Information about Asia and the Pacific Asia y el Pacífico
Chapter

IV Fiscal and Monetary Policies

Author(s):
Kenneth Bercuson
Published Date:
December 1995
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Information about Asia and the Pacific Asia y el Pacífico
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Author(s)
Robert G. Carling

Among the most important factors in explaining Singapore’s rapid development is the ongoing policy commitment to macroeconomic stability. The pursuit of cautious financial policies has underpinned investor confidence, facilitating sizable inflows of foreign direct investment.

In Singapore, the formulation of fiscal policy is generally guided by long-term considerations, although on occasion the cyclical position of the economy has prompted adjustment of tax rates or expenditure levels in annual budgets. The stated long-term objective of the authorities is to achieve structural balance in the primary operating budget, compared with surpluses that in recent years have averaged over 5 percent of GDP.1 Expenditure and tax levels in Singapore are moderate in comparison with both industrial countries and those at a similar stage of development.

The objective of monetary policy in Singapore is to achieve a low and stable inflation rate. Since Singapore is a small, open economy in which a majority of goods are traded, this objective is met by adjusting the trade-weighted exchange rate. When deciding on an appropriate level for the exchange rate, the authorities do not pay explicit attention to rates of monetary growth, since it would be inconsistent to target both the quantity of money in circulation and the exchange rate.

Fiscal Policy

In keeping with Singapore’s city-state character, the public sector consists of only one tier, the central government, and a wide range of state-owned enterprises, the latter comprising statutory boards (SBs) and corporations in which the Government has an ownership stake, the government-linked companies (GLCs). The SBs and GLCs together account for a larger share of value added than the central government.2 Central government revenues and expenditures, therefore, considerably understate the overall scope of the public sector. Because of data limitations, however, this section deals primarily with the central government budget.

Government Expenditure Trends and Policies

Government expenditure and net lending tended to rise as a proportion of GDP during the 1970s and into the 1980s but were scaled back after 1987 and have since averaged 20 percent of GDP (Chart 4-1). Both cross-country comparisons and time-series analysis for individual countries point to a tendency for government expenditure/GDP ratios to rise with the level of per capita income. Singapore’s experience up to 1987 conformed to this pattern, although analysis by Heller and Diamond (1990) for 1975-86 based on data for a wide range of developing countries indicates that total expenditure and net lending in Singapore was below the share of GDP predicted by structural relationships (Table A2). The decline in the government expenditure/GDP ratio since 1987 is clearly counter to the typical relationship with per capita income. The ratio in recent years has been about the same as it was 20 years ago, despite the very large increase in per capita income, and only slightly higher than the ratios of Indonesia, Korea, the Philippines, and Thailand, which have much lower per capita income levels (Table 4-1). Malaysia, with a lower per capita income than Singapore, has a much higher expenditure ratio, while Hong Kong, with a per capita income similar to Singapore’s, has a markedly lower level of government spending.

Chart 4-1Central Government Budget1

(In percent of GDP)

Sources: For 1965-71. IMF. International Financial Statistics Yearbook, 1993; for 1972-92, IMF, Government Finance Statistics Yearbook, 1993.

1 From 1965 through 1969, year ending December 31; from 1970, year beginning April 1.

Table 4-1Comparative Central Government Expenditure and Revenue, 1990-92(In percent of GDP; average)
Other Asia
SingaporeHong KongIndonesiaKoreaMalaysiaPhilippinesThailand
Total expenditure and net lending20.414.918.819.429.619.715.7
Of which:
Current (excluding interest)11.511.28.114.018.09.910.5
Capital5.03.78.612.56.23.43.5
Interest3.12.10.75.76.11.5
Net lending0.7-2.2-0.10.30.2
Total revenue33.017.218.218.427.417.619.6
Of which:
Tax17.512.217.216.021.114.817.9
Income, profits, and capital gains8.67.010.825.99.724.85.7
Social security--0.9---
Domestic goods and services5.25.14.86.15.94.88.4
International trade1.0-1.01.64.95.03.8
Nontax current9.83.41.11.96.22.51.8
Capital5.81.70.40.3
Memorandum item:
Per capita GNP (US$, 1991)14,21014,3696106,3302,5207301,570
Sources: IMF, Government Finance Statistics Yearbook, 1993; World Bank, World Tables 1993.

