On Feb. 19, Singapore’s Minister of Finance Heng Swee Keat delivered the nation’s budget for 2018. While budget speeches are typically uneventful, this year’s event was preempted by hints of an increased Goods and Services Tax (GST), as well as introducing means to tax the ever-growing ecommerce industry.

As it turned out, Budget 2018 actually exceeded expectations. For not only was there an additional carbon tax introduced instead of the two anticipated, it was also revealed that Singapore achieved a bumper budget surplus of S$9.61 billion (US$7.31 billion) in the full year 2017.

The surplus, which amounts to roughly 2.1 percent of the GDP last year, left many citizens baffled, to say the least. Why the need for more taxes when state finances appeared to be thriving? Why grow the tax base when it appeared to be more than enough?

Increased state spending

The answer, which was delivered by Mr. Heng between the seemingly untenable positions of a healthy surplus and increased taxes, is a significant increase in projected state spending. On the whole, total state expenditure is budgeted to increase by 8.3 percent in 2018 from S$73.9 billion (US$56.3 billion) to S$80 billion (US$60.95 billion). The bulk of this increase will go towards infrastructure development in sectors such as national development, home affairs, as well as trade and industry.

The biggest projected increase in development expenditure however, is targeted at transportation. By the end of this year, spending on transportation infrastructure is budgeted to increase to S$11.9 billion (US$9 billion) from S$7.4 billion (US$5.64 billion) in 2017. Given the litany of massive ongoing projects such as the new Changi Airport Terminal 5 and the KL-Singapore high speed rail, this is hardly surprising.

One noteworthy transportation project however, is the proposed expansion of Singapore’s rail network by over 100km through the Thomson-East coast line and Cross-island lines. What makes this unique is that the Singapore government through their transportation arm, the Land Transport Authority (LTA), only recently in 2016 subsumed responsibility over the rail infrastructure from SMRT corporation. The deal, known as the Rail Financing Framework, shifts responsibility of building-up, replacing and upgrading trains and train tracks to the state, which accounts for a significant portion of development expenses. On the back of the rail expansion plans, Mr. Heng announced in Budget 2018 the setting up of a new Rail Infrastructure Fund, which will receive an injection of S$5 billion (US$3.81 billion) this year directly from the last year’s surplus. This fund is similar to the Changi Airport Development Fund set up in 2015, although in the case of airport development, a separate levy was introduced shortly after Budget 2018 to aid with development costs.

Addressing the ageing population

Singapore’s median age has been steadily rising from 34 years in 2000 to 40.5 years in 2017, raising concerns about future healthcare needs.

Aside from transportation development, Mr. Heng has also stressed the need for increased healthcare spending in the long term. This issue, of course, is hardly new. With Singapore’s median age steadily rising from 34 years in 2000 to 40.5 years in 2017, coupled with a birth rate that has fallen from 1.6 to 1.16 over the same period, it is little wonder that the state is concerned about meeting future healthcare needs.

In light of this, Mr Heng stated during Budget 2018 that state spending on healthcare is likely to “rise quite sharply” within the next three to five years. Despite the 2018 budget for healthcare of S$10.2 billion (US$7.77 billion) being slightly less than spending in the last budget year of S$10.4 billion (US$7.94 billion), expenses are expected to increase by at least S$3.5 billion (US$2.67 billion) by 2020. The majority of these funds will go towards increasing the state’s healthcare capacity, where Mr. Heng has projected building six more general and community hospitals, four new polyclinics, as well as more nursing homes and eldercare centers within the next five years.

Given these projections, Mr Heng has noted that healthcare spending is likely to overtake education spending within the next decade. This sharp rise is reflective of the general trend in healthcare spending. Where education expenditure increased by 20.8 percent from S$10.5 billion (US$8 billion) in 2017 to S$12.7 billion (US$9.68 billion) in 2017, healthcare spending has more than doubled over the same period, growing from S$4.7 billion (US$3.58 billion) in 2012 to S$10.5 billion (US$8 billion) in 2017. Averaging over the five-year period, this sharp growth amounts to an annual spending increase of 24.9 percent. And if Mr Heng’s healthcare spending projections materialize, it may soon grow to over three times the 2012 amount by 2020.

Protecting Singapore’s “precious nest egg”

It is on the back of these projected spending increases, both in the short term and long term, that the state has announced the new tax policies going forward. With Singapore budgeted to incur a primary deficit of S$7.3 billion (US$5.56 billion) in 2018, it is clear that existing operational revenue will not be sufficient to cover the nation’s growing expenditure needs, lest the nation dips into its reserves or borrows funds.

And Singapore’s leaders have been heavily guarded on the matter, with Prime Minister Lee Hsien Loong commenting on how the government decided against tapping more of its reserves in order to protect Singapore’s “precious nest egg.” As PM Lee points out: “When the rain comes … and the children and grandchildren need the money, really truly, they will find it’s gone.”

Therein lies the political tension of Singapore’s fiscal policy. While the government recognizes that increased spending is required to meet the needs of our country, it is unwilling to break away from the fiscally responsible roots that has underscored Singapore’s tremendous growth since its independence.

What this means in terms of policy is prudence and saving, and what this means for citizens is that you have to give as much as you receive. To maintain its conservative traditions, therefore, requires the state to bring in more revenue the more it intends to spend on the nation. To ensure that future citizens are able to enjoy benefits from the state requires more resources and saving from today’s residents. These are the time preference trade-offs that are imposed onto Singapore’s citizens by the government. This is how Singapore is trying to square the circle.

