INCREASE IN GST RATE

Mr Lee Hsien Loong: Mr Speaker, Sir, in the Budget Statement in May this year, I announced tax changes to support our economic restructuring and to secure economic growth. We must bring down direct taxes to stay internationally competitive, attract investments and create jobs. And to make up part of the loss in revenue, we have to raise indirect taxes; in other words, the GST.

We have cut corporate and top personal income tax rates to 22% for the Year of Assessment 2003, and we will lower them further to 20% within three years. At the same time, we announced that we would raise the GST rate from 3% to 5% on 1st January 2003.

To help Singaporeans adjust to the higher GST, the Government implemented a comprehensive offset package. This includes the Economic Restructuring Shares (ERS), rebates on rental and service & conservancy charges (S&CC), plus full absorption by the Government of GST for subsidised healthcare and state education charges. A full listing of all the assistance measures is provided to Members as an Annex (Cols. 1987-1988) to this statement. I have left copies on your seats. And you can see that the offset package costs $4.1 billion, and is enough to offset the additional tax that nearly all Singaporeans have to pay for at least five years and, in many cases, 10 years. Annex - GST Offset Package

At the time of the Budget Statement, expectations were that the US economy would pick up this year, and the Singapore economy would also complete its recovery from the sharp downturn in 2001. As events have turned out, both the US and the Singapore economies have done less well than expected. The US economic recovery has been weak and below expectations, even though the US has avoided entering a second recession. As Alan Greenspan recently said, the US economy was "going through a soft spot". Likewise, the Singapore economy is now projected to grow only by 2-2.5% for 2002 as a whole, at the low end of the 2-4% that we had projected in May.

Going forward, prospects for 2003 are still uncertain. The risks are not only economic, but also security and political, eg, the impact of another major terrorist attack, or of a war in Iraq. The EU and Japanese economies are slowing down. In the US, most analysts expect a gradual recovery, supported by steady growth in consumer spending and a more substantial pick-up in corporate investment in the second half of 2003. In recent weeks, US economic indicators have improved, and the mood has become more optimistic. However, some respected analysts still worry that the US could yet experience a second recession next year.

Singapore has been affected not only by the slow US recovery, but also by the problems in Southeast Asia, including the terrorist attack in Bali. Hence the downward revision of this year's growth estimate to 2-2.5%. However, early indications are that we will enjoy positive growth in the fourth quarter. Our exports to key markets are growing, albeit slowly. Non-oil domestic exports rose by 6% in October, and improved further in November, according to preliminary estimates.

The manufacturing sector has also continued to grow. Output rose by 12% in October, similar to the 11% in September, driven by an increase in semi-conductors, petrochemicals and pharmaceuticals. On a month-on-month basis, manufacturing output increased by 1.3%, the first increase since May 2002.

For 2003, MTI has forecast growth of 2-5%, although we cannot yet be certain how things will turn out.

From a fiscal point of view, the tax changes announced in May remain appropriate despite the less vibrant economic conditions today. We should not hold back on our restructuring on account of the adverse climate; indeed, this makes it even more important for us to press on and strengthen our competitiveness and resilience.

To individuals, because of the ERS and other rebates, the GST increase should not cause hardship to any Singaporean, or result in consumers cutting back on spending. To the Government, the combination of direct tax cuts to 22% and a GST increase to 5% plus the first tranche of the ERS shares together result in a revenue loss of $1.2 billion in the first year (2003). Therefore, the overall effect of the tax changes and offsets on the economy is expansionary, rather than contractionary.

Some have suggested that the Government should defer the GST increase completely for 12 months or longer. But this approach risks leaving the Government with insufficient funds for urgent needs, especially in education, healthcare and defence. And if later we have to defer the increase again, the Government may wind up with a structural deficit, which would have serious consequences for the exchange rate, for inflation, and for the value of Singaporeans' CPF savings. I have therefore decided against deferring the GST increase.