Includes net lending.

Includes taxation of the oil and gas sector, which was 6.8 percent of GDP in Indonesia and 2.6 percent of GDP in Malaysia.

Sources: IMF, Government Finance Statistics Yearbook, 1993; World Bank, World Tables 1993.

Includes net lending.

Includes taxation of the oil and gas sector, which was 6.8 percent of GDP in Indonesia and 2.6 percent of GDP in Malaysia.

Although a recession in the mid-1980s prompted some countercyclical spending, it was followed by a strong recovery, and expenditure restraint has been tightened since 1987. Policy targets of holding operating and development expenditure (defined as all expenditures except debt servicing, investment expenses, and net lending) to within 20 percent of GDP and the number of government employees to within its 1986 level have been adhered to. In the five years to 1992/93, operating and development expenditure averaged 17 percent of GDP. Specific factors that have enabled government expenditure to be held to relatively low levels include: (i) the satisfaction of many infrastructure and public housing needs by high levels of spending in the 1970s and 1980s; (ii) the existence of the Central Provident Fund (CPF), a compulsory saving scheme under which employees and employers contribute a portion of labor income and which has relieved the budget of social expenditure pressures (see Section VII); (iii) the self-financing of most public enterprises and avoidance of large subsidies from the budget; (iv) the fact that the budgetary cost of investment incentives has been borne largely on the revenue side; and (v) the emphasis on a lean administration.3

The economic classification of government expenditure reveals that Singapore has focused on capital expenditure and net lending (Tables A2 and 4-1). Capital expenditure rose steadily relative to GDP during the 1970s and into the 1980s, reflecting an emphasis on infrastructure development and public housing, and reached a peak in the mid-1980s as expenditure was further increased during the recession. Net lending was a major outlay until the late 1980s, the main borrower being the Housing and Development Board (HDB); as housing needs reached a high level of satisfaction and repayments of earlier loans increased, net lending declined. Interest payments are also relatively high, but these payments reflect the growth of CPF balances rather than deficit financing and have a counterpart on the revenue side of the budget in the form of investment income.4

The functional classification of expenditure reveals relatively high levels of expenditure on defense, education, housing, and transport and communications (Table A2). High defense spending is based on Singapore’s assessment of its security risk as a small, strategically located nation, while high levels of expenditure on education and housing accord with the Government’s economic and social development priorities. The emphasis on infrastructure development accounts for the high level of expenditure on transport and communication until the mid-1980s. The functional classification points to relatively low and stable levels of expenditure on social security and welfare, while according to the economic classification current expenditure on goods and services and subsidies and transfers have been relatively low. Singapore has few social welfare benefits or subsidies to state-owned enterprises, while subsidies to private enterprises take the form of taxation expenditures.

Taxation Policy and Revenue Trends

Revenue has shown a clear upward trend relative to GDP since 1965 (Chart 4-1). While the revenue/ GDP ratio fell sharply in response to the mid-1980s’ recession and the tax cuts implemented at that time, revenue rebounded after 1987, resulting in a revenue/GDP ratio in recent years well above the levels of other Asian countries and comparable with industrial countries that have larger public sectors (Table 4-1). However, the high overall level of revenue stems from an unusually high level of nontax revenue, while tax revenue is moderate by international standards. At about 17½ percent, the average tax/GDP ratio in recent years was in line with that of other Asian countries and well below that of industrial countries.