Certainty amidst uncertainty

Now, to be clear on the matter, it is by no means a guarantee that everything the government spends going forward will be successful. Nor is it the case that each citizen will receive state benefits equally; the person who has worked and saved up for a car will not use the trains as often, and the person who takes better care of themselves will have fewer trips to state hospitals.

However, what is absolutely clear is that the taxes will be an additional cost. For a country that traditionally has had low taxes compared to its neighbors, the 2 percent increase in GST beginning in 2021 will likely have the double effect of hurting its citizens and its own competitiveness as a nation.

On the whole, however, Singapore is still relatively attractive within the region. For instance, at a corporate rate of 17 percent, the country is only bettered by Hong Kong at 16.5 percent. Meanwhile, Singapore’s rate is more attractive than Australia and the Philippines at 30 percent, or its immediate neighbors Indonesia at 25 percent, and Malaysia at 24 percent.
In terms of individual taxes, Singapore’s top rate of 22 percent is again only second best to Hong Kong at 15 percent. Though, it compares very favorably against higher tax countries, such as Japan at 55.95 percent, China at 45 percent, and Australia at 45 percent.
Indonesia and Malaysia are not too far off, however, with top individual rates of 30 percent and 28 percent, respectively.

Where Singapore faces stiffer tax competition is in the category of goods and services taxes or value-added taxes. Even at its current level of 7 percent, Singapore is only barely ahead of Japan at 8 percent, while it is level with Thailand and beaten by Malaysia at 6 percent, and Hong Kong, which does not implement any VAT. This makes Mr. Heng’s announcement of a GST increase even more bewildering. The proposed rate will push Singapore towards the high end of VAT, where its proposed rates of 9 percent are only marginally better than that of Australia, Indonesia, and South Korea, all of which are at 10 percent.

Cautioning against state spending

Now, it is of course naive to think that a nation’s attractiveness to foreign investment or business is dependent solely on how low its tax rates are. In Singapore’s context, some of these other pull factors include a stable political scene, a highly educated workforce, strong legal institutions, and the relative ease of doing business. And, to be fair, much of the foundations of Singapore’s attractiveness can be traced back to its free market orientations and the business-friendly policies set by the state.

However, historical performance does not necessarily guarantee future success. And just because a government has led a nation to prosperity from poverty does not mean that has complete foresight over the right paths going forward. This is more pertinent, given the case of Singapore’s present fiscal existential crisis as I have argued in this article. And as the state pushes for greater and greater levels of spending in the name of welfare for the whole, we should at least be wary of the tradeoffs and its effects on society.

One such risk pertaining specifically to growing healthcare spending is the risk of moral hazard. This is the problem in which a safety net incentivizes risky behavior and is commonly associated with various kinds of insurance for vehicles, health and even bank deposits. In the case of Singapore’s healthcare spending, we should question whether a greater capacity for healthcare will actually improve public health, or whether it will just provide a greater tolerance for poorer health. For the act of building up healthcare capacity allows individuals to take more comfort in knowing that they will be cared for in times of need, which results in a shifting of responsibility of health from the individual to the state. And when the state bears the burden of the health of the nation, each individual has more incentive to abuse it. Just like how one drives a rental more dangerously with car insurance, an individual is likelier to live unhealthily knowing that they will be taken care of. Therefore, while growing healthcare spending might seem necessary, given Singapore’s demographic conditions, we should also be wary of how such spending might incentivize poorer health choices by individuals. At the very least, building up is not a signal of improving public health, but of tolerating poorer health.

Next, growing state spending siphons away resources from the private sector, a problem which is known as the crowding-out effect. The more government spends, the more it competes with private businesses for key resources such as capital and labor. As such, the direct involvement of the state stifles growth and innovation within the country. For it is the smaller businesses, the ones with little access to resources, that are hurt the most. And this adds barriers to entry and protects entrenched players, thereby reducing innovation from new entrants.

Again, while Singapore is still a relative beacon for enterprise and innovation within the region, we should not ignore the warning signs. For instance, the Singapore government’s expenditure as a share of GDP has been gradually rising since 2007, where it was at 12.16 percent. In the space of 11 years, that share has risen to 16.53 percent, and will undoubtedly rise further in light of Mr Heng’s spending plans.

What this means for local business and entrepreneurs is that they have to compete with the state for resources such as employees, funding, technology, and so on. And as the state grows to be a bigger part of the economy, the sources will get even more scarce for the smaller players.

Further evidence of this crowding-out effect can be seen in the trend of growing state debt. As of 2017, total government debt (entirely domestic debt) of S$502 billion (US$382.5 billion) has grown to more than two times the 2007 national debt level of S$234 billion (US$178.28 billion). As a percentage of GDP, total state debt is at 112 percent as of 2017, where it was 86.3 percent in 2007. Again, as the state competes for more resources, less is left to private industry to fund new ideas or business growth. This is the essential trade-off being made in the scenario of growing government expenditure.

Given these conditions, it is little wonder that the government has come under scrutiny. Aside from the possible risks I have mentioned above, there is the query from the associate dean of the LKY School of Public Policy, Donald Low, who is questioning why taxes were hiked instead of looking into the alternative of raising the state’s net investment returns contribution. Further, there’s Nominated Member of Parliament Kuik Shiao-Yin, whose impassioned speech on whether the government has lost sight of the meaning of their prudence presents the perspective of Singaporean youth and what the budget means to them.

Yet, this is the path that Singapore’s government has elected to take. Trying to massively raise spending whilst being fiscally responsible was always going to be a challenge.

Will a new airport help to improve Singapore’s already stellar airport competitiveness even further? Will more hospitals and clinics improve public health? Will a bigger state mean less growth and innovation from private industry?

Only time will tell now.