands.

Top sources for Singapore’s piggy bank

Historically, Singapore’s top three revenue sources came from corporate income tax, personal income tax and GST receipts. Between 2016 and 2020, these sources accounted for more than 52 per cent of Singapore’s total revenue. In the first half of 2021, these sources well exceeded 50 per cent of 2021’s budget projections, supported by the favourable economic and business conditions despite COVID-19.

Collectively, Singapore’s overall “income” in the first half of 2021 was 56.2 per cent of the official 2021 budget estimates. This might seem like a healthy amount, especially as Singapore gradually reopens the economy. But in the face of an uncertain macro environment with sustained COVID-19 risks, China’s economic slowdown and inflation risks globally, it is perhaps wise to stay prudent and save for a rainy day.

Another contribution into Singapore’s piggy bank is the Net Investment Returns Contribution (NIRC). NIRC is defined as investment returns from Singapore’s reserves from assets managed by GIC, the Monetary Authority of Singapore and Temasek, as well as income from past reserves. The NIRC increased an average of 10.4 per cent from 2010 to 2019, outperforming the rise in Singapore’s expenditure. For 2022, we expect the NIRC to grow by 33 per cent to S$26 billion.

Yet, these revenue sources are still insufficient to cover Singapore’s spending needs and build its reserves.

Hence, we think GST will increase to nine per cent from as early as 1 July 2022.

Your weekend plans

While the GST increase is inevitable, we think the government will cushion the impact through various schemes. As announced in the 2020 Budget, the Government will introduce a S$6 billion Assurance Package to delay the effects of the GST rate increase by between five and ten years.

We expect cash payouts to adult Singaporeans and an enhanced GST Voucher (GSTV) scheme, which will mitigate the impact of the higher tax. As seen back in 2021, the GSTV cash payouts were allocated based on annual income, and annual home value with caps of S$28,000 and S$21,000 respectively. This suggests that Singaporeans who are more vulnerable will receive more help.

The government could also top up the Community Development Council (CDC) vouchers, which will boost domestic consumption and Singapore’s retail sector.

There are 52 weekends in a year. You may spend a few weekends joining the mad rush to shop before GST increases. You may spend others in the neighbourhood, enjoying a meal at a coffeeshop courtesy of the CDC vouchers.

But perhaps your weekend plans may not change much after all.

Barnabas Gan is an economist at UOB and he is responsible for providing macroeconomic research focusing on Singapore, Thailand and India.