My take on Budget 2018

This is written for my students (as I do every year).

Three Key Themes of the Budget Relevant to A Level Students

· Raising tax revenues to support rising expenditures to ensure a sound & sustainable fiscal position.

An ageing population and the government’s mood to increase social spending to foster greater inclusive growth has resulted in government expenditures rising significantly over the last few years.

The government has already made use of the NIRC framework, to allow it to tap on 50% of the returns from investments on its reserves to finance such increased spendings.

The announced increase in GST from 7% to 9% is in anticipation that social and healthcare spending will increase further beyond 2020 and given that we are already seeing projected budget deficits (after accounting for conservative estimates of revenues) – the government thinks that a tax raise is necessary beyond this term.

· Increasing productive capacity through innovation, building human capital through skills deepening, digitalization and helping firms to grow.

There are a few issues that we are trying to resolve.


· Singapore has been operating at near full employment level pretty much most of the time – this means that we need to increase productive capacity

· There is a general consensus now that increasing immigration alone / significantly is not the way to go to increase our productive capacity

· Which means there are only a few ways to go about doing this, raising birth rates – it was just announced our TFR is at 1.16 (so it’s really tough), increasing the hiring of older workers (already trying to do with schemes like Special Employment Credit) or to increase productivity, encourage innovation


· We are also addressing the disruption and problems brought about by globalization

· How we are in an economy today where skills & jobs are being made obsolete fast

· We are trying to develop human capital, not just simply by deepening skills but also to start building a mindset of a life-long acquisition of new skills, and improving and building on what we have.

· Inclusive growth

The subscribed Singapore mentality back then, and the message was “we do not want to create a culture of dependency” and “work hard to improve your life”.

Today, the message is that of ‘inclusive growth’. In fact, the A Levels Economics curriculum was revised 2 years ago to specifically include “inclusive growth in the context of Singapore”

The government recognizes that to navigate the ‘waters’ today, it has to revise its policies. Growth has to be ‘inclusive’ in the sense that while we are not moving away from the principles of i) Hard work as a way to improve your circumstances, ii) No welfare ‘mentality’ iii) Merit-based society

However, we also want to avoid going towards the way that U.K has gone with Brexit, and U.S. has gone with the recent surprise presidential election results. The risk of political instability has an implication on the economy.

Thus, to achieve ‘inclusive growth’, policies are set out to achieve the following

· Higher taxes on the wealthy (notice that our higher taxes are on wealth and not so much on income?)

· Transfer payments to lower income groups

· Ensure that social mobility remains high

This serves to reduce income inequality in Singapore.

In summary

1. As part of the solution to address income inequity and achieve ‘inclusive growth’, more spending are going towards transfer payments. This will include direct cash payments, utility rebates, healthcare & education subsidies. Social spending & addressing income inequality à requires additional spending

2. To address the disruption brought about by globalization and also to increase our productive capacity, there is also a need to focus on the building of human capital, specifically spending on re-skilling / deepening capabilities of our workers / building resilience in terms of the ability to acquire new skills In order to build capacity à also requires spending, but this is an investment for the future

Issues to ponder on

1. Most people focus on the following

a. Whether we should be raising GST from 7% to 9%

b. Whether there are alternative ways to fund the increase in expenditures (e.g. raising corporate tax rates, raising personal income taxes, some say land sales, others say raise NIRC to 60%)

What I would instead ask

· Haven’t we only in the last decade or so, implemented the NIRC framework to allow 50% of the NIRC to be used to cover our increased spending?

· Now that we need to increase GST from 7% to 9% to support our increased expenditures, what happens when we reach 2030? Do we again, resort to GST increases to support increase in expenditures?

· Isn’t it kind of dangerous to use long term projected returns instead of actual realized returns (I think the problem lies with that in some years we don’t have positive returns, and also that revealing the actual realized returns will also reveal the value of our reserves)

The above questions I have are to provoke thinking and to consider trade-offs. I’m not suggesting that I have a better solution, because I actually don’t.

2. Potential economic challenges not discussed in Budget

a. Impact of rate hikes by Federal Reserve on SG economy

i. SG is an interest rate taker, so interest rate hikes by the Federal Reserve (which is expected this year) – mortgage rates will go up. What is the impact on households in Singapore and are we prepared to deal with these impacts?

b. US Corporate Tax Rates cut from 35% to 21% - what are we doing to remain competitive as an economy?


1. As in the last 2 years, we are moving from broad-based approaches like the Productivity Innovation Credit, to more specific targeted help to individual sectors through the Industry Transformation Maps. IE & SPRING has also merged to become more synergized and this will allow firms to just approach one single entity to seek the help they require.

2. “Inclusive growth” is a core theme by the government in the last few years, recognizing the need to push for economic growth but yet ensuring that income inequality does not become worse (measured by GINI coefficient) and that there are actual help to help the low-skilled and low-income seek and improve their skills so that they have access to better job opportunities. The government has also recognized that social mobility is very important and this can be improved with continuous education.

3. Recognition that we are in a ‘Brave New World’ where skills and entire professions are becoming obsolete very quickly. We live in a world where retail is dying, cars are going driverless soon, and any task that is repetitive can be automated and replaced with a robot. Policies like CET, SkillsFuture have the same ideas in mind – essentially we are trying to get our people to subscribe to the idea that skills is something that should be continuously acquired, updated, renewed. That is why NUS is making enrolment ’20 years’ now. You are allowed to, after graduation, continue to take courses, with some subsidies – gain accreditation like graduate diplomas, Masters degree & micro-credentials. Why do that? Ensure that our people are resilient – adaptable & ready to thrive in this new world.

4. Lastly, in trying to become a more inclusive society, spending has to go up. While spending must go up, the government is trying to still maintain the ‘prudent’ and conservative budget position to the best of its ability. Which means there is a need to raise tax revenues. How to raise – can be debated of course and should be debated, because every method has its trade-offs and we must be agreeable as a society to what kind of trade-offs we are willing to accept.