Budget 2022 — speech by Louis Chua

It was the best of times, it was the worst of times.

Mr Speaker those were the opening lines from the novel by Charles Dickens, A Tale of Two Cities, lines which I find to be quite apt to describe the situation we find ourselves in today. 

Two years into the pandemic, we are still battling the latest wave of infections brought about by the Omicron variant, with many of our healthcare workers struggling to cope with the stressful working conditions today. Covid fatigue has also meant that many of us cannot help but feel overwhelmed at times, even as we try so valiantly to live with endemic Covid.

On the economic front, it seems that economic growth is starting to pick up again. Singapore’s GDP grew by 7.6% in 2021, with the Government projecting an above trend 3-5% growth for 2022, with total employment seeing the highest quarterly growth since 2014 of 47,400 workers.

Yet the rosy headline numbers belie the risks to the fragile global and local economic recovery, not least because of geopolitical tensions and rising concerns over inflation, among others, and one cannot rule out the tail risk of a recession in the near future.

Inflation and the rising cost of living in particular, have been of grave concern to policymakers globally and the man on the street alike. As shared in one of my speeches in November last year, it remains to be seen if the current inflationary pressures in the market are transitory or permanent, though the U.S. Federal Reserve has since then dropped the term “transitory” in its description of inflation, and with concerns about stagflation now appearing in the market lexicon instead.

Locally, the Monetary Authority of Singapore (MAS) has been concerned enough about inflation to surprise the market with a tightening of monetary policy in October, given that external and domestic cost pressures are accumulating. And soon after its first tightening in three years, the MAS acted again in its second tightening in three months, given upside risks to inflation.

Now even if, what MOS Low shared in this house stands true, and that inflation is expected to ease in the later part of the year, it doesn’t mean prices are going to come down. It means prices will still rise but not jump, and still continue to eat into the real incomes of Singaporeans! Who can forget the slew of price increase signs being put up at the coffeeshops since the start of this year, the more than 30% increase in fuel prices, or the 23% increase in electricity prices since a year ago?

In the context of rising inflation and an uncertain global economic recovery, a GST hike, while delayed, would still be counterproductive given the potential drag on private incomes, consumption and ultimately our GDP growth. As my fellow Workers’ Party colleagues have shared earlier, there are alternative revenue sources that can and should be considered beyond the regressive tax that is the GST, with options to use more of Singapore’s existing fiscal headroom for example, having the added benefit of minimising the impact to our local households and economy alike.

My speech will thus focus on three main areas which warrant urgent consideration.

Room for wealth taxes

Finance Minister Lawrence Wong made adjustments to residential property taxes and additional registration fees for cars as part of Singapore’s answer to wealth taxes. I welcome these changes.

When viewed from a glass half full perspective, it is a step in the right direction when it comes to tackling wealth inequality and strengthening our social fabric, albeit a small step. However, when viewed from a glass half empty perspective, the measures are a mere tokenism rather than a meaningful attempt at wealth taxes in Singapore.

Higher property taxes and ARF are expected to result in a $430 million increase in annual revenues, and even if we include higher personal income taxes, the total annual increase is just $600 mn. This is significantly below what some academics had put forth as possibilities, and our conservative estimates of what a net wealth tax could bring, at about S$1.2 billion annually.

For example, in a November 2021 CNA article, Assoc Prof Walter Theseira from SUSS noted that a wealth tax might conceivably pull in a similar amount to raising the GST by a few percentage points, while a Bloomberg article on 16th February quoted Mr Christopher Gee, Senior Research Fellow at the Institute of Policy Studies as sharing that a similar wealth tax rate in Singapore, as that of Switzerland presumably, would generate $2.7 billion in government revenues.

Property taxes

Consider the case of property taxes, which as Minister said, is currently Singapore’s principal means of taxing wealth. As what a Business Times correspondent Ben Paul shared in his article, “As an owner-occupier of a modest apartment in the core central region, property tax is not a particularly big expense for me. In fact, it’s nothing compared to the maintenance fees and cost of general upkeep for my unit”.

While the increase in headline marginal property tax rates appear high, the actual impact on the households involved are unlikely to be material.

As noted in Annex-C2 of the budget statement, an owner occupied condominium in a central location is only expected to see an increase of $200 a year, while a very large landed property is expected to see a $15,400 increase. The corresponding numbers for non-owner-occupied properties are $1,400 and $19,200 respectively.

Based on my analysis, a centrally located condo in Cairnhill that is being leased out as an investment property need only raise rents by 2% to offset the higher property tax rates, while that of a luxury development located on Nassim Road, commanding monthly rentals of almost $20,000 a month need only raise rents by 7% to offset the higher property taxes. To put this into context, rents in 2021 alone already rose by 10%.

ARF for luxury cars

The other tax change is that of introducing a new Additional Registration Fee (“ARF”) tier for cars. For a Bentley Flying Spur which retails for almost S$900,000 without COE, the new ARF tier is expected to increase the ARF by around S$59,000, a fairly large number in itself but represents just about 6-7% of the cost of the car. For someone who’s prepared to pay almost a million dollars for an asset that depreciates rapidly over 10 years, is it even meaningful in the grand scheme of things?

