The GST spin and the whole truth

Part 2 of the series on the GST hike

Continuing from my previous post, this post will highlight some of the spin that the government and the mainstream media has been putting out to soften the blow of the GST hike announcement. It will also explore some other possible reasons for the government’s decision, not all of which have been publicised.

In most other developed countries, a two per cent increase in consumption tax – which will impact every single resident in the country – would be cause for a huge public outcry. In Hong Kong, the government’s mere proposal to introduce a 5 per cent GST sparked huge protests in August by 3,000 to 10,000 Hong Kongers, including local businesses operators, traders and retailers.

Unsurprisingly in Singapore, where street protests are banned, the shock announcement has been met with meek acceptance by MPs and the mainstream media, and a sense of resignation by the general population.

The spin

The government and the mainstream media are fond of comparing figures with other countries to show how much better off Singaporeans are. TODAY’s report (15 November) dutifully did a “consumption tax comparison” between Singapore and other countries. It cited how Australia, Europe, the UK and New Zealand have GSTs of between 10 and 17.5 per cent.

The sales tax in the US was listed as being “up to 9.4 per cent”, but the report conveniently omitted the fact that some states like Oregon, Delaware and Montana don’t even have sales tax. In New York city, although the sales tax is 8.325 per cent, essential items like groceries and clothing under US$110 are exempt.

The report also failed to mention that these countries are all welfare states (to varying degrees) which spend a higher proportion of government revenue on public assistance and health care than Singapore. Australia, for example, spent A$17.1 billion or 2.3 per cent of its GDP on just welfare services in FY2002-03. In contrast, the Singapore government’s total expenditure on health and community development, youth and sports in 2005 took up only 1.28 per cent of that year’s GDP (assuming that all of it goes to public assistance, which it certainly doesn’t.)

On the other hand, Japan, a developed economy just like Singapore, has continued to maintain its 5 per cent consumption tax. Hong Kong, which has a corporate tax rate that is 4 per cent lower than Singapore’s, has yet to even implement their proposed 5 per cent GST.

Local blogosphere hasn’t been so acquiescent in its reaction to the GST hike announcement. It is one of the hottest topics on local blogs, with article after article (some say too many) slamming the GST as a regressive tax which will hurt the poor.

The mantra that the government is singing to Singaporeans is that the GST hike is about “tilting the playing field in favour of the poor”. Coming hot on the heels of the tragic suicide by a Singaporean in financial crisis and the Wee Shu Min affair, the government has probably calculated that the best way to sugar coat this bitter pill is to emphasise that most of the additional revenue collected will go to help the poor.

The whole truth (well, at least some of it)

The actual reasons for the increase are not as clear cut as the sound bites portray. Firstly, the government is trying hard to balance the budget, which is currently in deficit. Between FY2002 and FY2006, the government accumulated a net overall budget deficit of $4.23 billion. (Note: This figure does not factor in additional inflows like capital receipts from statutory boards – more of this in my next post.) In certain circumstances, a large and prolonged budget deficit could lead to higher inflation and interest rates (although not necessarily so).

Secondly, the GST hike will give room for the government to further lower corporate and top bracket personal income tax rates to increase economic competitiveness. As globalisation and Singapore’s high operating costs are resulting in more and more multinational companies (MNCs) relocating to lower cost countries like China, the government is desperately trying to boost the incentives for these entities to remain in Singapore. Slashing direct taxes for high income earners and MNCs is seen as key to achieving this.

Thirdly, with the elections over (but not too recently) and the PAP receiving its “strong mandate”, there is no better time than now to feed Singaporeans the bitter medicine so they will have more time to forget its unpleasant aftertaste before the next elections in 2011.

Lastly (and this is what the government is emphasising), with an ageing population, growing income inequality and more populist pressure to increase social spending, the government is embarking on a policy shift to provide a little more financial assistance to the needy. Someone will have to pay for this “Workfare” assistance.

However, it is unlikely that the entire $1.5 billion expected windfall from the GST increase will be used to fund social assistance programmes. Institute of Southeast Asian Studies researcher Terence Chong told TODAY (15 November) that he “doubt(s) the full amount will be used purely for assistance programmes. Some of it may go into research and development costs, some may be used to fund education.”

Conclusion

Despite the concerted efforts by the government and the media to paint a rosy picture behind the GST hike, it is clear that the announcement is not going down well with most Singaporeans, except the fiscal conservatives who dominate the Establishment. Keeping in mind that it is still three months before Budget 2007 is officially announced, I would not exclude the possibility that the government might back down slightly under pressure on the GST hike. Singaporeans might either see a very gradual increase in the GST rate or generous offset packages to help them cope with the hike.

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Coming up next….Some suggestions on how the government could balance the budget without hiking the GST.

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3 thoughts on “The GST spin and the whole truth”

  1. Sorry, I meant to say that the GST hike is not as rosy for the poor as the govt would have us believe.

    If you ask me, I’m rather optimistic about the future of Singapore as a whole. Just that there are certain things which don’t seem right which we need to speak out on.

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