Every Budget must be focused on our future: DPM Tharman Shanmugaratnam Budget 2014 Debate Round-Up Speech

Deputy Prime Minister Tharman Shanmugaratnam yesterday wrapped up two days of debate on his Budget Statement. He spoke on how Singapore needs to ensure that it can pay its way even as social spending rises in the years ahead. Here is an edited extract of his speech.

The Straits Times, 6 Mar 2014

IN BUDGET 2012, we had projected yearly total health-care spending to double from $4 billion to $8 billion by 2016. We are in fact likely to reach the $8 billion figure, which is close to 2 per cent of GDP, a year earlier, in 2015. Beyond that, health-care spending will continue to grow. We expect it to reach about $12 billion by 2020 from $4 billion in 2011. This is, therefore, a three-fold increase from 2011 to 2020. The bill will grow further as our baby-boomer generation moves into their senior years.

So we will have to spend more as our society gets older, but we are not spending less in other areas. If you look at it demographically, you may think that as our society gets older, you spend more on health care and less on the young because younger cohorts are getting smaller.

In fact, despite smaller cohorts, we are not spending less on education because we are spending a lot more per student at every level - at pre-school, school, and tertiary levels. We are expanding opportunities in the tertiary sector, including university enrolment, which is going up to 40 per cent of each cohort. We have to keep investing in our young.

How do we manage this increase in spending and stick to prudent fiscal planning?

Our first strategy has to do with spending itself. We have to ensure that all spending is judicious. We have to achieve value for money in every programme. Be obsessed with achieving value for money in every programme.

We must also continue to target social subsidies at those who need them most. For most of our schemes, this means more for the lower-income group and also some support for our middle-income group. We should be avoiding universal subsidies, as Mr Ang Wei Neng has also just said. The Pioneer Generation is the exception because we are honouring a whole generation for what they have done for Singapore.

That is our first strategy, to do with spending.

Revenues: Starting from a position of strength

SECOND, we need to raise revenues over time to ensure that we can meet our future needs without the risk of persistent deficits. We are starting from a position of strength. We have a healthy fiscal position today because we made timely changes over the years to strengthen the resilience of our revenue base.

We increased the GST in 2007, while providing a significant package of offsets to help the lower- and middle-income groups. The GST Voucher for the lower-income group is now permanent. We also put in place the Net Investment Returns (NIR) framework in 2008, which has been a major addition to our revenues, and had provided greater resilience in our revenues as well. Net Investment Returns Contribution (NIRC) provides 2 per cent of GDP each year in our Budget, or about $8 billion.

To illustrate how significant that is, just think of the many other countries which are in exactly the reverse situation. Instead of bringing 2 per cent of GDP each year in net investment returns onto their budget, they have to do the opposite. They have to find tax revenues to service debts, with 2 per cent of GDP being the lower end of the scale. In many of the advanced economies, it is about 3-4 per cent of GDP each year that has to be found in revenues to service the debt.

So this is a real strength for Singapore, and it comes about because we have maintained prudent fiscal policies over the years. We built up our reserves, and we are now able to use the investment returns on our reserves to fund budgetary spending each year. Our strong fiscal position has allowed us, in the current term, to set aside resources to meet future priority needs. This is a prudent way of managing the Budget. While you have the strength, set some aside because you know there are needs in the future. We've set aside money for the Community Silver Trust, for R&D, and most significantly now, for our Pioneer Generation.

But what do we expect going forward? Beyond this term of government, it's going to be different. Our revenues are not expected to increase as a percentage of GDP. In fact, revenue growth could moderate. Asset markets are likely to moderate and we are not going to get the same amount of asset market-based taxes as we've done in the last few years.

Our foreign worker levy collections should also taper, as the foreign workforce growth slows. Overall, therefore, we cannot expect revenues to increase as a percentage of GDP. But spending will go up as a percentage of GDP. Our current fiscal advantage will not last. And at some point, therefore, our revenues will fall short of expenditures.

Hong Kong, which is a very similar society to us in terms of its demographics, faces the same problem. They have the same ageing profile, and have projected that within the next seven to 10 years, they are likely to face structural deficits.

