Winds of change in tax collection in a post-pandemic landscape

Singapore will need to find that sweet spot where fair and progressive taxes are palatable, while generating tax revenue for growth.

In brief

• Singapore expects its largest budget deficit since independence for the 2020 financial year, while tax revenue collection during the period dropped by 7.3%.
• The COVID-19 pandemic contributed significantly to the budget deficit and the BEPS 2.0 tax framework may also impact tax revenue collection.
• Singapore will need to adapt its tax system for the new normal and changes under the BEPS 2.0 tax framework to sustain inclusive growth.

The COVID-19 pandemic has reshaped the global economy and amplified the need for nations, including Singapore, to strengthen fiscal resilience. As we expect to move into a COVID-19 endemic new normal, Singapore needs to write a new tax chapter — one that can robustly secure economic sustainability for future generations.

More than a health care crisis, the COVID-19 pandemic has accelerated technology disruptions in almost every nook and cranny. It has brought income and wealth disparities into sharp focus. Along with climate change, the future is nearer than we think.

Like other jurisdictions, Singapore has injected a massive fiscal stimulus into the economy to cushion the blow from the pandemic. In 2020 alone, this accounted for almost 20% of Singapore’s annual gross domestic product (GDP). The planned withdrawal of S$53.7b from its past reserves over two consecutive years is equivalent to about two decades’ worth of fiscal surpluses.

Past fiscal discipline has afforded Singapore the means to respond resiliently to current economic shocks and steward long-term national plans. But as Minister for Finance Lawrence Wong acknowledged in his opening speech at the 35th Singapore Economic Roundtable, “the task at hand will only become harder”.

Already, we know that Singapore needs to and has committed to several key areas of focus. There is a need to upskill and reskill the workforce. More than a tenth of the tax revenue collection in the 2020 financial year (S$5.4b) has been set aside in Budget 2021 for traineeships and skills training. There is also health care — where the annual spend more than doubled from S$10b in 2010 to S$21b in 2018. Over the next decade, Singapore is likely to spend an additional 3% of GDP on health care. Lastly, there is the fight against climate change, where the “50- to 100-year problem” of rising sea levels could cost Singapore S$100b or more.

Given that tax revenue collection accounted for 73.6% of the government’s operating revenue in the 2020 financial year, it is little wonder that the quest for new sources of tax revenue has been a top-of-mind concern for the government lately.

Widening the tax net? 

A distinctive feature of Singapore’s fiscal policy is to fund current and future expenditures while building up the reserves. A balanced budget must come before that journey can begin. While the planned GST rate increase to 9% by 2025 can help cover some of the forward expenditure, it is clearly not enough.

In recent times, about half of the net investment returns contribution (NIRC) is used to fund current spending needs. Drawing further from the NIRC to fund spending can impact Singapore’s economic robustness in the future.

Singapore has traditionally focused more on taxing income and consumption. There is also taxation on assets, such as property taxes and stamp duty, although estate duty was abolished in 2008.

In recent years, the calls for wealth taxation, in Singapore and globally, have grown louder. After all, moving toward a more progressive and equitable form of taxation is in line with promoting an inclusive society.

Almost a decade ago, Prime Minister Lee Hsien Loong shared that Singapore faced a choice of either “low taxes and targeted welfare benefits, or high taxes on all and comprehensive welfare”.  A high-tax model is unlikely to sit well with the general income tax-paying population. It could even chip away at the economy’s competitiveness.

While higher-income earners and wealthier individuals can afford to bear a greater share of the tax bill, Singapore is balancing this against the impact that taxes on wealth can have on its position as a wealth management hub and international financial center. During the recent 20th annual Morgan Stanley Asia Pacific Summit, Finance Minister Lawrence Wong said: “If you're not careful, you [could] have a tax in place that doesn’t actually end up collecting very much money, [and] it’s counterproductive because the wealth just moves around to other places.” 

Courage to rethink and reboot

The pandemic has accelerated structural shifts. It has also forged new mindsets. To face a new notion of normality requires the courage to do things we do not lightly do or even slaughter sacred cows that we have steadfastly avoided.

Singapore’s tax system has served us well for the past decades. But shifting priorities dictate changes to our tax system. Among other pressing needs, many sectors are seeking government support, not just to stay afloat but also to rapidly adapt and grow in the new normal. This transition to the future takes time, during which the types of government support will need to transform as well. New taxes may be inevitable. Yet with these changes, we take on the burden to invest in our future generations. We pay it forward for our children, and their children.

Should we rethink or even reboot the tax system, the challenge lies in finding that sweet spot: where fair and progressive taxes are palatable, while generating enough revenue for sustainable and inclusive growth.