Aging Singapore Faces Tax Problem

Beneath its modern and glitzy exterior, Singapore is aging. For the first time in its short history, the Southeast Asian nation is expected to have as many people aged 65 and older as under 15 this year, a demographic crux that challenges the low-tax economic model that helped transform Singapore from port town to financial hub in a matter of decades.

Top government officials have been signaling the need for higher taxes to support future social spending, and with the country forecasting a primary deficit in 2017 that would be the largest in at least 16 years, changes are expected as soon as the budget is announced on Feb. 19, Reuters reported.

The city-state has some of the lowest tax rates in the world, with room to adjust parts without risking its competitiveness, but not even its citizens, who stand to be better supported by welfare changes, welcome higher taxes.

A recent study by the Institute of Policy Studies showed Singaporeans would rather the government dip into its national reserves than raise taxes.

But economists say things will have to change in a country which has one of the highest life expectancies and lowest fertility rates in the world and marginal increases to the likes of the goods and services tax this year may only be the start of a longer-term rethink.

The city-state’s population of seniors is expected to double by 2030, straining the government’s budget for healthcare. The IPS estimates the aging trend represents a drag of 1.5 percentage points on Singapore’s annual GDP per capita growth from 2011 to 2060.

One of the reasons the tax issue has come to the fore in Singapore is because efforts to boost productivity have been slow to bear fruit. With restrictions on foreign labor, Singapore has championed investment in automation and artificial intelligence to help gear its economy toward higher-value-added industries with strong productivity growth. But this transition takes time.

Labor productivity growth was flat around 1-1.5% in the years 2013 through 2016, having been at nearly 10% in 2010.

Meanwhile Singapore’s tax revenue, as a percentage of economic output, is below the average of other high income countries, World Bank data shows.

As a result, the government is projecting a primary budget deficit of S$5.62 billion ($4.3 billion) in 2017. If realized, that would be the largest since at least 2001 when changes to the classification of some items were brought in.