12 December 2017
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Singapore's ageing population a ticking 'time bomb'

Business Times
07 Dec 2017
Vivien Shiao

UOB economist expects GST hikes over 2 years to cope with resulting rise in govt spending and lower tax revenue, but OCBC economist says raising GST is not only option

Singapore's population will reach a critical juncture next year, as the number of people above 65 will equal those under 15 for the first time in history, UOB economist Francis Tan has said in a research note.

But even as the greying demographic exacts its toll on government spending, economists have different takes on how revenue can be raised to fund this spending.

In his report, Mr Tan warned that the situation is a ticking "demographic time bomb", with implications on costs, taxes, labour and productivity.

As it is, Singapore already has the oldest society among Asean's 10 member nations; the median age of its resident population is 40.5 years old. In contrast, the projected median age for Asean in 2020 is 29.8 years.

By 2030, the gap between the young and old in Singapore is expected to widen considerably; the percentage of seniors will rise to 27 per cent, and that of youths will fall to 10.8 per cent. This will put Singapore on a similar footing with current-day Japan, the oldest society in the world with 26.6 per cent of its population above 65 years old.

With increasingly heavy costs that come from an ageing population in areas such as healthcare and social services, Singapore's primary budget deficit will widen.

Mr Tan said: "Not only will the increase in spending widen the budget deficit, the slowdown in economic contribution as more of the population drops out of the labour force will also reduce tax revenue for the government, resulting in a double whammy."

To cope with that, the government will have to find more ways to increase revenue, he said, echoing the recent comment by Prime Minister Lee Hsien Loong - that it is "not a matter of whether, but a matter of when" taxes would have to be raised.

Mr Tan said this is likely to come in the form of a revision to the Goods and Services Tax (GST); he expects two GST hikes over the next two years, to be announced in the 2018 Singapore Budget.

He is forecasting an increase of one percentage point to 8 per cent, likely to be implemented on April 1, and then perhaps another one percentage point hike exactly a year later. "Being in the middle of the electoral term, the GST hike is more likely to be implemented early, rather than near the end of the term."

He added that this year's higher economic growth is likely to push up wages next year, providing "some cushion" against consumption cutbacks due to a raised GST.

The GST, last raised in 2007, is the third biggest contributor to Singapore's budget after net investment returns and corporate income tax.

OCBC economist Selena Ling contends, however, that raising GST is not the only way for the government to boost fiscal revenue.

Asset taxes, stamp duties, customs and excise taxes, betting taxes and motor taxes are some alternative sources of such revenue, she said. It could even be a combination of GST and other sin taxes, she added.

As the population in Singapore gets older and richer, bringing back the estate tax is also another possibility. Ms Ling said this could contribute 1 to 3 per cent of revenue if needed.

"My point is that all options are on the table. We don't have to narrow ourselves and say it has to be GST, per se."

Taxing e-commerce transactions is yet another option to consider, and this is already being done around the world, she said, describing this route as the harvesting of "low-hanging fruit" to raise revenue without raising the quantum of GST.

The GST is a regressive tax, which means lower-income households would feel the pinch more.

Ms Ling acknowledges that government expenditure needs have risen rapidly, but differs from UOB's Mr Tan on the urgency of tax hikes to increase revenue.

She said: "I would hesitate to say that there's an immediate need to raise revenue next year. My concern would be the timing. If we are going to shift monetary policy from neutral to a slight appreciation stance, and if you raise taxes, you are tightening both the fiscal and monetary policy levers."

This is likely to exert additional pressure on small and medium-sized enterprises (SMEs), which are still struggling to cope with economic restructuring and high costs, she said.

But if there is one thing economists agree on, it is that tax hikes are on the horizon.

Ms Ling said: "There is no smoke without a fire. The fact that the government has hinted quite strongly that there are some tax changes coming up means that they will probably announce something in the 2018 budget."

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.