Their Finance Secretary, Mr John Tsang, has acknowledged this. In last year's Budget, he acknowledged that the growth in government revenue will drop substantially if the tax regime remains unchanged. Like them, we will run into structural deficits if we do not raise revenues in the next decade. We must be prepared for the years ahead and build up our revenues for the spending needs of the next decade and beyond.

Approach to taxes and transfers

HOW do we do it? Our approach has to be based on three principles.

First, whatever our tax and revenue strategies, we have to sustain a vibrant economy. Second, we have to maintain a progressive fiscal system - a fair and equitable system of taxes and transfers. And third, we have to keep the tax burden on the middle-income low.

The first principle is important. Mr Alvin Yeo and Dr Janil Puthucheary spoke about it. Keeping our economy vibrant is central to our social strategies, because an inclusive society is a hollow concept if we don't have fruits to redistribute and share. Keeping our economy vibrant has allowed Singaporeans' lives to improve.

Global economic competition is intensifying. The United Kingdom is bringing down corporate income taxes to 20 per cent by next year. Taiwan has reduced its corporate income taxes to 17 per cent, which is the same as Singapore's.

More importantly, quite apart from taxes, the world of technology and globalisation is reshaping the way business is being done. Re-shoring back to the advanced economies has begun, particularly in the United States. It is driven partly by cheaper energy costs because of the shale oil and gas revolution. Advances in robotics and additive manufacturing also allow cost-effective manufacturing to be done much nearer to major consumer markets. They allow for rapid prototyping and mass customisation close to the market. It used to be expensive to do it in the United States, but it is now increasingly possible because of advances in technology.

To be sure, economic competitiveness is not just about taxes. It is about a quality workforce, excellent infrastructure, rule of law, and our whole system of governance. It is about how as Singaporeans we make our system work well. Taxes are not the only factor.

But the reality is, we are a small country without a natural hinterland. Businesses are mobile and do not need to be located here. Ms Jessica Tan made this point: that knowledge-based or creative activities can now be done anywhere in the world. They need not be here.

We have to remain competitive so that we continue to attract investments and grow talents. And that also involves retaining our own talents - Singaporeans who are well-qualified, well-educated, and mobile.

It doesn't mean that we keep taxes unchanged, however. For example, we made property taxes more progressive last year, and there is room over time to enhance our asset taxes. We have to keep all options open.

A fair and equitable system of tax and benefits

OUR second principle is to have a fair and equitable system of taxes and benefits.

It means, first, that everyone has to pay some tax, and everyone is hence contributing. The majority of Singaporeans don't pay income tax, but they pay GST. Everyone pays something for a better Singapore. But those who are better off should contribute more to society. And the lower-income and others in need should receive the bulk of the benefits. Taxes and transfers have to help us level up society.

That is our system. Everyone contributes something but those who are better-off contribute far more, and those in need receive more benefits than the taxes they pay.

Not every tax in a progressive system needs to be a progressive tax. In fact, that would not be an efficient system. But the system as a whole must be progressive. The GST is a good example because the GST in its own right is a regressive tax. But together with the increase in the GST, we have made major changes in other social policies - Workfare, housing grants, education subsidies - changes that far more than offset the impact of a higher GST on our lower-income group.

It is not just about the GST Voucher. The GST Voucher is one part of the permanent offsets for the GST. It is part of a larger system of means-tested benefits that ensures that our lower-income group gets back far more benefits than the taxes they pay. In fact, for every dollar of tax they pay, they get $5 in benefits, through benefits at each stage of life - from childcare through to retirement needs.

In my Budget speech, I gave the example of a low-income couple and the amount of benefits they get over a lifetime. I will not go through the details again. But it is a very progressive system of taxes and subsidies. If you look at the tax system alone, it is more progressive than in advanced countries like the United Kingdom, for instance, despite much higher top marginal tax rates in the UK. The top 20 per cent pays 44 per cent of all taxes in the UK. If you add Value Added Tax, income tax and other taxes together, they pay 44 per cent of all taxes. In Singapore, the top 20 per cent pays about 52 per cent of total taxes paid.

Next, I will show you how things add up across the system, when we take taxes and transfers together. It shows a system where those who are better-off pay more taxes than the benefits that they receive and those who are less well-off get more benefits than the taxes they pay.