However, I am also mindful of the current mood of apprehension and uncertainty among Singaporeans, because of the economic troubles this year and the security concerns in the region. MTI's recent downgrading of this year's growth estimate, and the NWC's recommendation to extend the wage freeze for another six months, also contribute to the sense that things are not yet back to normal. We do not want to add to the burdens and worries of Singaporeans at a difficult time. The psychological impact of the GST increase could result in consumers cutting back on spending and business putting off investments.

The uncertainty over economic prospects for next year, as to whether and how soon the US and the Singapore economies will recover, reinforces the need for caution. Although, on balance, another downturn does not appear likely, the possibility of one occurring still cannot be ruled out and it would be prudent to be cautious.

I have therefore decided to phase in the increase of the GST rate, and implement it in two steps instead of one. The GST rate will go up from 3% to 4% from 1st January 2003, and then from 4% to 5% from 1st January 2004.

I believe that a phased introduction will have more impact than proceeding with the full tax increase to 5% and enhancing the offset package. Many Singaporeans have not made the link between the benefits they will receive from the offsets, and the additional GST they will have to pay. Phasing in the tax increase is a more direct and easily understood signal.

Despite the phased introduction of the GST, I have decided to maintain unchanged the offset package announced in Budget 2002. I am happy to announce that Singaporeans will receive the original amount of Economic Restructuring Shares in January 2003, and the same schedule of rental and S&CC rebates as announced earlier. I have also decided that the increase in the Public Assistance rates and the Singapore Allowance paid to Government pensioners will proceed in January 2003 by the full amounts originally planned. The details will be announced next week.

The lower GST increase will cost the Government $163 million in FY2002 and $488 million in FY2003. Effectively, the Government will be putting an additional $650 million into the hands of Singaporeans. As a result, the Government is not likely to have any budget surplus in FY2003. At best, we will be able just to balance the budget. All Ministries will have to economise on spending and trim back on non-essential programmes.

I hope the phasing in of the GST will lessen the burden on Singaporeans, and help them cope with the uncertainties that we are now facing. This change is a fine-tuning to the original tax restructuring plans. The Government is making a tactical course correction while still heading for the same destination. We remain committed to bringing down top direct tax rates to 20% within three years, and to offer a more attractive business environment to bring talent and investments to Singapore.

Mr Speaker, Sir, I am now submitting an amendment to the GST (Amendment) Bill, to provide for the GST rate to be raised in two steps, from 3% to 4% from 1st January 2003 and from 4% to 5% from 1st January 2004. I will ask the House to consider the amendment in the Committee Stage of the Bill later this afternoon.

Mr Leong Horn Kee (Bishan-Toa Payoh): Mr Speaker, Sir, I am very pleased to hear from the Deputy Prime Minister and Minister for Finance that he has decided to phase-in the increase in GST from 3% to 4%, and after one year, from 4% to 5%. I believe this decision will be well received by the people and this House. Even with this phased-in approach of a 1% increase, may I ask the DPM whether it would still have a dampening effect on the economy, in view of the fact that the economic prospects are currently uncertain. I am very concerned whether a GST increase would have a further dampening effect on the economic downturn.

My second question is with regard to the point made by DPM that there will be deficit budgets for the following two years. I think that was what he said. Would it also impact the Government's coffers, and how does the Government intend to deal with the deficit budget? Is it going to come from the national reserves?

Thirdly, I would like to ask a question that I asked previously in this House, whether the Government would consider reintroducing the Economic Downturn Relief Scheme that had been stopped at the end of November. This scheme is useful because with the continuing economic downturn, more people will be facing unemployment. With the scheme re-introduced, there would be some form of relief for them.

Mr Lee Hsien Loong: Mr Speaker, Sir, Mr Leong Horn Kee asked whether this 1% increase in GST will still be a dampener. I do not believe so because, if you look at the sums, it is quite clear that, in fact, far from dampening the economy, we are administering a major stimulus to the economy. First of all, the reduction in personal and corporate income taxes is going to pump $1.3 billion into the economy. This will be offset by the GST increase, which will now only raise $650 million. On the other hand, we are going to put into the economy, through the Economic Restructuring Shares on 1st January 2003, about $1.2 billion. So, actually on a net effect, if you add up these sums, we are putting $1.8-1.9 billion into the economy next year. Far from dampening the economy, the overall impact is highly expansionary and stimulative.

