(Photo - Terry Xu)

If NIRC is not expanded, Singapore will expect several tax hikes in the next decade

by Chris Kuan

Finance Minister Heng Swee Kiat again. “Govt spending on healthcare set to go up in 3 to 5 years” reports the MSM. Healthcare expenditures will go from $10b in 2016 to $13b in 2020 due to ageing population and advances in healthcare.

But before you start thinking this is new government spending, it is not. It was already projected in 2014 when Mr. Tharman was the Finance Minister. We must expect this narrative of increased healthcare expenditures to be repeated many times over in the near future to set voters up for a hike in tax rates.

However, this is what is not mentioned. We must expect this narrative of increased healthcare expenditures to be repeated many times over in the near future to set voters up for a hike in tax rates.

In 2015, a decision was made to apply the basis for calculating the Net Investment Returns Contribution (NIRC) of using long term real returns to Temasek. Up to that point, Temasek had only delivered the net investment income, unlike GIC and MAS which delivered the net investment returns.

The effect was immediate: in 2015 the NIRC was $9.9b, in 2016 $14.4b – lifting funds available for spending by $4.5b per year. Note how nicely this change in the NIRC application to Temasek fits in with the projected increase in healthcare expenditures.

The question is what happened to the funds if the government is talking about tax hikes? All swallowed up by current expenditures?

Not really. The 2016 reported budget surplus was $5.2b and the estimate for 2017 was $1.9b but do note estimates of surpluses have a nasty habit of being revised upwards. So, taking both into consideration, the government still has at least $3.5b a year of unspent funds.

If this is repeated, then that $3b increase in healthcare expenditures is fully funded. More so if one consider part of that $3b increase is already included in the 2017 budget.

Increased healthcare expenditures are crucial. Singaporeans’ share of healthcare costs are the highest among peers and we are a long way from the average 75-80% share taken by governments. I don’t mean to alarm you but at last year’s $10b healthcare expenditure, that is still only 2.4% of Singapore’s Gross Domestic Product (GDP). Mr. Tharman had forecasted that it will rise to 3.5% of GDP by 2030. Still low by peer standards but that’s over $20b projecting current change in nominal GDP forward. If the government is not expanding the NIRC, there will be several tax hikes in the next decade.

Mr. Tharman had said during his speech for the Singapore Budget in 2014,

“The first concerns healthcare costs. Healthcare will be the main driver of the higher social spending that we will see over the next 10 to 15 years. It will happen as Singaporeans get older, but also as new medical treatments become available, enabling longer and better lives. The demand for medical treatment will inevitably grow.

We will have to find the right ways to fund these future healthcare needs. It means finding the right balance of funding: between tax-funded subsidies, collective risk-pooling through MediShield Life and ElderShield, individual co-payments and safety nets like Medifund for the needy. We must find a balance that is equitable to the poor, and that also ensures that we can fund quality healthcare on a sustainable basis, in the next decade and well beyond.”