Consumer tax hike sours Singapore budget mood

May 4, 2002

Curbing the property craze

IG business came out tops in a Singapore budget filled with tax cuts, but many people worried higher consumer taxes next year will add to the pain for the unemployed, retired and lower income groups.

The government said on Friday, May 3 corporate and personal taxes would be cut immediately, but the fall in revenue would be offset by a hike in the goods and services tax (GST) to five percent from three percent next January.

"Pro-business or not, 70 percent of people don't pay tax. You still have to have a safety net. By raising GST, they will be squeezed against the wall," said Kuay Soong Teck, a marketing executive, who feels the budget benefits the well-heeled.

A five-year package of relief measures to help lower income groups cope with the rise in GST cut little ice with some people.

"They are trying to generate business. All I see is five percent GST with no exemptions for basic essentials," said Margaret Mok, a retired school teacher.

The changes will shift more of the tax burden away from personal income tax, which in Singapore is paid by a large minority, toward indirect consumer taxes, paid by the many.

"From an economic perspective, it's very straight-forward -- it's more efficient," said Chia Ngee Soon, associate professor of economics at the National University of Singapore. "But come to the man on the street, it's going to be quite hard."

The tiny island nation of four million is grappling with structural unemployment as it migrates to a knowledge-based and services economy from manufacturing, and the jobless rate is set to climb from an already three-year high of 4.5 percent.

"The cost of living is getting higher all the time and the GST rise is something that will affect everyone," said Eng Hui Hua, administration manager at an insurance firm.


The GST hike was expected to rake in additional revenue of S$1.32 billion (US$733 million) per year -- making up just half of the amount lost from the income tax cuts.

To cushion the GST rise, the government would hand out reliefs totalling S$1.23 billion this year and S$3.6 billion in bond-like Economic Restructuring Shares over three years.

Singaporeans will be given between S$600 and S$1400 of shares, which they can cash in or hold to receive dividend payments.

Public flat dwellers, about 80 percent of the population, will get an extension on rebates for rental and conservancy.

Carol Tan, who owns a florist, expects business to drop initially as people adjust to higher costs.

"Five percent is a lot of money to pay, on top of what you already have to pay, and concessions don't apply to everyone."

At a roundtable late on Friday, Deputy Prime Minister and Finance Minister Lee Hsien Loong stopped short of giving a guarantee that GST would not be raised again in the next five years as the political and economic climates could change.


The government says the increase in GST, still among the lowest worldwide, will not hurt consumption because more disposable income will be ploughed back into the retail sector and the economy, which is emerging from its worst recession in four decades.

Singapore's S$29.2 billion budget had aimed for a small surplus but, due to the relief measures for GST, is now expected to leave a deficit of S$190 million.

"The fact that the government is willing to have a mild budget deficit is an indication that it is willing to do all it can to help the economy grow and to reposition and that's a strong positive signal," said Marc Tan, principal fund manager at OUB Optimix Funds Management, which manages S$250 million.