Secondly, if we have a deficit, how would it be funded? I think, best of all, it is not to have a deficit, then we do not have to worry about funding it. I did not say that we would have a deficit. I said we are not likely to have a budget surplus and, at best, we would be able to just balance the budget, and we will try hard to do so.

Thirdly, should we re-introduce the EDRS? The EDRS was introduced last year as a one-year programme specifically to deal with the very sharp economic downturn. People were out of work. They needed help. It was something of an emergency. We had a package to deal with that. As Members know, over the last few months, applications to the EDRS have tailed off significantly. I think the most urgent cases have already been seen to, and people have other sources of assistance available to them - from the CCCs, CDCs and welfare organisations. So the EDRS demand has tailed off and we decided, at the end of the one-year, that we should let it lapse. Because if we do not let emergency programmes lapse, when emergencies pass, the next time we have an emergency, we have to pile on additional programmes, and eventually end up with more and more items meant to deal with previous problems.

As the position stands now, we are not in a recession. Our economy is growing. It has been growing in the second quarter and third quarter. I think it is growing in the fourth quarter, and people are being looked after. Going forward, we will monitor the situation. If we have another sharp downturn, another economic crisis, we will look at the need for an EDRS. But, as of now, I do not believe that we need one.

Dr Ong Chit Chung (Jurong): Mr Speaker, Sir, first I think the new announcement would be most welcomed by the people and the business sector, and I believe this is a very clear and unmistakable signal that the Government is hearing the voice of the people, and addressing the people's concern. Not only is the phasing in of GST, it is also having the offset package remaining. I think it is a double blessing, and I believe it will boost public confidence and market confidence as well. We should congratulate the Government for making such a bold move and I would ask whether the Deputy Prime Minister would continue to monitor the situation and adjust, if necessary, with other measures to move the business sector, and have more money in circulation in the market.

Mr Lee Hsien Loong: Mr Speaker, Sir, we will continue to track the state of the economy very closely. This is a time of considerable uncertainty. It does not mean that all the signals are black. Two or three weeks ago, I think, the mood was significantly gloomier, but looking at what has been coming out, the data, the indicators from America, there has been a significant pick up in performance and in sentiments, and similarly in Singapore, from our own indicators. How it goes forward next year it is very difficult to say. Normally when the Ministry of Trade and Industry puts up a forecast for next year they plus or minus 1% and you more or less know where it will arrive. This year, they set 2-5%, which means it is really a very wide uncertainty and it is an educated guess of how things will turn out, because it just does not depend on the economic trend, but also on the security situation and political developments. So we will keep on tracking what is happening very closely, and if there is a need to make further adjustments, you can be sure that we will not be slow in noticing it and doing so.

Mr A Nithiah Nandan (Nominated Member): Mr Speaker, Sir, first allow me to applaud the Government's decision to stagger the GST increase. In fact, the views and concerns of workers have been adequately addressed. At the same time, I am also glad that the ERS shares will be paid accordingly as announced earlier. But I have one other request, which is that the Government will consider and monitor the economic conditions. And, if there is a need, make a further review whether there is a need to introduce GST further to 5% in 2004, but definitely the economic condition in 2003 has to be taken into account. I am also glad that the workers' views and points have been carefully considered by the Government and I do not think they have been put aside by the Government. They are very happy and I wish to thank, on behalf of all workers, the Government's decision and to bring about a relief to workers during these difficult times.

Mr Lee Hsien Loong: Mr Speaker, Sir, I thank Mr Nithiah Nandan for his full support for this move. Next year is 12 months from now, but we have to plan on the basis that we are going to proceed with the second phase of the increase because next year the increase would already be twelve months late. But I understand his concerns. We will track what is happening in the economy next year, very closely, and if need be, we will make many adjustments to the economy to keep it on track. But the GST programme, we have made rephasing, and we have to be very careful that the rephasing does not become an indefinite postponement, which would cause us a lot of trouble.

