WP's alternatives to GST hike 'do not add up', would either need middle income to pay more or use reserves: Lawrence Wong

Wong said he took issue at the simplistic narrative that the WP has painted of the government.

Fiona Tan | November 08, 2022, 06:04 PM

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Singapore's Deputy Prime Minister and Minister for Finance Lawrence Wong addressed points made by Louis Chua and Jamus Lim, Members of Parliament (MPs) of the Workers’ Party in his wrap-up speech in parliament on Nov. 7.

Wong spoke near the end of the debate on the Goods and Services Tax (GST) hike and the top-up to the Assurance Package to support needy Singaporeans.

Rebutting their points, Wong said their suggested alternatives in lieu of raising the GST "do not add up".

Points by WP's Louis Chua and Jamus Lim

Chua and Lim spoke at length against raising the GST in Parliament on Nov. 7, both explaining their views and suggesting alternatives to the GST hike.

Chua raised the following points during his speech:

  • It is not necessary to raise the GST as of yet as the government is supposedly currently in a favourable fiscal position;
  • Raising the GST, particularly during this current rate of inflation, is harmful as it raises the cost of living;
  • Measures to ease the GST increase are temporary and will diminish over time, taking into consideration that tax raises are "forever" and the ongoing inflationary climate;
  • Raising the GST could reduce GDP and private consumption considering the local and global economic conditions.

Fellow Sengkang MP Lim suggested the following:

  • The GST hike will cause further inflation;
  • Temporarily excluding certain categories of essential goods from the GST hike;
  • Implementing a multi-rate tax.

GST hike was a "very difficult decision"

During his round up speech, Wong explained why the government made the "very difficult decision" of increasing the GST, especially in the face of a "challenging economic environment".

Wong said conditions have deteriorated since the GST hike was announced during Singapore's 2022 Budget.

Despite this, he and the Ministry of Finance remain of the stance the GST hike is "necessary", especially since Singapore’s economic challenges are not just near-term or cyclical in nature.

He listed the ongoing invasion of Ukraine by Russia, disruptions to energy and food supplies, rising geopolitical tensions, and increasingly fragmented supply chains, saying that these are now realities that Singapore has to contend with, and possibly for a prolonged period.

International economic conditions have changed fundamentally, but at the same time, inflation rates, while expected to ease, are unlikely to go back to what they were in the past decade both locally and globally, he noted.

Supports in place to offset inflationary effects

Wong acknowledged that the cost of living would increase in view of the inflationary climate, and the government has thus extended "comprehensive support" to Singaporeans, particularly to the low and middle income families.

The support measures will fully offset the increase in spending caused by the inflation for low income and retiree households, whereas it will offset more than half of the inflation driven increase in spending for the "typical middle income household".

He added that there will be additional GST support for low and middle income families, with the aim of minimising additional inflationary pressures, which is a point Chua had brought up earlier.

With regard to the effects of a GST hike given Singapore's slowing economy and higher inflation, yet another point that Chua raised, Wong said it is "an appropriate macroeconomic stance to adopt at this juncture" as the overall package has been designed to neither "stoke inflation inadvertently nor choke aggregate demand".

Wong called Lim's examples "alarmist", saying he should know better

Wong also chided Lim, saying that as a professional economist, he should know better than to use Japan as an example during his argument against the GST hike.

"Context matters", Wong said.

Lim said earlier in his speech that Japan increased its version of the GST thrice over the past 25 years, and as a result, experienced double the inflation rate for up to a year each time they did so.

Lim therefore cautioned against the GST hike as it may lead to further inflation, especially when inflation is currently at "unbearable levels".

In response, Wong said Lim raised "alarmist examples", adding that what happened in Japan is not relevant to Singapore for three reasons.

Japan was in a deflationary environment, its inflation doubled from a "chronically low" 1 per cent to 2 per cent, and even then, it was only temporary.

