Ten years ago, 65-year-old Helena Wong used to fork out around $400 monthly for groceries and necessities. Today, the retired school teacher, who lives alone, says her monthly bill has nearly doubled for the same list of items. “I am actually buying the same things — fresh fruits, vegetables, rice, fish, and occasionally, some condiments, vitamins and snacks. Nothing unusual or fancy,” she tells The Edge Singapore.
With things being “very expensive these days”, Wong is concerned about rising prices in view of the inevitable rise in the Goods and Services Tax (GST) in Singapore. “Things are already so expensive, I am scared that they will become more expensive over time, especially when GST goes up,” she adds.
Wong is not alone in feeling the pinch of higher prices. Forty-seven-year-old Siti Aisha notes that over the past two years, there have been 50% to 80% increases in the prices of most things like shampoo, detergents, fruits and vegetables. “I always go to the same stalls in the market, so I can really see that prices have gone up so much,” she sighs.
Mainly due to the supply chain disruptions caused by the pandemic, inflation has become a widespread issue. The US, for example, is seeing its highest inflation rate in four decades. Singapore, with its need to import just about everything the country consumes, is a price-taker in this whole equation.
In the most recent reading in December 2021, headline inflation — the measure of the total inflation in the economy – rose to 4%, the highest level the price gauge has been at in nearly eight years. This pushed the Monetary Authority of Singapore (MAS) to strengthen the Singdollar so that rising costs of imports can be reined in somewhat. It is doing so by raising the rate of the appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) slightly in an out-of-cycle move, while keeping its width and level unchanged.
While the move aims to tackle the higher-than-expected inflation, there are still concerns over whether the widely-expected GST hikes to be announced as part of Budget 2022 on Feb 18 will lead to a further uptick in inflation levels. The last GST hike, from 5%, was back in 2007.
Worldwide, governments, both emerging and developed countries alike, are looking around for ways to raise revenues. For example, Indonesia plans to raise its value- added tax to 11% from 10% in April, while the UK last September announced increases in its payroll and dividend taxes to help cover pandemic-related costs.
To be sure, the Singapore government has always made it a point to allocate utilities rebate and other subsidies to help the low- income group especially, to insulate them from the effects of higher GST.
Nevertheless, there have been calls for the hike to be delayed, or, at the very least, be deferred for sectors that are still reeling from the pandemic. For instance, John Bittleston is suggesting that the government delay the increase for two years. “Singapore’s finances, we understand, are not in dire condition. The next phase of the pandemic is extremely problematic right now,” explains the founder and chair of Terrific Mentors International
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Others like Lawrence Loh, director at the Centre for Governance and Sustainability at NUS Business School, say the hike is “inevitable” given Singapore’s long-term fiscal needs. GST involves taxation at the point of consumption — which is where direct economic activities take place — so it is “only fair that payment should be levied on the use of facilities [so] earning and ownership are more passive”, he explains.
Agreeing, Yeo Kai Eng, a GST and tax compliance expert at EY Singapore, says that “there will never be a perfect time for a rate hike”. He adds that “it is probably the right time” to raise the GST rate, given that the population is adapting to living with Covid- 19 and the economy is showing signs of a recovery.
A delay in taxes?
In any case, economists such as UOB’s Barnabas Gan point out that the link between GST hikes and higher inflation is best described as a “one-time pass-through” to consumer prices. “This will not be considered as having an enduring impact on inflation, and in turn, the MAS is unlikely to tighten policy in response to a one-time GST increase,” he adds.
Meanwhile, Irvin Seah, senior economist at DBS Bank, estimates that the impact of the new GST rate on inflation will only last for 12 months. This comes even though the hike will have a permanent impact on prices be- cause inflation is calculated on a y-o-y basis.
Yun Liu and Heidi Tang from HSBC’s Global Research team estimate that a one per- centage point increase in GST will add 0.5 to 0.7 percentage point to headline inflation in 2023 and 2024. As such, the economists are expecting the hike to come in two steps: the first in 2023 and the second a year later. This gives the authorities some flexibility in the face of lingering uncertainty over the Omicron variant.
Looking forward, market watchers argue that the fiscal consideration for a GST hike will not be overridden by inflation or monetary policy. In fact, the tighter monetary pol- icy is expected to help cool overall inflationary pressures and facilitate the hike, says Seah, “We see the move by the MAS — which is aimed at anchoring inflation expectations and buffering imported inflation — as paving the way for an eventual GST hike,” he adds.
OCBC Bank’s chief economist Selena Ling says MAS’ pre-emptive move “does give them some policy space, at least on the monetary side”.
To this end, Eugene Tan, law don at the Singapore Management University, notes that there may a strong case for a gradual introduction of the GST hike so as to manage the inflationary pressures that accompany it. His comments are based on official estimates that core inflation – inflation without accounting for accommodation and transport – will rise by 2% to 3% this year.
Cover image: Albert Chua/The Edge Singapore
