Thursday, November 16, 2006

Rising Cost of Living in Singapore

Cost of living will rise in Singapore.

In a surprise announcement on Nov 13, Singapore Prime Minister Lee Hsien Loong said the government will raise the Goods and Services Tax to 7 per cent from 5 per cent. The move will be tabled in the next Budget, which will take place on Feb 15 next year.

The conventional arguments:

1. Singapore must resort to indirect taxes as it can't afford to raise direct taxes to meet its own spending needs in the competitive global market for foreign investments and capital.

2. The government will try do more to help the lower income group cope with the increase in the consumption tax that applies to both rich and poor alike.

3. Singapore's GST or Value-Added Tax is still low, even at 7 per cent. Other countries have substantially higher VATs.

Yes, it may be an inevitable move to raise GST worldwide (including nearby places such as Malaysia and Hong Kong) although it is a regressive move -- GST affects the poor more than the rich. But the Singapore experience warrants a closer look:

1. Timing is an issue. The government is planning to jack up GST shortly after voters gave the ruling People's Action Party a clear mandate in the May election. Opposition figures had taken the government to task for not keeping the costs of living down, and pointed out during the campaign period that GST, carpark fees and other things had risen soon after the last election in 2001.

Prime Minister Lee countered it during the campaign period, according to a ST report dated 5 May 2006:

"The opposition is, as usual, rumour-mongering. It is impossible for costs never to go up. But it's also ridiculous for the Government to want to push them up deliberately just to make life difficult for people."

To be fair to the government, it never said outright that GST won't go up after the election. And the government has always maintained that its package of benefits -- such as the Economic Restructuring Shares, rebates for certain services and conservancy charges -- will more than offset the effects of higher GST for the lower income group.

2. The argument that the Singapore government may face constraints in trying to balance its annual expenditure bills based on the current taxation system neglects the fact that Singapore is sitting on massive and generally untapped reserves of more than US$100 billion. There are also myriad indirect taxes already imposed on residents of the island -- such as water conservation tax and the COE system for the purchase of cars. The government can afford to tap the reserves judiciously.

3. Other countries that have higher VATs generally provide plenty of state aid to their citizens. Singapore has given offset packages to help the poor cope with the rising cost of living. But somebody should do an in-depth study on whether such handouts are efficient in helping poor families tide over their cash-flow woes arising from higher GST.

While the debate continues, cost of living will rise in Singapore as all businesses -- even hawkers or kopi tiams that are exempt from the GST net -- will take the opportunity to jack up their prices.

1 comment: said...

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