The pitfalls of a multi-rate GST system

Wong said Lim's suggestion of exempting essential items from the GST hike not only does not work, but is also costly and "onerous to implement" and is "very, very cumbersome".

He pointed to an example in India, where a company claimed their pizza topping should be classified as cheese, and thus be taxed lower accordingly at 12 per cent instead of 18 per cent, which resulted in the courts having to sort it out. "No end of these sorts of challenges," Wong said.

However, the court disagreed as a fifth of the toppings constituted other ingredients such as vegetable oil, which is not considered as cheese, and thus falls under the higher tax class of "edible preparations".

Wong added that exempting essential items from the GST hike have be found to ultimately benefit those with high incomes, as "the well-to-do will spend more on everything, not just luxury items but basic necessities as well”.

He noted that 80 per cent of countries that implemented GSTs after 1995 have opted for a single rate system like Singapore's, saying that while exempting essential items from the GST hike may sound good on paper, it is not effective and does not work in reality.

He added that Singapore’s current GST system is effective and taxed consumption fairly and effectively and is "certainly not" the patchwork of offsets that Lim suggested.

Surplus has been used up

With regard to the point that it is not necessary to raise the GST as the government is supposedly in a favourable fiscal position, such as a fiscal surplus, Wong said: "I wish that were so."

While revenue will increase with inflation, government spending, such as public servants’ salaries and public support schemes, must also go up correspondingly.

For example, the revenue surplus of S$1.9 billion that was collected in the last financial year, as well as the better than expected revenue from the first half of FY 2022, has already been used up to fund two support packages.

Wong said: "The bottom line is, any surpluses you can think of are imaginary. They are not there and will not allow us to delay the GST."

On WP's suggestion for the government to accumulate reserves at a slower rate, Wong noted that while the WP has maintained that it was not raiding the past reserves, he said they were basically asking the government to use more of Singapore’s past reserves.

This may sound attractive, but would leave future generations with less resources, and is not the responsible thing to do.

"Let's not succumb to the temptation of taking this easy way out, making things worse for our children and grandchildren," he said.

Sums do not add up

Lastly, on the suggestion that the government raise its from other alternative source besides the GST, Wong pointed out that property tax and personal income tax has already been raised, but the "sums do not add up".

If the additional GST revenue was to be loaded onto personal income tax instead, the top marginal rates would go up from 22 to 42 per cent. "Why would the top earners stay in Singapore and earn 42 per cent tax?" Wong said.

Not to mention, raising corporate and income taxes could make Singapore less attractive to talent and investors, especially in an increasingly competitive climate.

"Surely our jobs and investments will be at risk if we are not able to keep pace and offer equally attractive value propositions in Singapore," Wong said.

Government spending has gone up

From increasing healthcare costs, to uplifting lower wage workers, to investing more in early childhood education, these various government policies and spendings have resulted in a "huge spending gap" that can only be funded by the GST revenue, in tandem with the revenue from all the other alternatives, Wong said.

While the WP is entitled to their position against the GST hike, Wong said:

"By all means, oppose the GST, adopt a different position, fine.

But at least be honest and responsible, acknowledge that your alternatives would either end up requiring the middle income to pay more or would use more of the past reserves, therefore (resulting in) less for the next generation.

And at least have the decency to acknowledge that the government had considered all of these alternatives. Carefully."

Wong said he took issue at the "false and simplistic" narrative that the WP has painted of the government, where it seems like alternatives to the GST hike has never been considered.

"We debated them in the Budget thoroughly and rigorously, before we decided on this move. I would have thought that what a responsible political party would have done. Unfortunately, I'm very disappointed that the Workers' Party has chosen to take a different path.

And I wonder if this is because they feel that this approach is the best way to advance their political agenda, as they have been over the years to paint the PAP government as uncaring and out of touch."

The Government passed the GST (Amendment) bill in Parliament, with all the eleven opposition Members of Parliament (MPs) standing up to record their dissent.

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