SINGAPORE: The increase in the Goods and Services Tax (GST) over the last two years did not "turbocharge" inflation as the Leader of the Opposition has asserted, said Prime Minister Lawrence Wong on Friday (Feb 28).

Instead, external factors are the primary drivers of inflation in Singapore, and in the two years that the GST was increased, inflation according to the Consumer Price Index (CPI) actually fell, Mr Wong said in rounding up the debate over the national budget.

Workers’ Party (WP) chief Pritam Singh had on the first day of the debate questioned the government’s move to raise the GST and “thereby turbocharging inflation”.

“Let's be clear, as a small and open economy, our inflation was driven primarily by global factors, wars, supply chain disruptions and rising energy costs,” said Mr Wong, adding that even before the GST increase, prices were already going up globally.

“The central bank MAS (Monetary Authority of Singapore) had assessed that the effect of the GST increase on inflation would be transitory. Indeed, that was the case,” he said.

Mr Wong said that in 2022, CPI inflation was 6.1 per cent. With the GST increases, it actually dropped to 4.8 per cent in 2023 and fell further to 2.4 per cent in 2024.

“Where is the turbocharging? Look, I know elections are approaching, but this chamber is not an election rally. Let's not get carried away by hyperbole and have a debate based on facts,” said Mr Wong.

The budget was passed unanimously in parliament on Friday.

In his clarification, Mr Singh said he had taken reference from a previous reply given by the government which stated that the MAS' core inflation forecast for 2024 was projected to average between 2.5 per cent and 3.5 per cent.

"It assessed or it estimated that the GST increase would contribute slightly less than 1 (percentage point) to core inflation. So if you take that figure with the lower end of the estimate at 2.5 per cent, that's 40 per cent and that's the contribution of the GST hike," said Mr Singh.

"That's how I read it, hence my characterisation of 'turbocharged.'"

Responding to Mr Singh, Mr Wong said that other MAS statements had said "clearly" that the impact of the GST on price levels is "once-off" and that the impact of inflation is "transitory".

"The explanation that he gave ... actually doesn't make sense because if I take that view, then I really should be raising GST at a time of very high inflation. Then the proportionate impact would be quite small," he added.

"Because the 1 per cent on a very high inflation base means there is very little impact. But if that's the case that the Workers' Party feels, then really there should not be any concern about the timing of the GST increase."

DIFFICULT BUT NECESSARY DECISION

Responding to MPs’ questions on the need to increase the GST given Singapore’s strong fiscal position, Mr Wong said that the current position is “precisely because the government took the necessary steps early in this term to raise revenues”.

He said that Singapore would have ended the last financial year on a deficit if the government had decided against the GST increase due to its unpopularity, and if it did not see the unexpected corporate income tax collections which emerged only in the last two years.

“The projected balance in FY2025 would also have been a deficit, and that would have meant less funding for essential services, less support for our seniors, and fewer resources to invest in our future. Basically, Singapore and Singaporeans would have ended up in a much weaker position,” he said.

At the height of the COVID-19 pandemic at the start of this decade, which Mr Wong said “feels like a bad dream and a distant memory to all of us”, the country saw five budgets in 2020 and three in 2021, with the government seeking the president’s approval to draw from past reserves five times.

There was much uncertainty over things like when the pandemic would end, whether more restrictions would have to be imposed, and how much deeper a fiscal hole Singapore would end up with, said Mr Wong.

“But we already knew for sure that spending needs would rise over the horizon. It was coming year after year. We could see it happening. Healthcare spending was rising, especially with our rapidly aging population,” he said.

“We looked at different ways to raise revenues, including through property and income taxes, but these moves were still not enough to cover the expected increase in expenditure, which was sure to happen.”

To plug the funding gap, the “difficult decision” was made to raise the GST, said Mr Wong.

“It's never easy to raise taxes, and certainly not a tax like the GST, but governance is about making responsible choices, not just popular ones,” he said.

“We must ask ourselves, do we want short term populism or long term stability? Do we want to kick the can down the road or take the hard, but necessary decisions?”

Mr Wong highlighted that a comprehensive assurance package was also rolled out with the GST increase, effectively delaying its impact for the majority of Singaporean households for at least five years.

“At the same time, we have a permanent GST voucher, which we also enhanced. This ensures that the GST and the GST voucher scheme, combined together, will support the lower income groups and will protect them, not just over the next five or 10 years, but on a permanent and ongoing basis,” he said.

Mr Wong added that Singapore’s tax and redistribution system is “fair and progressive”, with its strong fiscal system internationally recognised by bodies such as the Organisation for Economic Co-operation and Development.

ACCURACY OF PROJECTIONS

Responding to criticisms of the Ministry of Finance’s (MOF) fiscal marksmanship, Mr Wong said that a budget is ultimately a projection, based on the best available information and assumptions.

During the debate, WP chief Singh had asked about the need to collect so much money when the government's fiscal projections are unpredictable, while Progress Singapore Party (PSP) leader Hazel Poa said that larger surpluses in the reserves mean bigger cost burdens on taxpayers as the government collects more than it needs for public programme.

The Singapore government’s projections have “generally not been far off the mark”, with an average deviation within a reasonable range of 5 per cent across the financial years of 2010 to 2019, he said. In the last two years which saw more uncertainty, the deviation was larger at around 7 per cent.

“I will not defend the figures if they are off the mark, but I will speak up for our MOF officers who do this work with dedication and professionalism, against any unfair criticisms,” said Mr Wong, who shared that he started his career as an economist in the ministry decades ago and understands what the work entails.

“In most other countries, poor budget marksmanship is when a government severely overestimates the revenue it will collect and underestimates its expenditure,” he said.

This brings about unfunded promises that cannot be fulfilled due to a lack of funds, or completed through borrowing, hence leaving behind a growing burden for the next generation.

“But this is not the case in Singapore, where we practice responsible and prudent budgeting,” he said.

“The WP and the PSP may think that we are being overly cautious in our projections, but this government will never take risks with Singaporeans’ lives and future.”

He cited examples of the fiscal situation in other advanced economies around the world, especially in the West and closer to home in Hong Kong.

“They are running record levels of fiscal deficits, and their national debts are growing faster than their economy. So the fiscal space they have to sustain their higher levels of welfare while continuing to invest in defence and economy, is shrinking. And at some point, the reckoning will come,” said Mr Wong.

He called it a “Singapore miracle” that the country can also receive a boost to its revenues through its investment returns, such as through the Net Investment Returns Contribution (NIRC).

“Countries that have this luxury of investment returns are the ones that are endowed with oil and gas or some other natural resources. They have been blessed by the heavens, with these endowments. We have nothing, and yet we are in this position,” he said.

The People’s Action Party’s (PAP) approach to the country’s fiscal wellbeing is clear, said Mr Wong, who is the secretary-general of the ruling party.

“We take our duty as stewards of the country seriously, we remain true to our mission and manage our finances carefully for the benefit of all Singaporeans now and in the future,” he said.

“We will continue to do our best to convince Singaporeans that ours is the right approach. It has served us well these last 60 years, and it will continue to keep Singapore on the right track in the years ahead.”