The broad structure of the tax system has not changed markedly over the past two decades, with about 50 percent of revenue coming from personal and corporate income tax and most of the remainder from indirect taxes on a narrow range of goods and services (mainly motor vehicles, petroleum products, alcohol, tobacco, and betting). There has been no capital gains tax, social security tax, or, until 1994, broad-based consumption tax.5

A continuing aim of tax policy has been to lower income tax rates and thereby minimize disincentive effects, while also providing major tax concessions to attract investment in industrial and financial sector activity. The top personal income tax rate was 55 percent until the early 1980s but was then brought into line with the corporate rate at 40 percent. Effective rates were lower as a result of variable annual rebates in the case of the personal income tax and of investment incentives in the case of corporate tax. As a reaction to the economic downturn in 1985-86, both corporate and personal rates were cut from 40 to 33 percent with effect from 1987. The corporate rate was further reduced, in several steps, to 30 percent in 1992, and annual personal tax rebates continued. Despite these rate reductions and rebates, strong fiscal drag associated with economic growth kept income tax collections at 50 percent of total tax revenue and 9 percent of GDP in 1992, about the same as in the early 1980s and higher than in the early 1970s. In 1994, the Government introduced a broad-based 3 percent Goods and Services Tax (GST) offset by reductions in corporate and maximum personal income tax rates to 27 and 30 percent, respectively (see Appendix 4-1 at the end of this section). This package is intended to reduce the disincentive effects of income tax, keep tax rates low relative to other countries in the region, and broaden the overall tax base.

Nontax revenue—mainly fees and charges, investment income, and capital revenue—accounts for much of the trend increase in the overall revenue/ GDP ratio over the two decades prior to 1992. The high level of revenue from fees and charges (averaging 3 percent of GDP in 1990/91-1992/93) results primarily from the use of the price mechanism to regulate certain economic activities, particularly charges on automobile ownership and property development, and environmental permits and fees.6 The main sources of investment income are the foreign reserves and overseas investments managed by the MAS and the GSIC. Such income grew rapidly in the 1970s and 1980s because surplus funds generated by the budget surplus and bond issues to the CPF fed the rapid growth of government investments. In the three years to 1992/93, investment income averaged about 6½ percent of GDP. Capital revenue results mainly from sales of government land. Although volatile, capital revenue rose as high as 11 percent of GDP in the mid-1980s, accounting for much of the surge in the revenue/GDP ratio at that time. Capital revenue was again strong in recent years, averaging 6 percent of GDP in the three years to 1992/93.

Fiscal Balance

A prudent fiscal policy has been a cornerstone of Singapore’s financial management, with the budget recording an overall surplus in every year but two since 1970 (Chart 4-2). In 1990/91-1992/93, the overall surplus was particularly large, averaging 12 ½ percent of GDP and reflecting partly the high level of land sales. The overall surplus represents a negative borrowing requirement and indicates the amount available annually to be applied to such uses as asset accumulation or debt reduction. In practice, the surplus has been committed mainly to asset accumulation through overseas portfolio investment.7 Since 1992/93, part of the surplus has also been allocated to two funds to help finance future growth of social expenditures—the Edusave Endowment Fund and the Medical Endowment Fund.8

Chart 4-2Measures of the Budget Balance1

(In percent of GDP)

Sources: IMF, Government Finance Statistics yearbook, 1993; and Singapore authorities.

1Year beginning April 1.

Singapore’s fiscal policy concentrates on the above-mentioned primary operating balance as a superior measure of the underlying fiscal position and of the impact of the budget on aggregate demand. On this measure, the budget varied between a peak surplus of 7 percent of GDP and a peak deficit of the same magnitude in the 1980s and averaged a surplus of 2 percent of GDP. The wide variation in the primary operating balance reflected both the cyclical sensitivity of the budget and expansionary fiscal policy action taken in response to the 1985 recession. In general, however, fiscal policy has concentrated on medium-term goals, and discretionary countercyclical action has been limited. The average surplus rose to 5½ percent of GDP in the three years to 1992/93. The long-term objective is structural balance in the primary operating budget, with surpluses in years of strong economic growth offsetting deficits in downturns.

