More than 8% GST is needed to meet increased expenditure

by Chris Kuan

Hike in Goods & Service Tax (GST) – 1% point not enough – still lots of talk about it and why not?

It just reminded everyone of a 2015 pre-election claim that a post-election hike was unlikely. Not quite a broken promise because it was claimed and not promised but it does underlie the issue of trust.

Here is the thing though – I don’t think a single 1% point hike in the GST is enough and I don’t think it will be GST alone.

Let’s just look at healthcare expenditures alone. Former Finance Minister Tharman Shanmugaratnam had said that government healthcare expenditures will rise to $11b by 2020 and to $14b by 2030. Presently it is about $8b – the government needs to raise $3b a year by 2020 and $6b by 2030.

A hike in GST from 7 to 8% and assuming the same ratio of GST rebates, will produce just over $1.3b in revenues (total GST revenues for 2017 estimated to be $11.2b). Even factoring the fact that tax revenues rise more or less in line with the increase in nominal Gross Domestic Product (GDP) and assuming GDP growth is achieved at the top of the new normal, plainly one hike in GST by 1% point will not pay for rising healthcare expenditures let alone other social expenditures like increased provisions for childcare and Silver Support.

An argument can be made that some of it can be funded by increased revenues from personal and corporate income tax due to the rise in nominal GDP without hiking tax rates on these categories. But in my humble opinion, this is far too optimistic and the gap is too big. This is not even factoring the other reason for raising taxes – investments in the economy and infrastructure.

Do not expect the government to implement a slew of tax hikes before the 2020 election. They will do just one, most likely a hike in GST. But don’t accept any pre-election claim there will be no post-election tax hikes like the government did prior to the 2015 election.

The likelihood is very strong there will be more tax hikes on the way – GST and income tax. The only way to avoid this as I posted yesterday was to amend the constitution rule to tap 100% of the expected long-term inflation-adjusted returns earned from the reserves.