A historical perspective: doomsday predictions of poor becoming poorer due to GST hikes didn’t happen

07/11/2022

Mr Murali Pillai (Bukit Batok) spoke in Parliament today (Nov 7) on the GST amendment Bill and gave an interesting historical perspective of the GST and the subsequent effects. This is an abridged version of his speech.

“So how is it that two parties, which are aligned on all the main objectives can be so far apart in assessment of whether or not a GST hike is the proper thing to do for our people.

Let me try and answer this by offering a historical perspective.

1993

In 1993, the GST Bill was introduced in this House:

Then as now, it was an unpopular move. Then, as now, there were good reasons to do so. We needed to strengthen the base of taxation, to ensure that our tax structure was resilient and promote enterprise and growth.

In 1993, direct taxes made up about 60 per cent of our tax revenue, of which 73 per cent was income and corporate tax.

Introducing a consumption tax would keep Singapore competitive and also allow us a stable and diversified stream of tax revenues and allow us to invest more heavily in growth.

The WP raised strenuous objections to its passing.

The honourable MP Mr Low in his speech felt that there was no basis to suggest that high income and corporate taxes had the effect of driving talent and entrepreneurism away. He was concerned about the regressive nature of the tax especially on low-income people.

The PAP’s response was to recognise the possible shortcomings and work in policy fixes such as GST offsets for low-income households.

The GST was introduced on Apr 1, 1994, and what happened thereafter? Historically, the highest rate of corporate and personal income taxes were at 40 per cent before 1985; these came down to 33 per cent after the recession in 1985. After the GST was enacted, it came further down to 28 per cent, now it is 24 per cent for personal income tax and 17 per cent for corporate tax.

In fact, the majority of Singaporeans still don’t pay income tax.

In the meantime, our Government grew our economy by leaps and bounds: We attracted investments and talent; we had government transfers to our people; median salaries increased.

In other words, whatever the honourable Ministers Dr Richard Hu and Mr Dhanabalan on behalf of the Government said on that occasion in 1993 would happen, happened.

Our tax rates went down, our tax revenues did not, and our social spending went up — benefiting the poorest among us the most.

The doomsday prediction that the poor and the lower income people will be left behind did not materialise.

On the issue of timing — it should be borne in mind that in 1993, there was strong economic growth and budgetary surpluses.

It could have been argued then that there was no pressing need to pass the GST Act.

But when you cast your eyes into the long term, your perspective changes. In 1993, when our economy was strong and our people were young, it was already felt that GST was needed for the long term. Today, when we are older and the economy is struggling, it turns out that our 1993 decision was correct.

2003

I then fast forward to 2003 – Those were tough times, more like 2022. Then, we were recovering from the Asian Financial Crisis of 1997 and recession in 2001. We had SARS. Our fiscal situation was very tight. The Singapore economy was struggling. Revenue needs to be increased to fund expenses.

The Government decided to stagger the GST increase much like this time; 1 per cent in 2003 and 1 per cent in 2004.

Then, like now, some voices had suggested to defer, but that will heighten risk of leaving Government with insufficient funds for healthcare, education and defence.

Singapore would then be in structural deficit — in a small open economy, this would have serious consequences for our exchange rate, for the stability of the Singapore dollar.

If we continually run a deficit, the Sing dollar would go down, inflation up, and everything in Singapore, including our CPF savings, would be worth less.

Therefore we decided to do the difficult thing and proceed.

Again, WP was against it. Mr Low argued for increase of the Net Investment Income (NII) ceiling – not unlike what WP is asking for now. He also suggested increase in property tax and sin taxes too. He was again concerned about the impact of GST on inflation.

DPM Lee Hsien Loong (as he was then) explained why we were unable to avoid a GST hike, much like how DPM Wong explained during the Budget debate this year.

What happened after that?

In 2002, we dreamt big. The Budget, which included the raising of the GST also contained the new thinking of the Economic Review Committee (ERC) – which brought about fundamental changes to our economic policies.

It aimed to develop a vibrant private sector: driven by entrepreneurial energies, fuelled by regional and global competition, all seeking for the best return on their ideas.

It aimed to attract more global talent, even as we improved and nurtured our own people. It wanted to make our economy more resilient and dynamic through investing in human capital.

But one thing remained the same as in 1993 — Government still saw its role as creating a pro-business, stable environment for the market to operate. Part of this requires the implementation of sound fiscal and monetary policies.

As a result of the GST hike, we kept fiscal discipline, turned in positive economic growth and improved the livelihoods of Singaporeans.

2007

I now come to 2007. That year, DPM Tharman (as he then was) announced the GST hike to 7 per cent :

At that point, there too were questions about the need to reduce direct taxes — the landscape was even more competitive. Everyone was waiting to grab our lunch. Taxes therefore had to be reduced.

He announced the decision to tweak NII, which was something Mr Low advocated, to what it is today.

Mr Low and Ms Sylvia Lim argued against the GST Hike and suggested instead that the Government use even more NII, get revenue from land sales, increase corporate tax, stamp duties, and so on. Much like what is being sought now.

SM Tharman demurred and specifically stated that “that is not the way that a responsible government conducts its fiscal policies”.

What happened since 2007:

We focused on creating a more inclusive Singapore with heavy investments in our people, especially the vulnerable with programmes such as Kidstart, WIS, Silver Support Schemes, etc.

In 2012, the GST voucher scheme was made permanent. This hardwired the GST to a larger redistributive regime, and is fair and progressive.

Today, our economic landscape has been transformed. We achieved a remarkable rise in GDP per capita with a larger private sector and a high value workforce.

But more importantly, quoting SM Tharman in his speech delivered on Aug 14, 2015 to the Economic Society of Singapore, “we achieved broad-based social upliftment, jobs for all, rising incomes for all, homes for all, quality schools and public healthcare for all, and neighbourhoods and parks shared by all”.

Doomsday predictions didn’t happen

It is not my intention to create a rosy picture of the past. The Government is not perfect. But by and large, the doomsday predictions of the poor becoming poorer owing to GST hikes simply did not happen.

Returning back to 2022, actually, set against the historical context, there is nothing significantly new in what the WP has suggested for this House’s consideration.

This leads me to a paragraph in Hammer article co-written by honourable Members Professor Jamus Lim and Mr Leon Perera entitled “Why the GST Hike is Not Necessary” that was published on July 1, 2022. They said and I quote: “Political courage means recognising that the facts and assumptions that supported an earlier decision have changed …Political courage means being able to recognise that contrary arguments have merit, even if those arguments come from one’s political opponents, Political courage means not opposing for the sake of opposing.”

I have no trouble with the statements but surely this applies both ways. What is clear is that WP, to date, has not accounted for its mispredictions of the past.

Rhetoric for effect seldom helps. Political courage commands a price, but mere talk of political courage is cheap.”