Proposed GST adds to worries over income disparity

John Burton
Financial Times (15 Nov 06)
16 Nov 06

Plans by Singapore to raise its sales tax while lowering corporate taxes have added fuel to a debate over an income gap that is becoming the city-state’s biggest economic and political problem.

Although Singapore is Asia’s richest country after Japan on a per capita basis, it ranks 105th in the world in terms of income equality, based on United Nations data.

The income disparity poses a political threat to the long-ruling government of the People’s Action party, which lost votes in the last election in May over the issue.

Singapore has long resisted introducing a full-scale social welfare system, saying it would sap workers of initiative. “But it has got to the stage where they realise that they need to build a secure social welfare net. That’s a breakthrough,” said Manu Bhaskaran of the Centennial Group, an economic consultancy.

Lee Hsien Loong, prime minister, this week said Singapore would increase its sales tax from 5 per cent to 7 per cent to help finance more government spending for the poor while suggesting corporate tax rates would be cut to enhance the country’s competitiveness in attracting foreign investment.

The proposals have not gone down well with the public, judging by postings on the internet, the main forum of local debate given Singapore’s state-controlled media. A frequent complaint is that an increased sales tax would hit low-income groups the hardest.

“A consumption tax is regressive,” said Song Seng Wun, regional economist with CIMB-GK Research in Singapore. “Inflation is higher for the bottom 20 per cent of the population, at 2.2 per cent against the Singapore average of 0.5 per cent.”

But Mr Bhaskaran believes that the government might try to tailor social welfare spending to minimise the impact of the tax on the poor. “It depends on what offsets the government offers,” he said.

Mr Lee said the government would “tilt the playing field in favour of low-income groups” by offering education and housing grants, and wage subsidies.

The government blames the growing income disparity on the effects of globalisation affecting its open economy. The income gap is now at its widest since independence in 1965, with a noticeable deterioration since the late 1980s. There are worries the gap could widen further due to an ageing population and Singapore’s low birth rate.

Pay for low-skilled workers has fallen. Singapore does not have a minimum wage or comprehensive unemployment insurance and a large influx of temporary foreign workers has put downward pressure on wages. The government says its stance is necessary to keep Singapore competitive against low-cost countries in the region.

Most welfare costs are taken care of by a mandatory savings scheme that pays for mortgages and healthcare as well as pensions. But workers who contributed to the system when wages were low are finding it difficult to survive in retirement as living costs have risen sharply.

Mr Lee said Singapore could not afford to adopt a Scandinavian-style welfare system because it would drive up costs and “no investments will come”.

Instead, Singapore is expected to adhere to its current model of combining targeted government welfare support with efforts by private charities to provide additional aid to the needy.

The government believes continued economic growth will eventually benefit low-income groups. “I don’t see the income gap widening forever,” said Mr Lee.

But some economists ask whether a higher sales tax may harm efforts to attract more tourists, since prices tend to be higher already than neighbouring Malaysia or Thailand.

Opposition groups say Singapore can afford to spend more on its poor since the government’s financial reserves are among the largest in the world when measured against gross domestic product.

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