Mdm Ho Geok Choo (West Coast): Mr Speaker, Sir, first I would like to congratulate Deputy Prime Minister Lee for having taken this approach. In fact, there was some betting going on that, knowing the character of the Government, it would be quite out of question for the Government to actually consider any relent of the decision already taken. But the very fact that this phase-in had come in, I think that for some people who have gone on to this bet, some are going to win and some are going to lose. The phase-in only demonstrates that we are really remaking Singapore and that we are mindful that the audience is a very different audience, and the Government is actually putting the ears to the ground to really respond to the needs and calls of the people.

Having said that, I am very happy to note that the full package of the enhancement will be implemented with effect from 2003. But if the economy does not turn around for the better, say, in 2004 and the other 1% has to be phased in, and there are cries for another enhancement package to offset the additional increase of 1%, would the Government consider the request?

Mr Lee Hsien Loong: Mr Speaker, Sir, first of all, I would not advise anybody to bet against the Government. Secondly, on the hypothetical question, we will have to wait and see. We are not magicians who can show you empty pockets and put our hands in it and produce more money, but we will have to wait and see what the state of the economy is next year. As always, making an adjustment to the GST increase would be our last choice. We will try to do many other things first before we consider that.

Ms Braema Mathiaparanam (Nominated Member): Mr Speaker, Sir, I just have two questions in relation to this revised package. There was a story in the papers about the VWOs and how GST is imposed on the funds raised. I would like to know how, since 1999, the Government grant has stopped to offset such GST hikes on the donations raised by the VWOs. In this current climate when I think the charity dollar is stretched even more, how can the VWOs be helped where GST is concerned? Secondly, is it possible, perhaps in the year 2004, to consider splitting the GST into taxes on essentials and non-essentials, similar to what is practised in Britain? I am also looking at the offset package grant to CCCs - $15 million spread over five years, which means about $3 million - for quite a number of people. There is already a lot of generosity, but I still wonder whether in the current climate it is perhaps still not too sufficient.

Mr Lee Hsien Loong: Mr Speaker, Sir, I think the VWOs is a separate issue. The transitional arrangement was made for them when we first introduced GST and this transition arrangement is phasing out. If we need to assist the VWOs it is best for us to assist them directly with grants and other forms of assistance, rather than putting it into the tax system of the GST. That is what we have done with the foreign worker levy because we used to exempt them from the foreign worker levy, now we subject them to the levy but we give them a grant, and it is up to them whether they want to employ a foreign worker or they want to get a labour-saving equipment, or whether they want to find a Singaporean and do double the work, it is up to them. So I think that should be our approach to VWOs.

On whether to split between essentials and non-essentials, this is an issue which we have discussed many times when we first introduced the GST and again when we raised the issue of GST this year. And we have taken the approach of having the GST applied to all products in Singapore, whether essentials, non-essentials, goods, services, high-end, low-end, everything. And there is a reason for this. The reason is that we want to find the best way to help the lower income people bear the tax and to make ends meet in Singapore. We impose the GST, it imposes a burden on them. What is the best way to help them ease this burden? It is to identify who the lower income groups are and target the assistance at them. So the ERS, the S&CC package, plus the rental package, if you add it all together, in fact, the people living in the one and two-room flats get the most, three-room a bit less, and four-room, and so on.

Essentials are not just bought by poor people. Everybody buys essentials. Let us say food. Poor people buy food, middle income people buy more food, rich people buy even more food. So if you decide to exempt food, for every one dollar which helps the lower income, you have to spend nine dollars helping the non-lower income. So the expense of this tax expenditure is much more and the result is that revenues are less, and the result of that is to keep your revenues even, we will have to push the GST rate, instead of being 5%, it will have to be 6%, 7%, 8%, or if you take the British example, because you said the British have such exemption, 17% GST. So it is not a good way to help lower income people. Therefore, we have decided we will have a GST which covers everything and if we have target groups which need assistance, let us help them directly. I think that is the best way to do it.