Personal income tax rates

Thirdly, higher personal income tax ratesaren’t wealth taxes per se, but I do agree with the principle that those who earn more, should contribute more, and it’s a fine example of what progressive taxes look like.

However, the increase appears to be very modest once again, once we work through the math. For example, someone making a million dollars in chargeable income would pay a grand total of $5,000 more in personal income taxes, or 0.5% of chargeable income, while someone making $1.5 million would only pay $15,000 more or 1% of chargeable income.

I would even argue that the last increase in personal income tax rates in Budget 2015, where the top marginal personal income tax rates were raised to 22% among others, was an even bolder move than what we have today, raising more revenues at $400 million a year back then as compared to $170 million a year with today’s change! Also bearing in mind that from 2015 to 2019, i.e. the latest available year on Singstat, the number of individuals with assessed income of more than $300,000 has increased by 22% within this short timespan as well.  

Meaningful efforts to raise wealth taxes

I recognise that the Government will continue to study the experiences of other countries and explore options to tax wealth effectively, and I sincerely hope that more meaningful efforts to change our tax system and raise wealth taxes can be made sooner than later.

Yes I agree that taxing wealth has its challenges. But consider a hypothetical case of a multi-billionaire tech founder who made a windfall after his start-up’s IPO and has retired from the firm. From time to time he collects dividends as income, while continuing to hold shares in the listed company which accounts for the vast majority of his wealth. Meanwhile he’s renting multiple luxury apartments instead of owning one place of residence. Does our tax system adequately capture the wealth of what could be one of Singapore’s richest? Would this person even be paying income or wealth taxes at all? If we think about the Forbes 50 richest list in Singapore, just how much of their wealth is in their residential address and the cars they drive?

As highlighted by a 2018 OECD report on the role and design of net wealth taxes, which provides for certain tax design recommendations, in countries where capital gains are not taxed, there may be a stronger justification for levying a net wealth tax. A similar argument can be made for countries that do not levy taxes on inheritances. Singapore would fit into both of these cases, as a country with no capital gains tax, no tax on dividends, no inheritance tax, no estate duties, and still, has one of the lowest effective personal income tax rates globally. We must guard against only going through the motions where we move towards addressing wealth inequality, while still leaving the least fortunate among us still pleading, “Please sir, I want some more.”

Corporate income taxes and BEPS 2.0

Let me now speak about corporate income taxes amid BEPS 2.0, of which Singapore is one of 141 members of the OECD/G20 Inclusive Framework on BEPS.

Corporates to contribute a fairer share?

Corporate income taxes (CIT) have consistently been the largest contributor to the Government’s operating revenues, and 2022 is no different at an estimated $18.2 billion or 22% of operating revenues. However, while part of the goals of this budget is to build a fairer and more resilient tax system, where those with greater means contribute a larger share, could there be more scope for certain corporates to pay their fair share of taxes, especially against the context of a looming GST hike which ultimately, is borne by the end consumer and not the corporate?

To be clear, I fully recognise that many local SMEs and small businesses, especially those in the retail and F&B scene have been struggling to make ends meet amid the changing safe management rules over the past two years, and I applaud efforts by the Government to strengthen our local enterprises.

However, it is interesting to note that while more than $29 billion of Jobs Support Scheme (JSS) funding were provided to corporates in the last two years, it appears that corporate profitability as a whole didn’t fare too badly.

In FY2020, while the Government expected CIT revenues to fall by 18% YoY or around $3 billion to S$13.7 billion in FY2020, the actual CIT revenues turned out to be $16.1 billion, not too far off from FY2019 levels. Revised FY2021 CIT revenues are expected to exceed FY2019 levels at S$17.5 billion, growing by 9% YoY or S$1.4 billion and this is estimated to continue into FY2022, reaching a new high of S$18.2 billion in FY2022.  

Effects of BEPS 2.0

This brings me to my key point on BEPS2.0. I acknowledge Minister’s comments that the Government needs more time to study these issues thoroughly, and will announce changes in the corporate tax system when we are ready. However, if things go according to plan, BEPS 2.0 is already on the horizon, with the implementation of the two-pillar solution targeted to start in 2023.

I thank the Ministry of Finance and IRAS for patiently addressing my various PQs over the past year on this issue, and I believe the various public officers involved would have done plenty of detailed analysis and scenario planning on this issue by now. With less than a year to go before the implementation of the two-pillar solution, and with the OECD already having published in December last year the model rules for domestic implementation of the 15% global minimum tax, my question is, what is the Government’s current estimates, or range of estimates of the net impact of pillar one and pillar two on our CIT revenues?

While Minister Lawrence Wong noted that Pillar One will result in a negative revenue impact to Singapore, this is firstly limited in scope as it is expected to apply only to global MNEs with a global turnover of more than 20 billion Euros, with just around 100 of such companies. Secondly, it is only 25% of the profits in excess of 10% of revenues that will be allocated away. Thirdly, I do not believe that profits are being artificially inflated here in Singapore given rigorous transfer pricing rules.

