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Singapore Raises Taxes on Top Earners to Pay for Social Spending

Monday, 23 Feb 2015 07:39 AM

Singapore will raise personal income-tax rates for the country's top earners as the government shifts the burden of higher spending for an aging population to its wealthiest residents.

Expenditure will increase "significantly" in coming years as more money is allocated for development, Finance Minister Tharman Shanmugaratnam said in his budget speech in Parliament on Monday. The government will extend about $7.5 billion ($5.5 billion) to businesses over three years to help them cope with rising costs, and making changes to the national pension system to benefit older and middle-income workers, he said.

The move to increase tax rates is part of efforts to avoid sustained annual budget deficits as policy makers boost spending on infrastructure and health care. The island had its first budget shortfall since 2009 last year, and the finance minister said the tax increase for high-income earners will strengthen future revenues in what he called a "calibrated move."

"We have assessed that it should not significantly dent Singapore's competitiveness," Shanmugaratnam said. "Tax rates are not the only way we stay competitive."

Singapore will raise its top marginal rate to 22 percent from 20 percent, while others in the top 5 percent of earners will also see a bigger tax bill, he said. Hong Kong charges a flat rate of 17 percent for income exceeding HK$120,000 ($15,500.) The adjustments will affect those making at least S$160,000 annually, and will apply starting with income earned in 2016.

"It would be naive to think that we can keep raising tax rates without affecting our competitiveness," Shanmugaratnam said, adding the international race for talent is real. "We must remain an attractive place for world-class teams to be in Singapore."

The government will defer increases in foreign worker levies to give companies more time to adapt to years of restricting the supply of overseas labor, the finance minister said. The next scheduled increase was to take effect in July this year, and will now be postponed to at least 2016.

Prime Minister Lee Hsien Loong has tightened the inflow of foreign workers since 2010 as he urges companies to reduce their reliance on cheap overseas labor while encouraging them to boost productivity. The move has raised business costs, prompting some manufacturers to move operations off the island.

"While we are adjusting the pace of our foreign worker measures, we are not changing direction," Shanmugaratnam said. "It remains crucial for Singapore that we restructure towards reducing our reliance on manpower, and find new and more innovative ways to do business."

The government will spend $26 billion in the next five years on public transport, while expenditure on health care will exceed S$13 billion in 2020, it said today. It will provide personal income tax rebates worth S$717 million this year, while raising duties on gasoline for the first time in more than a decade.

"Our philosophy is to keep the burden on the middle-income low, and target benefits at the most important needs of the poor and middle-income groups," Shanmugaratnam said. "Hence, we have designed our system such that we have lower overall taxes than most countries, but nevertheless maintain a highly progressive regime."

Singapore's budget deficit for fiscal year 2014 was about S$130 million compared with an initial estimate of S$1.2 billion. The last time it had a shortfall was in 2009, when it took steps to stimulate the economy during the global financial crisis.

Shanmugaratnam projected a gap of $6.7 billion in the fiscal year starting April 1, or about 1.7 percent of gross domestic product. Singapore won't draw on past reserves to fund the deficit, he said.

The administration is constitutionally required to keep a balanced budget over its term in government. The current one was elected in 2011, when Lee's ruling party won with the smallest margin of the popular vote since independence in 1965. The next elections must be held by January 2017.

This is Prime Minister Lee's first appearance in Parliament after he underwent surgery last week to treat prostate cancer.

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Singapore will raise personal income-tax rates for the country's top earners as the government shifts the burden of higher spending for an aging population to its wealthiest residents.
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Monday, 23 Feb 2015 07:39 AM
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