Ms Braema says why not be a little bit more generous. ERS is good, more is better. Well, more is always better but, in fact, we have been quite a lot better already because although we say ERS is five years' worth of GST for everyone, actually for the lower income it is, in many cases, 9-10 years' worth of GST. So, in fact, you are well looked after, and if you are an old person, 10 years is a long time. So, this is something which we have already seen to. If it is still not sufficient because conditions are very hard, I think we can do more, but we should target it specifically rather than go on the basis of essentials and non-essentials.

Mr Steve Chia Kiah Hong (Non-Constituency Member): Mr Speaker, Sir, first of all, I would like to take the opportunity to applaud the Deputy Prime Minister, Mr Lee, for this phased increase in GST. I had actually hoped for a full deferment until the economy recovers or for at least one year but, as the saying goes, "if you cannot get a big fish, at least ikan bilis is still better than nothing." In a sense, it is better than a full increase of 2%, and I think many Singaporeans will appreciate that, especially those from the retail sector.

However, I want to say also that we from the Opposition do not mean that we are always opposing for the sake of opposing, and in this case if the Government had actually listened to the people and deferred it, we would be very appreciative and support it. If the economy turns for the worse next year, and if things become worse, I hope that the Minister would consider cutting the increase back to 3% or even lower, or to have additional off-budget measures to help Singaporeans to tide over the difficult period next year.

Mr Lee Hsien Loong: Mr Speaker, Sir, I would just thank Mr Steve Chia for his support for my $650 million ikan bilis.

Mdm Halimah Yacob (Jurong): Mr Speaker, Sir, let me join my other colleagues in thanking the Deputy Prime Minister and Minister for Finance and the Government of Singapore for listening to the voices of the people in asking the Government to take into consideration the current economic downturn and the hardship that they are faced with. I can quite agree that it is not really ikan bilis, it is a lot of money that the Government has to forgo in terms of the budget as a result of this 1% increase. I would like to ask, and I am sure, Mr Speaker, Sir, that the small businesses, the retailers, are the people who would be very happy because now, with the smaller increase, their sense of consumers not buying enough would be somewhat abated. But I would like to ask the Government to continue to look into this area: how to help the small businesses and retailers. And, in particular, I would like to ask the Deputy Prime Minister and Minister for Finance that for those who are having transactions with the Government, or who provide the Government with goods or services, or do any form of construction or public works for the Government, the Government could also consider expediting payments for them, for instance. I am not suggesting that payments are slow but, I think, many are faced with cash flow problems and for those dealing with the Government, if the payments are made much more promptly, that will certainly help them.

Mr Speaker: Mr Lee, can I suggest that we take all the questions at one shot?

Mr Lee Hsien Loong: All right.

Mr Tan Soo Khoon (East Coast): Mr Speaker, Sir, I had said previously in the House that one of the ways for the Government to ensure that the Budget is properly balanced is not merely to increase tax, but also to watch out for its expenditure. I was heartened to hear from the Deputy Prime Minister earlier that he would take steps to ensure that the expenditure is properly controlled. But I think it takes more than reassuring words from the Deputy Prime Minister to ensure that this is carried out. I am afraid that years of strong economic growth and years of strong surpluses may have set the free and easy mentality in some of our Ministries. I do not wish to repeat what I said during the Budget debate because I have no new seven wonders to reveal today.

But I was quite taken aback, like many other Singaporeans, when we heard that the Land Transport Authority was building a $500 million headquarters and I think because of the public ruckus, the whole project has been shelved. But I was also very concerned last month when I read that for the opening of the Esplanade - Theatres on the Bay, we spent something like $13 million and was all blown away in 23 days. And yet, on the other hand, the Government announced the increases in hospital charges, raising more money from the sick to the tune of $12 million a year. So I want to ask: sometimes have we got our priorities correct? Therefore, I would like to ask the Deputy Prime Minister, in spite of what he has told us and his reassurance to the House, what concrete steps can really be taken by the Government to ensure that the cost of Government is well controlled and, if not in a crisis, can it be reduced even further? Because, like all businesses, when we are faced in a difficult situation, one of the things that all businessmen do is to cut back on expenses.

