Bloomberg News

Singapore May Raise Taxes for Social Spending as Nation Ages

August 26, 2012

Singaporean Prime Minister Lee Hsien Loong

Lee Hsien Loong, Singapore's prime minister. Photographer: Munshi Ahmed/Bloomberg

Singapore will need to raise taxes in the next two decades as the government boosts social spending to support an aging population, Prime Minister Lee Hsien Loong said as he proposed measures to boost the country’s birth rate.

The prime minister pledged to ensure sufficient affordable housing for citizens, invest in pre-school education and add nursing homes for the elderly. He urged Singaporeans to build a more compassionate society, reject anti-foreigner sentiment and have more babies, saying the nation needs to re-invent itself as the economy faces slower growth after years of rapid expansion.

“As our social spending increases significantly, sooner or later, our taxes must go up,” Lee said late yesterday in his annual televised National Day Rally address, which ran for more than two hours. “Not immediately, but if we are talking about 20 years, certainly within that 20 years, whoever is the government will at some point have to raise taxes because the spending will have to be done.”

The government has sought to address public concern that Singapore’s economic progress has left its poorest citizens vulnerable to rising living costs while an influx of foreigners increased competition for jobs, education and housing. After the ruling party last year suffered its smallest electoral win since independence in 1965, Lee tightened rules on hiring overseas workers and boosted aid for the poor.

Inevitable Outcome

“With a shrinking working population, an inadequate birth rate and a higher dependency ratio, there is an inevitability that taxes will have to be raised,” said Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank Ltd. “I don’t think anything will change in our tax policy to make us less competitive in the next five to 10 years, but the prime minister is talking about something much further out.”

Singapore, ranked by the World Bank as the easiest place to do business, has cut taxes in recent years to spur investment. Bankers in the U.K. favor working in the Southeast Asian city over New York and London, where they face lower wage growth and higher taxes, according to an annual survey by recruitment firm Astbury Marsden.

Lee said yesterday the government drew S$8 billion ($6.4 billion) from returns generated by its reserves in the budget for the past fiscal year, exceeding the amount it collected from personal income taxes.

“It’s helped us fund many new programs and still balance our budget without having to push up taxes sharply,” he said. “We have to draw from the reserves in a sustainable way.”

Baby Bonus

Singapore’s fertility rate, at 1.2 children per woman, is too low, Lee said. The median age of Singaporeans will rise to 43.1 in 2020 from 37.6 in 2010, Bank of America Corp. said in an April report, citing data from the World Bank and United Nations. That compares with 23.9 in the Philippines, 31 in Indonesia and 28.4 in Malaysia at the end of this decade.

“We are having too few babies,” he said. “We have a problem. The long-term trend is down but we cannot give up. We’ve got to do something about it.”

The government will decide on measures to encourage Singaporeans to marry and have more children after consulting the public, he said. Areas being considered include better work- life balance, flexible work arrangements, priority housing for couples with young kids, paternity or shared maternity leave, defraying childhood medical expenses, better pre-school, childcare and infant care, and improving cash benefits for having children known as baby bonuses, he said.

Worker Shortage

The city has added about 1 million people since the beginning of 2005 as the government allowed more immigration to make up for the declining birth rate and to meet growing demand for workers in an expanding economy. Lee said yesterday the unemployment rate is low and some industries still face a shortage of workers.

Foreigners and permanent residents make up more than a third of the nation’s 5.2 million population and opposition parties have said that the large numbers of overseas laborers have depressed local wages.

The influx contributed to crowded public transportation and more competition for jobs, housing and places in schools, fueling voter anger. The gap between Singapore’s most affluent and poorest people widened last year.

“Many Singaporeans have concerns because the influx has caused some real problems,” Lee said. “It’s fair enough for people to express concern or disagree with our immigration trends or oppose our immigration policies. But I’m worried by some of the nasty views which are expressed. It reflects badly on us, it damages our international reputation.”

Singapore will have two more universities to increase educational opportunities and the government will invest S$60 billion over ten years on the island’s subway system, Lee said. He said he was confident of providing enough housing that is affordable to all Singaporeans.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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