The balance on current transactions highlights the contribution of the budget to gross national saving.9 The increase in the current surplus from an average of 8 percent of GDP in the 1970s to 11 percent in the 1980s and 12 ½ percent in 1990/91-1992/93 was one of several factors that helped push the national saving rate above the investment rate after the mid-1980s. As the Government’s current account surplus exceeded its capital expenditure by 7 ½ percent of GDP in 1990/91-1992/93, it was a significant contributor to the national saving/investment imbalance. Moreover, as noted above, the Government has made large overseas (mainly portfolio) investments from the budget surplus, reflected partly in the rapid buildup of official foreign reserves.10 In this sense, the outward investment that is the counterpart of Singapore’s positive domestic saving/ investment imbalance has been undertaken largely by the Government rather than the private sector. It is a moot point whether private investment would have earned a higher return. A major thrust of current economic policy is the encouragement of investment abroad by the private sector (see Section VI).

State-Owned Enterprises

The state-owned enterprises, as noted, comprise SBs and GLCs. The boards, of which there are about 70, operate outside the budget and with greater autonomy than government departments. They cover a wide range of functions and include educational institutions, public utilities, financial institutions, regulatory bodies, and providers of infrastructure, transportation, housing, and urban development services. The relative importance of the boards is indicated by their revenues and expenditures which, although smaller than those of the budget sector, are substantial (Table A3). Another important dimension of the boards’ influence on the economy that is not reflected in revenue and expenditure figures is their role as instruments of government intervention and regulation (see, for example, the discussions of the EDB and the CPF in Sections III and VII, respectively).

The effects of the SBs on the budget vary. Some, such as the educational institutions, are funded by grants from the budget, but many of the boards are commercially oriented and are generally required to operate without government subsidy. An important exception to the latter rule is the HDB, which has provided subsidized rental housing and mortgage financing in accordance with the high priority the Government has attached to quality housing and individual home ownership since the early 1960s. The commercial boards have made an annual contribution to government revenue since 1987 based on their operating surpluses.11 Thus, on the whole, the commercially oriented boards are net contributors to the budget.

The Government’s investments in the domestic corporate sector take the form of part or full ownership of GLCs. They have mixed origins, some being carryovers from the colonial administration, some having been created in response to specific needs such as defense-oriented production, and others resulting from government-led ventures into fields, such as high technology, where it was judged that the indigenous private sector required a lead from the Government. Compared with the SBs, the GLCs extend further into the traditional domain of the private sector in a mixed economy. They have a significant presence in the corporate sector: in 1988, the Department of Statistics estimated that there were 142 companies with a government shareholding of greater than 50 percent; and in 1987, the Public Sector Divestment Committee put the total number of GLCs, including those with minority government ownership, at about 500, although most of these are subsidiaries of three holding companies—Temasek Holdings, MND Holdings, and Singapore Technology Holdings. The GLCs are required to remain viable without budgetary support. However, little information is available about their size and financial results.

The extent of government participation in commercial activity through the state-owned enterprises is noteworthy. Since the boards and GLCs are not a drain on the budget, and the budget is regularly in surplus, there is no budgetary pressure to privatize. Moreover, there is no evidence that the boards and GLCs are inefficient. Rather, their role has come under increased scrutiny because some of the enterprises have outlived their original purpose or have the potential to stifle the growth of the indigenous private sector. The issue of privatization has been addressed from these perspectives and from that of providing Singaporeans more opportunities to acquire a stake in local corporations.

The Public Sector Divestment Committee in 1987 recommended a policy of “robust privatization” of GLCs but saw limits to the rate at which they could be digested by the private sector,12 The Committee envisaged a ten-year timetable for substantial reductions in government ownership. Significant progress has been made to date: the Government has divested its shareholdings in 58 companies (29 in full and 29 in part) since 1985. Among the SBs, the 1987 Committee proposed several for further study of their privatization potential—namely, the Telecommunication Authority (Telecom), components of the Public Utilities Board (PUB), the Civil Aviation Authority (CAA), and the Port of Singapore Authority (PSA). Telecom was converted to a corporation in 1992 and an initial 11 percent of its share capital was sold to the public in 1993; no other privatization of SBs has yet taken place.