On the other hand for Pillar Two, this applies to a much larger group of MNEs, any company with over 750 million Euros of annual revenue which would now be subject to a global minimum corporate tax. In Singapore alone, the Government shared that there are 1,800 such MNE groups operating here that are likely to be affected.

As I have shared in this house last year, I hope that the Government will view the global minimum tax reforms as an opportunity rather than a threat, given Singapore’s strong non-tax advantages and attractiveness to MNE, bearing in mind the current average effective corporate tax rate is close to 3% in YA2019.

If we look at the subset of non-SMEs, or those with revenues exceeding S$100 million and making an accounting profit, then in YA 2019 the average effective corporate tax rate is even lower at 2%. Now, profitable non-SMEs contributed S$10.4 billion or 64% of total CIT paid by all companies. If we assume a 15% tax rate instead, this could hypothetically balloon seven times to $71.5 billion. Of course, this is just a hypothetical exercise, since obviously not all companies will be scoped into the rules, and there could be some slippage from both Pillar One and Pillar Two rules and the actual impact would be much lower. But the point remains that technically, even a small shift towards the proposed global minimum rate of 15% could result in significantly higher corporate tax receipts for the Government.  

Beyond the dollars and cents, the more important conceptual point to me is this. If a global MNE is already operating in Singapore, what incentive would it have to incur additional relocation costs, when the minimum corporate tax rates of 15% would be normalised globally? And with tax considerations out of the way, why wouldn’t a global MNE keen to tap on the attractive growth prospects in Asia base their HQ here in Singapore? The World Bank has consistently placed Singapore as among the best places in the world to do business, and I am confident that our competitive strengths and strong non-tax advantages will continue to provide a competitive edge to companies seeking a place to do business. 

NIRC and our reserves

Lastly, let me touch on the other elephant in the room, the NIRC and our reserves.

It is comforting to know that instead of a $54 billion draw as announced in Budget 2021, the actual amounts to be utilised across three years was $43 bn. Savings of about $11 billion.

It was previously said that we have drawn on our reserves, equivalent to over twenty years of past budget surpluses. We have used a generation’s worth of savings to combat a crisis of a generation. I asked DPM Heng during last year’s budget debate, after accounting for the draw, where would our reserves be compared to five years ago and ten years ago, though I don’t think there was an answer to my question. Hence I would like to ask Minister Wong, after considering the $43 billion draw on past reserves, are our reserves today higher or lower compared to five years ago?  

I ask this because it is important to put into context the growth in our reserves, as we debate the source of funding for our future expenditures, even if the Government continues to be guarded over disclosing the absolute size of the reserves itself. It is not that I disagree with the need to be prudent, and I agree we should not take our reserves for granted.

But just looking at the MAS Official Foreign Reserves (OFR), they stand at around S$566 billion as of January 2022, an increase of S$185 bn or close to 50% compared to two years ago. Temasek’s net portfolio value as of March 2021 stands at S$381 billion, up S$75 billion or 25% compared to a year ago. And I believe GIC would have grown its portfolio as well, given generally supportive market conditions in the last two years.

Yes I understand that the design of the NIR framework is to provide a stable, sustainable source of income to our Budget, smoothed out over market cycles. But it is also helpful to remind members of this house, that our reserves grow not just from the balance of 50% of NIR not utilised, but also from inflows directly into the reserves, such as from land sales, which average around S$13 billion a year in the past 10 years, and from MAS interventions in the foreign exchange market to dampen appreciation pressures, given Singapore’s excess of domestic savings over investments and persistent capital inflows.

If the goal of this budget is to ensure a fairer revenue structure, that means everyone chips in and contributes to a vibrant economy and strengthened social compact, but those with greater means contribute a larger share. If so, should we not revisit the contribution of our investment returns as opposed the individual Singaporean who is grappling with the rising cost of living?

Over the past five years, the NIRC provided an average revenue stream of around S$17 billion or about 3.5% of GDP. If the assumption is that Government spending is at 18% of GDP today, but is expected to grow to more than 20% of GDP by 2030, could we not raise the contributions from the NIRC to the budget and raise its share of GDP instead? I hope Minister Wong will agree with me that raising the NIRC contribution rate will not result in a drawdown on the reserves, and would in fact still, allow us to continue building up our reserves.

So to belabour the point, this will not mean that we will not get a steady stream of income from the reserves to benefit both today’s generation of Singaporeans, and our children and grandchildren. On the contrary, as Minister Wong has said, it is about being able to invest even more in our people and social infrastructure. It is to me about ensuring that we invest not only in financial assets overseas but in our people, Singaporeans, who to me are the most important resource of this country. It is simply, about sustaining the value of our financial reserves, and sustaining the lives and livelihoods of our fellow Singaporeans.

Mr Speaker, allow me to conclude in Mandarin.