Singapore: A New Fiscal Era

Year: 2022

By Devadas Krishnadas

Singapore has moved to a new fiscal era. This shift began in 2019 but has been affirmed by Budget 2022.

Departing From Fiscal Norms

First, in Budget 2019, the then Minister of Finance, Mr Heng Swee Keat, announced that the Ministry of Finance would borrow from capital markets for large infrastructure projects. This was a major departure from our historical rule of never borrowing for expenditure. He had his reasons – interests are low, and our risk premium given the asset backing of our reserves is negligible.

Second, in Budget 2020, he introduced no less than 5 Budgets in 1 fiscal year. Across those 5 budgets, with the permission of the President, he drew down 53 billion from our past reserves. However, unlike the first occasion where we drew down from past reserves, which was in 2009 during the Global Financial Crisis, the scale and the precedent were vastly different.

In 2009-2010, we asked the then President, Mr S.R. Nathan for permission to draw 4.9 billion dollars. In Budget 2011, at the soonest opportunity we put back 4.2 billion, which was the actual amount we had drawn down by that time. However, not only did Mr Heng drawn down more than 10 times the amount in 2009-2010 but we have departed from the historical precedent of returning the monies to the past reserves. This is the second departure from fiscal norms.

Third, in Budget 2022, the current Minister of Finance, Mr Lawrence Wong, made a further draw on past reserves. This suggests that in the future, to close the deficit between revenue and expenditure, even without an extreme crisis, resorting to drawing down past reserves may become more common place. This is the third departure from historical fiscal rules, that past reserves are for extreme ‘rainy days’ not for days when the ‘sun shines’.

Fiscal Masks

Fourth, we are relying more and more on the Net Investment Returns Contribution or NIRC. This will only intensify in future years. There is still headroom to tap further on the NIRC under the current rules. Our reserves are of a sufficient size that we can extract more without ‘killing the golden geese’ of our sovereign wealth funds. Tapping on NIRC allows us to spend more without raising direct taxes on the middle income. This is largely opaque to most of the public.

Fifth, the size of government expenditure has grown considerably over the past decade from some 65 billion per year to some 85 billion per year. However, statistically, it can be argued that we are still a ‘lean’ government because relative to GDP, which has also grown, we are still spending under 20 percent. If, however, GDP were to stall or drop, that statistical mask will be removed.

A More Expensive Future

There is no argument that expenditures has to rise, particularly in healthcare and in retrofitting public infrastructure to be aged friendly, as we rapidly age as a society. By 2030, one in four Singaporeans will be above the age of 65. Further, our Total Fertility Rate hit a historical low of just 1.1 in 2020. This means that we will have fewer young people even as we have more seniors.

Further, due to lifts in general welfare over the years, our people are living longer. The triangulation of fewer young people, more seniors and longer lifespans creates sociological and fiscal challenges that have no “silver bullet” solutions. But one thing is for sure, it will cost more to address the needs of seniors and this will be a ‘long tail’ responsibility.


The government recourse is to raise the Goods and Services Tax or GST from 7 to 9 percent. The GST is a very efficient tax to administrate. In and of itself it is a very regressive tax. The government has long argued that its ‘tax and benefits’ system, ensures that the lower income are not only cushioned but that the fiscal table, is actually tilted in their favour.

This is true, both in spirit and to a large extent in fact as well. However, the GST is permanent and structural while GST offsets are temporary and capped. Further, we should expect further raises to the GST in future decades. I anticipate that the GST may eventually be raised to between 15 and 25% by 2050.

Carbon Tax

The government has also raised carbon taxes. The ostensible reason is to ‘price in’ the cost of our fossil fuel consumption. This is intended to ‘nudge’ industry and personal consumption patterns towards more sustainable means. But given that Singapore is so small, its impact on the global climate would be dismissible except as an exemplar of best practices.

The more practical reason for raising carbon taxes, and they will be raised further in future years to 80 dollars per tonne in 2030, and perhaps higher still by 2050, is fiscal. It will be a non-trivial source of revenue.

Wealth Haven

The wealth taxes that were also introduced in Budget 2022 are marginal in impact and meant to be symbolic rather than a meaningful source of revenue.

Our private wealth concentration in Singapore surpassed 4 trillion dollars in 2019. We are effectively a wealth haven for the global rich. The effect on the Gini coefficient should be much greater but it is statistically not. This is for the simple reason that the very rich – the so-called High Net Worth (HNW) and Ultra High Net Worth (UHNW) – earn their income from investments and not salaries.

As Thomas Picketty has argued, when R>G, or where returns on capital exceed returns on labour we will see a predictable outcome of wealth inequality.

We do not tax capital gains in Singapore. Nor do we have estate duty. Hence, the rich pay only consumption tax and property tax. Further, they can roll over their wealth intergenerationally without any redistributive effects thus creating a self-perpetuating wealth class or natural aristocracy.

The argument that attracting the HNW and UHNW to Singapore leads to spillover benefits to the general economy and workers is unproven. This belief is anchored in the ‘trickle down’ theory of economics which is more a faith than a fact.

Hence we should not just be considering income inequality – which is captured by the Gini coefficient – but also wealth inequality and take more seriously the concept of wealth inequity. Wealth inequity is the notion of social justice over the question of a small percentage of the population having such a high concentration of ownership of assets and influence.

The Next Stage

The upshot of the departures from historical fiscal rules is that as far as fiscal policy is concerned Singapore today and going forward is not the same as Singapore of the past.

Yes, we must change to meet different and growing needs. But we must be careful to calibrate and limit these changes in order not to travel down a ‘slippery slope’.

Singapore will and is becoming a more expensive place to live and work. However, the case is still defensible that the public get very high returns in public and merit goods for the level of taxes that they pay. We have world class infrastructure, education, health, and public transportation and at affordable prices.

But we are also seeing a squeezing of the middle class and there is a political limit to how far that strain can be tolerated without an electoral blowback.

We are also seeing the development of different Singapores, living in parallel. One for the ultra-rich, one for the merely rich, one for the middle income and one for the lower income. At some point, these will intersect sociologically and politically and not necessarily in predictable or desirable ways.

The End State

The government is not the enemy nor is it the sole source of solutions. Singaporeans need to take more responsibility for their retirement financing adequacy. They also need to ensure that they have a sufficient buffer of savings to withstand economic shocks. We also need to accept that social mobility is facing more friction but also that we remain largely meritocratic. Unfortunately, that meritocracy is subject to an educational ‘arms race’ with the wealthy having an unassailable advantage.

Singapore’s competitiveness as an economy is also under pressure. We are expensive and we are, for political reasons, constraining our input of global talent.

Singapore competes city to city. We have no natural hinterland. And so, we must ensure that the world is our hinterland – for human capital, intellectual capital, political capital and financial capital. Succeeding at doing so is the price of remaining relevant and sovereign. In truth, there is no ‘End State’, there is only the perpetual struggle to survive while evolving, not just retaining, our identity.

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