I should first explain that this chart shows the net benefits after you pay your taxes. The bottom 50 per cent in the income ladder receive significantly more transfers than the taxes they pay and those at the higher end are paying more taxes compared to the transfers they receive. This is expressed as a percentage of the household income. If I express it in dollar terms, those on the high end would be paying a large amount of dollars in net taxes, but as a percentage of income, it is lower.

Now I should mention also that I have left out the first decile here - which is the bottom 10 per cent. Two-thirds of the bottom 10 per cent are retiree households who are no longer earning incomes. However, a fair number of them are in fact not poor; 16 per cent of those in the bottom 10 per cent live in private properties; another 13 per cent live in HDB 5-room and Executive flats; and a fair number own cars and hire maids. The bottom 10 per cent includes any household which is not earning an income, although some are quite well-off. In any event, because they don't have income from work, the benefits they received can't be expressed on the chart, which shows benefits as a percentage of income.

The basic point is clear. If we look at the second decile, which is our low-income households, they get significantly more in benefits today (after netting off taxes) compared to what they received a decade ago. Compare the bars in 2003 and 2013. It is a significant shift towards progressivity in our fiscal system.

And we are doing more. In this year's Budget, we introduced increased subsidies for pre-school, and increased subsidies for tertiary education. I want to mention one further fact, which is a continuing story in the education system - how we are doing more in the school system to help children who have difficulties in basic skills, literacy, numeracy and other areas.

We are already spending 20 per cent more for a child who is weak in literacy and numeracy, throughout the course of their primary education, compared to the average pupil. And over the next few years, by 2017, this will increase to 40 per cent. We will be spending 40 per cent more on children with weaknesses compared to the average being spent on all pupils. It's an important MOE initiative.

Whatever we do to raise revenues in future, we have to retain this fair and progressive system of taxes and transfers.

Keeping tax burden on middle-income low

OUR third priority is to keep the tax burden on the middle-income low. It is an important objective of our system, and Singaporeans want it to remain that way.

This chart shows the average tax paid by the median worker in Singapore. The average tax paid by the median worker - this is just income tax and GST - is significantly lower than in other countries.

In fact, it is lower even than in Hong Kong because income tax is paid by many more people in Hong Kong. In our system, most people don't pay income tax, but they pay GST. So the average tax on the median Singaporean worker is low by international standards. And even if you include all other taxes - foreign maid levies, taxes on cars - we still remain a relatively low-cost country with low taxes for the middle-income group.

We have to keep that tax burden on the middle-income low, so that they get to keep as much as they earn. That has to be our principle. Help their incomes go up, and help them to keep as much as they earn. It is the higher-income group that pays significant net taxes into the system, which enables the lower-income group in turn to get significantly more benefits than the taxes they pay.

So we have to keep these approaches in mind in future years. We have a strong revenue position for now. But in the decade ahead and beyond, we are going to need more revenue to meet our infrastructure and our social needs.

Keeping our economy vibrant, a fair and progressive tax system, and a low tax burden on the middle-income group are principles that will enable us to keep Singapore a nation of opportunities, and one that is fair and equitable to its citizens.

And as Mr Seng Han Thong has said, it is a very unusual situation. We have a system where we have the heart as well as the strength. You used a common Chinese saying for this. There are many other countries that have the heart, but they leave it to future governments to pay the bill.

We are able to do things with a heart, provide quality care, provide services in a humane way, and sustain what we do because we have prudent fiscal policies. And we must stick to that system of having the heart and having the strength.

So let me conclude very briefly, Madam Speaker.

We had a very good Debate with very strong support for the restructuring of our economy and raising of productivity, including transforming our SMEs, transforming our jobs and transforming our social culture.

Strong support for the steps we are taking to build a fair and equitable society. And strong support for a prudent fiscal policy which has allowed us to set aside a Package to honour our Pioneer Generation, for the full life of that Package. But it is worth emphasising a point which Ms Penny Low made, which has to remain our key focus for the future. She made a very good point I think, which is about what has mattered most to the Pioneer Generation.

What has always mattered most to them is that the next generation does better than them. We all know it. We know it from every meal time, and we know it from every conversation we have in the community. That that is what they are like. They want their children, they want the next generation to do better than them.

And because they are like that, Singapore is like that. We are like that. We want our children to do better.

So every Budget must be focused on our future - investing in our young, opening up opportunities and helping them to create a better Singapore.