Mr Lee Hsien Loong: Mr Speaker, Sir, may I respond first to Mdm Halimah. She talked about the problems of small businesses and retailers. We are very much aware of it. I think it is not just because of the GST increase. Even this year, without any GST increase, they have been having quite a slow and difficult time. It is partly a structural problem because there are too many of the businesses which are in HDB estates, ie, there are whole rows and many of them are selling similar goods. It is partly a matter of change in habits and customs of our younger generation. Instead of people with two-income households, instead of shopping in the wet market every day, they will shop once a week in the supermarket and put the stuff in the freezer, and they are going for a different range of goods and different range of services. Or they may even go to JB, or some place, to shop instead. So it is a structural problem and it is one which is being studied by one of the Economic Review Committee working groups. They have some ideas to ameliorate the difficulties. But I do not think there is any quick solution to make the sector bloom and prosper again overnight.

As for transactions with the Government and expediting payment, I agree with Mdm Halimah that it is important that Government be a prompt paymaster. I am not aware of any complaint that the Government has been slow. If Mdm Halimah, or any of the Members, comes across any such cases, please let me know and I will look into it. It is our practice to administer and pay promptly. It is most important to our reputation that we do because, if we start paying slowly, then whoever is providing the services will start factoring in that and the interest cost in his next tender to us. Then we will have a problem. I was just discussing with my staff yesterday evening and they told me that in fact many of the companies prefer to do business with the Government, precisely because of this reason, they can be sure to pay you and they would not drag the matter. Whereas if you do business with the private partner, if he runs into financial difficulties, you have a problem. And they have confidence that the Government will not run into financial difficulties, and it is my job to make sure the Government does not run into financial difficulties, which is why we are proceeding with the GST increase to four percentage points.

I agree completely with what Mr Tan said, that it is not just what I said, but also how we practise it and how the civil servants internalise with the need to be parsimony and to be careful with money, and to spend as if it is effortless for MOF to produce the next dollar, and we are in different circumstances and we have to be very careful. As I said, we are going to have a very tight Budget next year and the Ministries are going to cut back both on substantive programmes as well as on frills. On education, for example, they have been planning on a certain percentage of GDP to spend. But we have also been expecting a certain rate of growth of GDP, that if you have 5-6% growth per year, therefore, education will have 5-6% more to spend per year, plus extra percentage on that because we think this is a priority area. Now, our base has shrunk. The GDP is growing less rapidly. Educational need has not shrunk. Your children still need good schools, computers, laboratories. You still want more people to go to university and more people can benefit from going to university. All these cost a lot of money.

How can we afford as much of this as possible while living within our means? They will have to cut and it will be things like travel and perks, and non-essential things, that is, when you renew your computer, and so on, every two years, it may be every three or three and a half years. When you are renewing your school building, instead of 20 years, it may be 25 years. We will have to live within our means. These are adjustments which we have to make. When they opened the Esplanade building, they also have to live within their means and decide what they are going to do. The Esplanade, which Mr Tan raised, is an issue. Before we had the opening ceremony, we considered this matter and we discussed it carefully with MITA because, in fact, we are doing this at a time when the economy is down, the mood is down. We do not want to be extravagant because we cannot afford the money. Anyway, it is a wrong signal to send to the people. And MITA understood this.

On the other hand, they said, "We are making a very big step. We spent a lot of money building it. It is a long term investment. The purpose is not just for Singaporeans but really to register ourselves internationally." So we become one of the spots where people believe and know that there are cultural activities and it is a place which people want to come to perform. Therefore, you need a series of events to launch the theatre as well as the concert hall and to make ourselves known to Singaporeans and internationally, and it costs money. The fireworks cost money, yes. I would have preferred far fewer fireworks. But it is not the fireworks which are the most expensive thing. If you want to have Jose Carreras here, that costs money. If you want orchestra here, that costs money. A lot of it is sponsored, but some of it are operating cost. And that is why it costs a certain amount to have the festival which went to the opening ceremony. But Mr Tan's point is well taken and it is a message which the Ministry of Finance reiterated to all Ministries, including ourselves, regularly, and especially before next year's Budget.