Monetary Policy

Singapore has a good record of inflation control, with an average annual rate of increase in consumer prices of 4 percent over the three decades since independence. Since 1980, Singapore’s annual average of 2 ½ percent compares with averages of 4 ½ percent in the industrial countries and 6 percent in Hong Kong, Indonesia, Korea, Malaysia, and Thailand. Monetary policy has been instrumental in this performance, particularly after the 1970s. The approach to monetary policy has evolved from a reliance on direct controls in the early 1970s to a focus on exchange rate management since the early 1980s.

Evolution of Monetary Policy

Several key factors have guided the evolution of monetary policy. First, the extensive regulation of the financial sector that accompanied direct controls was inconsistent with Singapore’s objective of becoming a major international Financial center. The domestic financial system was deregulated in steps culminating in 1975: a special reserve requirement on banks’ net foreign interbank liabilities was eliminated in May 1974; credit guidelines were lifted in January 1975; and the minimum cash ratio was reduced and the interest-rate-setting cartel was dismantled in July 1975.

Second, exchange controls were dismantled in stages, culminating in complete liberalization in June 1978. Foreign exchange controls on domestic residents were eased in 1975. In June 1978, residents were allowed to borrow and lend in all currencies as well as deal freely in foreign exchange. At the same time, the Asian dollar market flourished after its establishment in 1968 as various concessions were granted to Asian currency units. Thus, Singapore residents had ready access to a large offshore market in foreign-currency instruments. (The offshore market is further discussed in Section VI.)

Third, Singapore’s trade account was and remains extremely open. Even after excluding entrepôt trade, both exports and imports of goods and non-factor services exceed 100 percent of GDP. It is estimated that the import content of domestic expenditure is about 60 percent, white that of non-oil exports is about 70 percent (MAS (1992)). This means that foreign prices and the exchange rate have a powerful effect on the domestic price level, both directly and indirectly through the wage response to changes in import prices. Thus, changes in the nominal exchange rate have much leverage with respect to the rate of inflation, but less leverage with respect to the real exchange rate and competitiveness because a depreciation (appreciation) in the Singapore dollar triggers a partially offsetting increase (decrease) in domestic costs and prices.13 Moreover, external demand is a more important determinant of domestic activity and employment than is domestic demand, and measures affecting competitiveness rather than domestic demand management are critical to the level of domestic economic activity.

These factors have been key to the evolution of monetary policy. By the end of the 1970s, Singapore approximated the textbook model of an open capital market that was fully integrated with global markets. In this model, domestic interest rates are essentially determined by foreign interest rates adjusted for exchange rate expectations, and the monetary authorities face a clear choice between targeting monetary aggregates while allowing the exchange rate to float freely, and targeting the exchange rate while allowing monetary aggregates to be fully demand determined, with any disequilibria between demand and supply being quickly resolved by capital flows. In practice, the choice of a target was determined by the openness of the trade account, which suggested that monetary policy would be most effective if it adopted the exchange rate as its intermediate target and price stability as its ultimate target.14

Role of the Exchange Rate

Until 1973, the Singapore dollar was pegged (first to the pound sterling and then to the U.S. dollar), and there was little scope for an independent monetary policy (Chart 4-3). Inflation was below the world average mostly because of the dampening effects of the large pool of the unemployed, which was not absorbed until the early 1970s. After the floating of the Singapore dollar in 1973, the exchange rate appreciated until 1975 as monetary policy was tightened to counter inflationary impulses from abroad (particularly the first oil shock). At that time, monetary policy operated through changes in reserve requirements, credit guidelines and ceilings, and adjustments to controlled interest rates. The focus of policy on inflation was relaxed from 1975 in order to counter the slowdown in the economy, and the exchange rate tended to depreciate. The burden of anti-inflation policy shifted to wage restraint under the National Wages Council (NWC). By the late 1970s, this policy mix had become unsustainable because of the tight labor market. The impact of the second oil shock also redirected attention to inflation.

