Advertisement

Who wins and who loses from the Singapore Budget 2018?

Singapore’s economy is at a sweet spot. The country’s gross domestic product grew at 3.6% in 2017. Not only was this much higher than the 2.4% achieved in the previous year, it also exceeded the government’s estimate of an expected growth rate of 1% to 3%.

But the good news doesn’t end there. In 2017, Singapore managed a budget surplus of S$9.6 billion, the highest in 30 years. That’s a remarkable achievement in view of the fact that an earlier estimate had forecast a surplus of only S$1.9 billion.

What does Heng Swee Keat, the country’s finance minister, plan to do with this bounty? Firstly, he has clearly indicated that the nation cannot expect a budget surplus of this amount in the coming years.

Last year’s S$9.6 billion got a big boost from the contribution made by the Monetary Authority of Singapore. The regulator made big gains from currency fluctuations. The country invests large amounts in different international currencies. In 2017, these investments were highly profitable.

Here is what the finance minister plans to do with the surplus:

  • Rail infrastructure will get S$5 billion, an investment in Singapore’s future.

  • Another S$2 billion will be spent on subsidising ElderShield premiums. ElderShield is a type of insurance for the nation’s elderly. It provides a monthly cash payout to disabled seniors to help them meet their expenses.

  • Finally, in a radical move, the government will make a cash payment of S$100/S$200/S$300 to each adult Singaporean. This is a step that has been taken by the government to “share the fruits of Singapore’s development with Singaporeans.”

 

GST rates – up, up and away

Singapore’s goods and services tax (GST), a tax on domestic consumption, is a major contributor to the nation’s revenues. In 2016, GST accounted for about 13% of the government’s inflows.

When it was introduced in 1994, GST rates were fixed at 3%. But over the years, the rates have been repeatedly hiked.

 


Source: Bloomberg

 

The 2018 budget proposes to raise the rate of GST to 9% from its current level of 7%. This increase will be implemented sometime in the future. The Budget 2018 document explains, “… the Government plans to raise GST by two percentage points, from 7% to 9%, sometime in the period from 2021 to 2025.”

That timeframe could be confusing for Singaporeans. Will the increase be implemented in 2021 or four years later, in 2025? The finance minister has subsequently clarified that “I expect that we will need to do so earlier rather than later.”

So Singaporeans should get ready for an increase in the cost of living in about three years.

Here’s what the government plans to do with the extra money that it collects by hiking GST rates:

  • Pay for the rising costs of healthcare. In a little over a decade, the number of elderly will rise from 450,000 to 900,000. Large sums will be needed to pay for their healthcare expenses.

  • Invest in infrastructure, including expansion of the existing rail and bus networks.

  • Increase the amounts that are spent on education, especially for pre-schoolers.

 

Increase in buyers stamp duty

Singapore’s property market is finally changing direction. For four years, residential property prices were in decline. But in the last two quarters, prices have registered an increase. A Bloomberg poll of 11 analysts reveals that prices are expected to increase further by 5.5% this year.

Capitalising on this development, Budget 2018 has increased the rate of buyers stamp duty (BSD). BSD is payable when documents are executed for the sale and purchase of property.

However, the rate increase is limited in its scope. It affects only residential properties that are valued in excess of S$1 million. The existing maximum BSD rate of 3% has been raised to 4%.

Here is how the change, which is applicable from 20 February 2018, will work:

 


Source: Inland Revenue Authority of Singapore

 

The rationale behind increasing the duty for high-value residential properties is to promote “progressivity.” A progressive tax is one where high-income people pay additional amounts. The government has decided to increase BSD in preference to other means to tax the rich.

The finance ministry had received suggestions to introduce wealth tax/capital gains tax. But finance minister Heng Swee Keat has preferred to hike BSD.

He has probably chosen this route as implementing an increase in BSD is simple and does not require any additional tax collection infrastructure. Rising residential property prices also presented a good opportunity to increase taxes without much of an adverse effect on the property market.

 

Who benefits? Who loses?

Obviously, any change in the government’s taxation structure and expenditure will not affect all Singaporeans equally. Some sections will benefit while others lose out.

Here’s a quick analysis of the gainers and losers:

 

Benefits

  • A one-off bonus for every Singaporean – the budget surplus in 2017 has prompted the government to declare a “hongbao” for everyone. Here’s how much you can expect:


Source: Budget 2018

 

  • Enhanced proximity housing grant – if you are planning to buy a flat so that you can live closer to your parents, the government will provide you with an increased financial incentive. Formerly, a family that bought a resale flat that allowed them to live closer to their parents was eligible for a grant of S$20,000. This sum has now been enhanced to S$30,000. Increases have been made for other categories of beneficiaries too, under this incentive scheme. Additionally, the definition of ‘proximity” has been revised upwards from 3km to 4km.

  • Service and conservancy charges rebate + GST vouchers to be enhanced – the government is planning to spend S$126 million to extend the existing scheme to provide a rebate to HDB households that receive a rebate on their service and conservancy charges.
    Additionally, lower-income households and seniors will benefit from an enhancement in the permanent GST Voucher scheme when GST is increased.

 

Losses

  • GST on imported digital services – from 1 January 2020, Singaporeans will have to pay GST on imported digital services. This will apply to, among other items, the amounts that you spend on downloading music and apps from overseas.

  • Cigarettes and other tobacco products will be costlier – Budget 2018 has imposed a 10% hike in tobacco excise duty across all tobacco products. This move will result in increased expenditure for the 12% to 14% of Singaporeans who are smokers.

  • Buyers of flats that cost more than S$1 million – the impact of the increase in BSD is applicable only to the value in excess of S$1 million. So, a S$2 million flat will attract additional BSD of S$10,000 (1% of S$1 million.)

 

Preparing for the future

The question that could be on the lips of many Singaporeans is why should the government increase the rate of GST when there is a surplus budget. In fact, the government is even distributing a gift of S$100 or more to every Singaporean.

The answer to this has been provided by finance minister Heng Swee Keat when he said, “This GST increase is necessary because even after exploring various options to manage our future expenditures through prudent spending, saving and borrowing for infrastructure, there is still a gap.”

 

This article first appeared on ZUU online.

ZUU online is an Asia-based financial education online portal. Founded in Japan by Kazumasa Tomita, a former private banker at Nomura Securities, the portal seeks to fill the information gap between institutional research houses and the private investor.

 

(By Ravinder Kapur)

Related Articles
- Insurance in Singapore: From Buying To Making A Claim, Here Is What You Need To Know
- Technical Analysis | A Complete Beginners’ Guide
- Beginner’s guide to investing in stocks in Singapore: everything you need to know