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In this Explainer, find out...
What led to the proposal of the Goods and Services Tax (GST) hike and the Assurance Package (AP)?
What benefits will Singaporeans receive from the AP?
What are the reasons for and against the GST hike?
Introduction
On 1 January 2023, Singaporeans who took a closer look at their receipts may have noticed that the Goods and Services Tax (GST) rates had increased from 7% to 8%. A month earlier, the first payouts from the Assurance Package (AP) had been distributed to those aged 21 and above. Though these events may seem disconnected, both the recent GST hike and the Assurance Package have their roots in the 2018 Budget. Read on to find out more about the Government’s motivations behind implementing a GST hike, and the subsequent Assurance Package.
The Policies' Origins
Announcing Another GST Hike?
The Government’s plans for a GST hike were officially announced during the 2018 Budget, with intentions to increase it at some time between 2021 to 2025.
Tax rates would be raised from 7% to 9%, with projections that the 2% increase would generate revenue equivalent to around 0.7% of Singapore’s GDP.¹ GST, being a broad-based tax that is levied on almost all consumer-facing goods, forms a rather stable source of revenue. Hence, raising GST is understandably effective and attractive as it will aid the Government in meeting the country's growing revenue requirements, especially in the areas of healthcare, education, and security. Analysts posit that it will generate S$3.5 billion annually by 2024.²
The announcement also contained information on policies to alleviate the effects of the GST hike. First, the Government will continue absorbing GST on publicly subsidised education and healthcare. The GST Voucher (GSTV) scheme, which provides rebates for household bills and payouts for low-income and elderly citizens, will also receive enhancements. Additionally, the Government intended to introduce a support package to help Singaporeans cope with increased costs arising from the GST hike.³ This measure was not unprecedented — an offset package had also been implemented when a previous GST hike occurred in 2007, consisting of cash payouts and rebates.⁴
Introducing the Assurance Package
In February 2020, Deputy Prime Minister (DPM) Heng Swee Keat officially announced the Assurance Package.⁵ The package aimed to mitigate increased costs through cash payouts and offsets to adult Singaporeans. During the 2020 Budget, it was also stated that the GST hike would not occur in 2021, after reviewing economic indicators like revenue and expenditure projections. The delay was well-timed, in light of the severe effects of the COVID-19 pandemic.
Impact of the COVID-19 Pandemic
In the 2021 Budget, DPM Heng announced a further delay of the GST hike to between 2022 to 2025, depending on Singapore’s economic outlook.
The preceding 2020 Budget had accumulated an overall deficit of S$64.9 billion for the fiscal year (FY) 2020, and projections for the 2021 Budget predicted a deficit of S$11 billion in FY 2021.⁶ DPM Heng noted that it would be unsustainable to continue accumulating high deficits from state spending in the long run, thereby emphasising the importance of implementing a GST hike. However, the effects of COVID-19 also increased the need to provide support for vulnerable segments of the population by mitigating the effects of the tax increase.
In the aftermath of the COVID-19 pandemic, the implementation of the GST hike was revisited at the 2022 Budget. The tax hike will be staggered over a two-year period, increasing by 1% each at the start of 2023 and 2024.⁷ It was hoped that the two-stage increase would balance rising costs along with the need to support public spending. The AP was also enhanced, receiving an additional S$640 million on top of its original S$6 billion budget.⁸ The package would cover at least five years of extra costs from the GST hike for a typical household, while lower-income households receiving additional offsets would have 10 years of increased expenses covered.⁹
The Assurance Package
The AP acts on top of the permanent GSTV scheme introduced by the Government in Budget 2012 to help lower- and middle-income Singaporean households defray their GST expenses.¹⁰
The AP has five main components:¹¹
AP Cash: Cash payouts ranging from S$700 to S$2,250 for all adult Singaporeans.
AP Seniors’ Bonus: Cash payouts for lower- income Singaporeans aged 55 and above, ranging from S$600 to S$900.
AP MediSave: MediSave top-ups for all Singaporeans aged 20 and below or 55 and above.
AP U-Save: U-Save rebate top-ups for eligible Housing & Development Board (HDB) households.
Community Development Council (CDC) Vouchers: Digital vouchers for all Singaporean households, to be used for purchases at participating hawkers, heartland merchants and supermarkets.
In addition, the Government will provide a top up to the Citizens’ Consultative Committee ComCare Fund, which provides social assistance to low-income Singaporeans and grants to self-help groups.¹²
Both the AP Cash and AP Seniors’ Bonus will be means-tested, meaning that Singaporeans with lower income or with fewer properties will receive higher payouts.¹³ Figure 2 provides an example, illustrating the level of cash payouts under AP Cash.
The AP will aid in cushioning part of the effect of the GST hike, theory easing Singaporeans into the new status quo. Notably, lower-income Singaporeans will receive higher cash payouts, reducing the GST hike’s impact on them significantly. Middle-income and high-income Singaporeans stand to receive cash payouts as well, albeit less than their lower-income counterparts.
The AP will also support Singapore’s lower-income elderly population in transitioning to a post-GST hike regime. Such targeted support is critical, as the elderly lack adequate financial security, either due to retirement or a higher likelihood of being laid off. The latter is especially pertinent in environments that prefer younger talent.¹⁵ Thus, it is apt for the Government to assist seniors in defraying additional costs associated with the GST hike.
Discussion
To better understand the GST hike, it is important to take a comprehensive look at different reasons for and against its implementation.