Chart 4-3Exchange Rates

(Index 1980=100)

Sources: IMF, international Financial Statistics, and Information Notice System.

It was in this setting, and having regard to the features of the Singapore economy discussed above, that in 1980 the emphasis shifted to and has remained on the exchange rate as the intermediate target of monetary policy and on price stability as its ultimate target.15 The MAS monitors the rate of the Singapore dollar against an undisclosed trade-weighted basket of currencies within a target band. The setting of the target band depends on current and projected inflation pressure. In the latter connection, the medium-term outlook for both foreign inflation and domestic unit labor costs carries a heavy weight. If these factors threaten to boost inflation unacceptably, the exchange rate is allowed to appreciate sufficiently to reduce imported inflation and dampen demand pressure in order to maintain a low and stable inflation rate.

Official intervention in the foreign exchange market keeps the rate within the band and aims to counter excessive speculation and smooth out sharp day-to-day fluctuations. Intervention normally works to moderate the strength of the currency. The budget surplus and net CPF contributions represent a heavy drain on domestic liquidity, which is countered by unsterilized official sales of Singapore dollars for foreign exchange. The volume of such intervention during any given period is determined by the exchange rate target. Official intervention is able to exert a strong influence on the rate both because of the strong fundamentals and because the Singapore dollar has not been “internationalized.”16

The nominal effective exchange rate has appreciated in all but two years since 1980, by a cumulative 25 percent, as policy has aimed to insulate domestic prices from imported inflation and counter the inflationary impulse of the tight domestic labor market. However, as domestic inflation eased dramatically in 1986-87 and import prices fell with the oil price collapse, a sharp depreciation of the exchange rate (by 12 percent in 1986) proved compatible with domestic price stability. Again, when imported inflation eased in 1992-93 with the fall in world inflation, stabilization of the exchange rate proved consistent with a steady domestic inflation rate of 2 ½ percent; inflation picked up late in 1993, and the exchange rate appreciated.

Appendix 4-1: The 1994 Tax Restructuring

In February 1993, the Singapore Government announced a proposal to restructure the tax system by introducing a broad-based goods and services tax (GST) with effect from April 1, 1994, while at the same time reducing direct taxes and some existing indirect taxes.17 This appendix examines the tax structure, describes the changes implemented in April 1994, and reviews their effects on the budget and the price level.

Prereform Tax Structure

Singapore’s tax/GDP ratio, which averaged 17 ½ percent in 1990/91-1992/93, was similar to that of other Asian countries. About 60 percent of tax revenue in these years came from direct taxation: personal and corporate income tax, property tax, and estate duty (Table 4-2). At this level, Singapore’s dependence on direct taxation was relatively high. Comparable proportions for Korea, Malaysia, the Philippines, and Thailand were in the range of 30-45 percent. (In Indonesia it was about two thirds, but this reflected taxation of the oil sector.)

Table 4-2Composition of Tax Revenue(In percent of total tax revenue)
Average 1990/91-1992/93Budget 1993/94
Direct taxes59.859.5
Income149.149.9
Assets210.79.7
Indirect taxes40.240.5
Customs and excise duties311.311.0
Motor vehicles11.211.5
Betting5.15.4
Stamp duty4.94.3
Selective consumption40.40.5
Other7.37.8
Source: Singapore, Budget for the Financial Year 1993/94.

Personal and corporate income tax and statutory boards’ contributions in lieu of income tax.

Property tax and estate duty.

Duties on petroleum products, tobacco, liquor, and motor vehicles account for over 95 percent of customs and excise duty revenue.

Entertainment duty and taxes on Public Utilities Board and Singapore Telecom accounts.

Source: Singapore, Budget for the Financial Year 1993/94.

