Thursday, October 09, 2008

Fiscal Policy - Singapore

from Inland Revenue Authority of Singapore (IRAS) website

In Singapore, the long-term objectives of government budgetary policy are:
  • to promote and support sustained, non-inflationary economic growth;
  • to maintain a balanced budget, i.e. to finance total operating and development expenditures from operating revenue over the course of the business cycle; and
  • to focus government expenditure on delivering essential public goods and services, e.g. education, healthcare, infrastructure, housing and programmes to protect the environment.

Underlying the above objectives are the recognition of market forces in driving the economy, financial prudence and emphasis on human & infrastructure investment.

Tax Policy

Tax policy is an integral part of fiscal policy. The main objectives of tax policy in Singapore are:

  • Revenue Raising

    This is the traditional aim of tax policy. Tax revenue is a substantial source of funding for government operations.

  • Promotion of Economic and Social Goals

    Tax has been used to influence behaviour towards desirable social and economic goals. For instance, to encourage mechanisation and automation, the government allows accelerated capital allowance for most assets used for business purposes. To encourage Singaporeans to have more children, tax rebates are given for the first to fourth child(ren).

The fundamental tenet of Singapore's tax policy is to keep tax rates competitive both for corporations as well as individuals. Keeping our corporate rate competitive will help us to continue to attract a good share of foreign investment. Keeping our individual rates low will encourage our people to work hard. It will also make risk-taking worthwhile and encourage entrepreneurship.

To increase the resilience of taxes as a source of government revenue, Goods & Services Tax (GST) was introduced in 1994. This balanced mix of tax on consumption and income reduces the vulnerability of revenue intake to adverse changes in economic conditions and strengthens the resilience of Singapore's fiscal position.

Taxes are used to develop Singapore into a stronger community, a better environment and a more vibrant economy, a place that Singaporeans can be proud to call home.

chart

Taxes go towards the funding of government expenditure. In FY06, the Security & External Relations sector took up the largest share (51%) of total operating expenditure. The second largest sector is Social Development, making up 41% of the total Government Operating Expenditure. The Economic Development and Government Administration sectors make up approximately 4% each of the total expenditure.

Collection by Tax Type

The following pie chart gives a breakdown of the total tax collection by tax type for FY2006/07. Corporate Tax is the largest source of tax revenue, contributing a total of $8.5 billion. Individual Income Tax is next, at $4.7 billion. The Goods and Services Tax contributed $4 billion and Stamp Duty and Property Tax $2 billion each.

IRAS' Tax Collection by Tax Type FY2006/07

from Singapore Government Securities (SGS) website

Fiscal policy in Singapore is directed primarily at promoting long-term economic growth, rather than cyclical adjustment or distributing income. To meet its objective, the Singapore Government is guided by the following principles in its conduct of fiscal policy in Singapore:
  1. the private sector is the engine of growth, and the government's role is to provide a stable and conducive environment for the private sector to thrive;
  2. tax and expenditure policies should be justified on microeconomic grounds and focus on supply-side issues, i.e. incentives for saving, investment and enterprise;
  3. the counter-cyclical role of fiscal policy is limited, due to high import leakages.
The success of Singapore's fiscal policy over the years lies in the government's prudent expenditure patterns and conducive taxation policies that have complemented monetary policy in promoting sustained and non-inflationary economic growth.

The main focus of the Government's expenditure is on the delivery of essential public goods and services to Singaporeans. The government spends to assure the nation of a secure future. Therefore, key areas of expenditure are on education, public housing, health care and national security. The Government is also committed to building and maintaining world-class economic infrastructure and services. This is evidenced by the fact that development expenditure accounted for around one-third of government expenditure on average over the last three decades.

Singapore's tax policies, although providing the main source of funding for the government, seek to enhance its economic competitiveness and attract foreign investments to Singapore.

This combination of fair tax policies and prudent expenditure programmes, augmented by high economic growth has enabled Singapore to enjoy consistent budget surpluses over the years. Such a prudent fiscal policy has also contributed to Singapore's high savings rate and allows it to achieve one of the highest investment rates in the world without having to incur foreign debt. High domestic savings have, in turn, contributed to Singapore's high level of foreign reserves, which has served to boost investor confidence and provided a buffer against adverse economic shocks.

With this ethos of fiscal rectitude, which extends throughout the public sector, the MAS has been able to focus on its primary goal of ensuring price stability and preserving confidence in the domestic currency through the appropriate management of the S$ exchange rate, without needing to balance this against the requirements of deficit financing.

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