Taxing Home and Car Buyers Helps Singapore Keep Its Budget in Check

When it comes to balancing the books, Singapore's government has a tall order. The country's constitution demands that the budget is balanced over each government's term (which is a maximum of five years); the island doesn't borrow money to fund government expenditure and the government doesn't have any external debt.

For now, it's got a robust tax and revenue-generating system that supplies ample funds — even with among the lowest tax rates in developed nations. But with economic growth down to 2 percent in 2015 — its slowest pace in six years — and the country's population aging, demands on the budget are rising. Singapore last year decided to raise taxes for the richest 5 percent of its citizens amid rising discontent over living costs and a widening wealth gap.

"If social spending continues to increase, they will find it more limited in terms of revenue raising options,'' said Michael Wan, an economist at Credit Suisse Group AG in Singapore. "The challenge is to manage the changes in the revenue base such that you continue to maintain competitiveness in the global economy,'' because "there's only so much you can tax of the higher income earners before you engender a potential shift out of the country.''

Here is a snapshot of the country's economy ahead of the fiscal 2016 budget, which Finance Minister Heng Swee Keat will present in parliament on March 24.

Slowing job growth

The city-state's policy makers may be under pressure to provide some support to businesses and consumers, as growth in both employment and the broader economy slows.

The finance minister has signaled he will be "prudent" in this budget even as the government seeks to help companies cope with short-term challenges and find medium-term growth opportunities.

Cooling housing market

The government has used taxes to cool Singapore's property market. In 2009, as low interest rates and demand from foreign buyers raised concerns that the property market was overheating, the city-state’s government began introducing residential property curbs. Higher stamp duties on home purchases were part of the mix.

These measures may not go any time soon: while home sales have fallen, prices still remain well above global financial crisis levels.

Rising government spending

The government has increased fiscal support for the economy in recent years as its population ages and growth slows.

Singapore’s government expenditure may increase to 17.3 percent of gross domestic product in the year starting April 1 from 17.0 percent in fiscal 2015, according to Joseph Incalcaterra, an economist at HSBC Holdings Plc. That would be the highest spending relative to GDP since at least March 2010.

Growing, aging population

Spending on healthcare and transport has become a bigger chunk of the Singapore budget, while defense and education now take up smaller shares.

Singapore's aging population is set to keep healthcare costs rising, and the government has stepped up efforts to boost infrastructure to cope with population increase.

"Managing the pace of increase in social spending will be important," said Wan. "In many countries this can escalate quite quickly,'' and many of these commitments are quite permanent and can be hard to roll back, he said.

Costly car permits

Thanks to costly vehicle ownership permits to control congestion and pollution on the island, rising demand for cars means the revenue from such licenses have risen in recent years as a percentage of GDP. That's on top of a road tax that's imposed on vehicles.

State investment companies' help

Higher tax collections have made the budget less reliant on another source of income for the government: proceeds from state investment companies and institutions like Temasek Holdings Pte, GIC Pte and the Monetary Authority of Singapore.

Still, net investment returns contributions from the organizations is estimated to rise to about 3 percent of GDP in the next fiscal year from about 2.2 percent in the 12 months ending March 31, according to Credit Suisse Group AG.

With assistance from Pooja Thakur, Reinie Booysen, Masaki Kondo and Karl Lester M. Yap.

To contact the authors of this story: Ailing Tan in Singapore at atan193@bloomberg.net, Klaus Wille in Singapore at kwille@bloomberg.net, Myungshin Cho in Seoul at mcho38@bloomberg.net.

To contact the editor responsible for this story: Alyssa McDonald at amcdonald61@bloomberg.net.

By: Ailing Tan, Klaus Wille and Myungshin Cho

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