Personal and corporate income tax and statutory boards’ contributions in lieu of income tax.

Property tax and estate duty.

Duties on petroleum products, tobacco, liquor, and motor vehicles account for over 95 percent of customs and excise duty revenue.

Entertainment duty and taxes on Public Utilities Board and Singapore Telecom accounts.

The 40 percent of Singapore’s tax revenue derived from indirect taxes comprised customs and excise duties, motor vehicle taxes, selective consumption taxes, betting taxes, a stamp duty, and other indirect taxes. The indirect tax base was narrow, with two thirds deriving from petroleum products, tobacco, liquor, motor vehicles, and betting. This concentration resulted from the focus of indirect taxation on social and environmental objectives, such as discouraging more motor vehicles and the associated congestion and pollution. Taxation of services was limited to hotels, restaurants, and public utility bills. Singapore’s lack of a broad-based consumption tax contrasted with all other countries in the region except Malaysia (which is now proposing to introduce a broad-based sales and services tax in 1995) and Hong Kong.

The Restructuring

The restructuring involved the introduction of a 3 percent GST, reductions in income tax rates, property tax and some existing indirect taxes, and transitional increases in rebates and outlays to help offset the impact of the GST on low-income households.

The design of the GST is the same as that of a value-added tax (VAT). It aims for administrative simplicity and neutrality, with few exemptions and, apart from zero-rating of exports, a single rate of 3 percent. Exemptions are limited to firms with an annual turnover below S$l million, most financial services, and the rental and sale of residential land and buildings. While education and health services are subject to the tax, the Government is increasing subsidies on public health and education to prevent increases in prices to consumers.

The GST is not motivated by present revenue need, since the budget is in surplus. The overall package will slightly lower the surplus, and the Government has pledged not to raise the GST rate for at least five years. Rather, the objectives of the restructuring are to make room for a reduction in income tax rates, to broaden the indirect tax base, and to make the overall tax base more resilient to future population aging.

Reductions in income tax rates are designed to reduce disincentive effects and maintain the international competitiveness of Singapore’s tax rates. Rates were lowered from the mid-1980s to their prereform levels of 3 ½–33 percent for personal income and 30 percent for corporate income. The reductions accompanying the GST resulted in rates of 2½–30 percent for personal income and 27 percent for corporate income, which are the lowest in the region apart from Hong Kong (Table 4-3). The Government has stated that its ultimate objective is a corporate rate of 25 percent.

Table 4-3Comparative Tax Rates, April 1994(In percent)
Personal Income Tax (Maximum)Corporate Income Tax (Maximum)VAT
Singapore30.027.03.0
Hong Kong20.016.5
Indonesia35.035.010.0
Korea, Republic of50.0134.0110.0
Malaysia34.032.023
Philippines35.035.010.0
Taiwan Province of China40.025.05.0
Thailand37.030.07.0
Sources: Price Waterhouse, individual Taxes—A Worldwide Summary Corporate Taxes—A Worldwide Summary (1994).

As the first stage of a tax reform program, the maximum personal income tax rate is to be reduced to 47 percent, and the maximum corporate rate to 32 percent, in 1994. Both personal and corporate income tax are subject to a local government surtax of 7.5 percent.

A reduction to 30 percent in 1995 has been proposed.

Introduction of a broad-based, unified sales and services tax in 1995 has been proposed.

Sources: Price Waterhouse, individual Taxes—A Worldwide Summary Corporate Taxes—A Worldwide Summary (1994).

As the first stage of a tax reform program, the maximum personal income tax rate is to be reduced to 47 percent, and the maximum corporate rate to 32 percent, in 1994. Both personal and corporate income tax are subject to a local government surtax of 7.5 percent.

A reduction to 30 percent in 1995 has been proposed.

Introduction of a broad-based, unified sales and services tax in 1995 has been proposed.

The previous level of dependence on income tax made the tax base vulnerable to the effects of population aging. While this is a long-term consideration, the Government’s approach was to make an early start and to build the GST into the tax system at a low rate, thereby enhancing public acceptance and minimizing the risk of sparking inflation.

