Singapore Budget 2022: Walking the fiscal tightrope
- Budget 2022 is forward looking with significant tax adjustments to ensure fiscal sustainability
- Measures were also introduced to sustain the recovery and to help tackle rising costs
- Significant emphasis was placed to drive economic transformation while ensuring income equality
- New initiatives were announced to buttress Singapore’s Green Plan 2030
- A budget deficit of about SGD 3bn (0.5% of GDP) was allocated for FY22
Budget 2022 marks a key turning point in the fiscal policy focus. Coming off the worst recession since Independence and two years of pandemic, policy thrusts have shifted from crisis management to addressing longer term priorities. Emphasis have been placed on sustaining Singapore’s longer term economic relevance in a post-COVID world and supporting Singaporeans and local companies in the way forward.
In a bid to raise revenue to fund ever rising social and economic needs, a comprehensive adjustment in tax policies have been announced, affecting companies and across all income groups in the coming years. This calls for some delicate balancing of the potential impact particularly amid rising inflationary pressure at present. As such, policymakers have backloaded most of the tax hikes in the coming years. However, doing so may be cutting it too close as it entails certain risk (download report for more details).
Another fiscal deficit
The fiscal deficit for FY2021 (SGD 5.0bn, 0.9% of GDP) was smaller than originally budgeted (SGD 11bn) but in line with our forecast . The economic recovery turned out stronger than anticipated, which buttressed revenue collections. Spending was also lower than budgeted, especially in developmental expenditure as some infrastructure projects were delayed due to the COVID situation.
An overall fiscal deficit of about SGD 3bn (0.5% of nominal GDP) is allocated for Budget 2022. This came as a surprise as expectation was that the government may be eager to accumulate fiscal surplus amid the recovery, which can then be deployed to cushion the negative effects of tax increases in subsequent years. In fact, even if a modest surplus is not feasible, a 2%-pts GST hike in 2H22 would help to generate at least about SGD 1.6bn in FY2022, essentially offsetting about half of the projected fiscal deficit.
The average annual balance over the ten-year period (FY10-19) prior to the COVID pandemic was about SGD 3bn. Assuming growth remains stable in the coming years, policymakers would very likely be able to offset the existing deficit, and still achieve its mandate of a balanced budget in the current term of government. However, there is downside risk on corporate tax revenue inflow due to BEPS 2.0, which could dampen the fiscal position. The impending series of tax hikes (GST, PIT, carbon tax, property tax etc) will also take a toll on growth performance and may require additional fiscal offsets to mitigate the economic impact. Yet, the biggest concern is that given economic cycles are becoming more volatile and unpredictable in recent times, Singapore could be sandwiched between rising taxes and falling growth should another recession occur in the next 2-3 years.
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