For: Government Spending Needs
Singapore faces a number of challenges in the future that would require significant additional spending. Specifically, problems related to an ageing population, an expansion of social welfare, climate change, and evolving security needs all pose pressing demands.¹⁶
Factor 1: Ageing Population
Singapore is set to become a super-aged society, with one in four Singaporeans aged 65 and above by 2030.¹⁷ As the country prepares for a future replete with senior citizens, more Government expenses will be funnelled into providing accessible and affordable healthcare for its elderly population.¹⁸
In a 2022 press conference, DPM Lawrence Wong conceded that the hike will undoubtedly bring about challenges for certain groups of Singaporeans, but maintains that “an ageing population and healthcare spending” remains a large financial burden, thus necessitating the rise in GST.¹⁹
Moreover, abating an ageing population also requires the Government to heavily incentivise child-rearing among young couples. One approach would be to subside childhood education and expand accessible but quality childcare services in the years to come, alleviating the high cost of living many allude to when pressed for reasons of delaying childbirth.²⁰
Factor 2: Expanding Social Welfare
Social welfare schemes come a growing cost for the Government too. Schemes such as the Workfare Income Supplement, which top-ups the income of low-wage workers via cash and Central Provident Fund (CPF) contributions, are slated to incur greater costs over time.²¹ New support schemes intended to help retrenched workers get back on their feet will also require spending.²² To this end, additional revenue generated from the GST hike will support rising government expenses in this area.
Factor 3: Sustainability and Climate
Climate change and its mitigation is also a major consideration for the hike. The cost of protecting Singaporeans against ‘mankind’s gravest challenge’, as Prime Minister Lee Hsien Loong puts it, is close to S$100 billion.²³ Such anticipated costs thus make clear the Government’s conviction to pursue the GST hike; it may be regarded as a necessary pain to protect Singapore against challenges in the coming century.
Against 1: Regressiveness
However, to appreciate the efficacy of revenue generation brought about by the GST hike, is also to recognise its impact on vulnerable groups, namely lower-wage families and individuals. From its inception, Members of Parliament have cautioned about the hike’s disproportionate impact on the lower- income Singaporeans.²⁴
The issue is not irreconcilable, but cannot be understated. Without any preventive measures, the GST is a regressive tax. That is to say, since all individuals pay the same rate regardless of income, and poorer households tend to spend a larger proportion of their income compared to wealthier households, GST payments as a percentage of incomes are higher for poorer than wealthier households.
For example, two individuals pay the same S$10 in GST for weekly groceries:
The first individual earns $3000 a week, making the tax rate on the purchase 0.33%.
The second individual earns $300 a week, making the tax rate on the purchase 3.33%.
For the first individual, the GST is a mere slap on the wrist, whereas the second individual has to fork up a significantly larger percentage of their income to pay the tax. In the long run, lower-income Singaporeans may find it harder and harder to afford goods, manifesting as greater inequality on aggregate.²⁵
Against 2: Alternative Revenue Streams
Another point commonly raised by opponents to the GST hike is the possibility of funding government spending through other means. Concerns over the lower classes having to bear the brunt of the GST hike invites one to favour raising other taxes, such as the wealth or property tax, such that those who can pay do pay.²⁶ These taxes, as opposed to the GST, are more progressive and equitably distributes tax burdens across income levels.
Singapore recently raised its property taxes by hiking the Additional Buyer Stamp Duty (ABSD), and its income tax schedule is based on a progressive system where higher wages are taxed more, with those belonging to the top income bracket being taxed 24% from 2024 onwards.²⁷
Then, Why still Hike?
So then, why did the Government still implement the hike? Understanding the contest against the hike allows one to better appreciate the mechanisms implemented alongside it.
First, the GST has been disputed as being a regressive tax. In fact, with the AP and the GSTV Scheme, the GST becomes part of Singapore’s larger tax and transfer system.²⁸ GST offset schemes and government subsidies provide relief to lower-income Singaporeans, with some estimates showing that it could offset the GST hike by about 10 years. Post-transfers, the GST could thus be seen as progressive, since the net amount of taxes paid by lower-income Singaporeans is negative.
Second, the regressive nature of GST is also contested as higher-income Singaporeans have been found to spend more on goods and services as a proportion of income, thereby contributing more to GST. This has been highlighted by the Ministry of Finance, whose figures revealed 42.2% of GST were paid for by the top 20% of Singaporean households, compared to the bottom 20% who contribute 2%.²⁹
Third, it is also plausible that lower-income Singaporeans may pay less GST due to their tendency to shop at informal establishments, such as ‘mama’ shops and hawker centres, where GST registration may be harder to enforce.³⁰ In this case, the burden of GST is equitably lessened on lower-income households.
Finally, while expanding Singapore’s wealth and property taxes may be attractive, careful consideration is required. DPM Wong, for one, has emphasised how a wealth tax may undermine Singapore’s overall competitiveness.³¹ Such sentiments are echoed by industry leaders, who caution that a wealth tax on wealth brought into Singapore may trigger capital flight — an outflow of wealth from the economy. Coupled with the limited revenue impact of a net wealth tax, as observed in other jurisdictions like Switzerland,³² such taxation may lead to a net negative impact for Singapore.
Conclusion
The GST hike was implemented to reinforce one of the key sources of revenue for future public spending, especially in light of Singapore’s ageing population. However, redistribution was needed to mitigate effects of the hike, especially for more vulnerable sections of the populace. Thus, the Assurance Package is a mechanism to defray rising costs, ensuring that all sections of Singaporean society can better acclimate to the new status quo.
This Policy Explainer was written by members of MAJU. MAJU is an independent, youth-led organisation that focuses on engaging Singaporean youths in a long-term research process to guide them in jointly formulating policy ideas of their own.
By sharing our unique youth perspectives, MAJU hopes to contribute to the policymaking discourse and future of Singapore.
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