Budgetary and Price Effects

The GST is expected to raise S$0.9 billion (1 percent of GDP) in its first year (1994/95). Off-setting tax reductions and increases in outlays are estimated to cost S$1.1 billion (1.2 percent of GDP), resulting in a slight reduction in the budget surplus.

The one-off effect of the GST on the consumer price index is estimated by the Department of Statistics at about 2 percent. The exemption of small businesses and housing rents, increases in subsidies, and reductions in existing indirect taxes and the corporate income tax will partially offset the full 3 percent impact. Second-round effects through higher wage increases are expected to be minimized by the offsetting reductions in personal income tax.

1The primary operating budget excludes debt interest, investment expenses, and net lending on the outlays side, and capital revenue and investment income on the revenue side.
2The Singapore Department of Statistics has estimated that in 1988 the central government accounted for 5.3 percent of value added, the SBs for 10.4 percent, and the majority government-owned companies for 7.2 percent.
3There were 59.800 government employees (excluding armed forces personnel and employees of SBs) in 1992, representing 4 percent of total employment.
4Net CPF contributions are invested in government securities, the proceeds of which are invested by the Government of Singapore Investment Corporation (GSIC), mainly overseas. The sharp rise in interest payments in fiscal year 1987 was due to a one-off payment of back-dated interest payable on CPF advance deposits that were converted to registered stocks in FY 1987.
5Compulsory contributions to the CPF may be regarded as an alternative to a social security tax. A broad-based consumption tax was introduced with effect from April 1, 1994.
6A certificate of entitlement (COE), valid for ten years, is a prerequisite for automobile ownership. The national vehicle fleet is regulated by a ceiling on the number of COEs. As growing personal incomes have stimulated demand for automobiles, COE prices have been bid up to very high levels in recent years, reaching S$60,000 at the end of 1993.
7The overall surplus does not measure the net addition to total government assets because it partly reflects asset exchanges such as land sales and net lending.
8These are capital funds, the annual interest earnings of which will finance transfers to households for certain education and medical expenses. Allocations to the funds are, therefore, not classified as expenditures but as allocations of the surplus. Such allocations totaled S$1.5 billion (2 percent of GDP) in 1992/93.
9Estimation of the impact of the surplus on saving, and other factors bearing on domestic saving, are reviewed in Section VII.
10The budget surplus does not directly generate foreign exchange funds but after being deposited with the MAS is converted from Singapore dollars to foreign exchange as part of MAS monetary operations and exchange rate management.
11Prior to 1987, surpluses were allowed to accumulate. In 1987, accumulated surpluses were subject to a one-off transfer to the Government. Since then, SBs have been required to transfer 20 percent of their annual operating surplus to the Government: this transfer is estimated to be broadly equivalent in its impact to the imposition of a corporate income tax. In the last three fiscal years, SBs’ contributions to the budget averaged 2.8 percent of total budget revenue, while subsidies from the budget to SBs averaged 1 percent of total budget revenue.
12Singapore, Report of the Public Sector Divestment Committee (1987).
13The MAS (1992) estimates that a 1 percent depreciation in the nominal effective exchange rate leads to a 0.7 percent increase in unit labor costs within three years.
14Corden (1984) develops this argument by way of a theoretical model.
15The authorities aim to keep inflation “low and stable” (MAS Annual Report, 1991–92), which has generally meant less than 3 percent.
16The MAS restricts syndicated loans and bond issues denominated in Singapore dollars and bank lending in Singapore dollars (to both nonresidents and residents) when the proceeds are to be used outside Singapore. Banks are required to consult with the MAS before proceeding with any such transactions in excess of S$5 million. The policy was most recently reiterated in a MAS circular on July 18, 1992.
17The proposal was announced in a white paper, The Goods and Services Tax, Ministry of Trade and Industry and Ministry of Finance, February 1993.

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