While many of Asia's finance ministers have struggled to take advantage of a favourable global and regional economic climate, the latest entry in our Finance Minister of the Year study has positioned his country well, while also making headway on the challenge of preparing for an ageing population.
RANKED 2ND: HENG SWEE KEAT, SINGAPORE
Trade-dependent Singapore is benefitting as the world economy expands in synchronised fashion for the first time since the global financial crisis, but the government is facing a political test as it looks to raises taxes and future-proof the economy.
As finance minister Heng Swee Keat faces a delicate balancing act. He has demonstrated a desire to increase Singapore’s general sales tax to offset higher spending on healthcare and support for the country’s elderly, yet he must also decide how to help keep the Lion City competitive in the long run.
Heng has announced plans to increase the general sales tax by 2% to 9% sometime between 2021 and 2025 and to impose a levy on imported digital services – including music and video streaming and online subscription fees – from January 1 2020.
“The 2018 budget is a strategic and integrated financial plan to position Singapore for the future,” Heng said at a forum following his February 19 budget speech, justifying the planned tax increases in the context of the S$9.61 billion fiscal surplus recorded in 2017.
That big surplus, equal to 2.1% of its GDP, has generated some debate as to whether a tax hike is the most effective way to ease expected fiscal pressures in the future, and whether it will unfairly burden poorer Singaporeans.
Donald Low, an associate dean at the Lee Kuan Yew School of Public Policy, suggests the government could increase its share of annual returns from GIC, Temasek, and the Monetary Authority of Singapore to 60%. Currently the government uses half the investment income generated by these state bodies and sovereign funds to finance public spending, leaving the remaining half for reinvestment.
When questioned about it, Heng said he hoped the reserves would continue growing and that young people would have the same assurances as his generation had inherited, forecasting a jump in investment income from government funds to S$15.9 billion in 2018 from S$7 billion in 2009.
To be sure, the city-state has some extreme ageing demographics. Not only are fertility rates among the lowest in the world, its citizens also benefit from one of the longest average life expectancies. According to United Nations data, nearly a quarter of Singapore’s population will be aged 65 or over in 2030, double the share today.
So spending on healthcare is set to rise sharply – by 350% between 2015 and 2030, estimated Capital Economics – in turn highlighting the urgency of ongoing efforts to revitalise the Singapore economy by converting it into an Asian technology hub.
“Investment in more efficient and smart solutions will improve productivity when human resources become more constrained with Singapore’s aging population,” said Chester Wee, a partner at accounting firm Ernst & Young.
Timing the general sales tax hike could prove to be a tough call. The deferred tightening announced by Heng comes at a time when the country’s economic growth, which set a manic 9.4% quarter-on-quarter pace in the third quarter, has lost steam as electronics sales and exports slow. In December local factories posted their biggest year-on-year output decline in two years as shipments to China fell. Singaporean GDP growth was 2.1% in the final three-month period of 2017 and the government now sees growth moderating slightly this year.
But there were sweeteners too in Heng’s budget including increased corporate tax rebates and incentives aligned with the government’s quest to upgrade the economy to help sustain long-term growth and temper Singapore’s external vulnerabilities as a small open economy.
The government said it would provide funding support for up to 70% of qualifying costs, or up to S$100,000 for investments to improve innovation and productivity. It will also provide a 200% tax deduction capped at S$100,000 on licensing payments per year, between 2019 and 2025.
All the Singaporeans aged 21 and above will receive a one-time cash handout of up to S$300 as the city-state recorded a rainfall surplus of almost S$10 billion. Heng called the bonus “hongbao”, which literally means red envelope in Chinese.
About 2.7 million people, or almost half of the entire population, will get the payouts due at the end of 2018. The cash bonus, which will cost the government S$700 million, is the first time since 2011 that the government is handing out cash to its citizens. The move is a way public applause.
Heng rises from sixth place in the list last year to claim the silver medal.
On Friday: We reveal Asia's Finance Minister of the Year