WEAKER economic growth last year will not only dent the government's budget in financial year 2015, but it will also likely result in a hangover for its coffers in this coming financial year.
But even as the slowdown from last year extends its reach to the government's account books for FY16, observers are noting mitigating factors that can help raise fiscal revenue.
The coming Budget, to be unveiled on March 24, will reveal estimates for FY16, and a revised FY15 account book.
It comes at a time Singapore is facing anaemic growth. It also comes during a period when the government's total expenditure has been climbing drastically in recent years.
Figures released by the government in February showed that gross domestic product (GDP) grew by 2 per cent in 2015, its slowest growth since the 2009 global financial crisis. It expects growth to come in at between one to 3 per cent this year.
"Tax collection currently makes up more than two-thirds of the government's operating revenue," said Chung-Sim Siew Moon, head of tax services at Ernst & Young. "With a lower economic growth in 2015, we expect that the tax revenue collection in Singapore would be lower for the 2015/2016 fiscal year, compared to the prior year."
The government's operating revenue is generally made up of tax revenue, fees and charges and other receipts. The proportion of fees and charges, which include receipts from licences, permits, rental of premises, fines and forfeitures, to name a few, compared to total revenue has remained quite constant, pointed out Mrs Chung-Sim. Hence, it is not likely that a boost to revenue will come from these sources.
In contrast, changes in tax revenues, including corporate tax, goods and services tax (GST), and income tax tend to correspond to GDP growth, tax specialists noted.
"Tax revenues, which make up the bulk of the government's operating revenue, tend to grow in tandem with economic performance," said Tay Hong Beng, head of tax at KPMG Singapore.
But there is a difference in how the effects of an economic slowdown have on these different sources of tax revenue.
For one, GST seems to be sensitive to changes in economic climate, according to the specialists.
For example, in the aftermath of the global financial crisis, GST collections grew from S$6.9 billion in FY09 to S$8.2 billion in FY10, according to the Ministry of Finance.
This meant that while the economy grew at 15.2 per cent in the year ended Dec 31, 2010, GST receipts improved by 18.6 per cent in the financial year that started in April 2010.
Corporate taxes, on the other hand, have a delayed response to any economic growth or downturn.
This is because companies have to grapple with tighter profit margins or increased possibilities of bad debts as the economy slows, explained Low Hwee Chua, head of tax services of Deloitte.
This is even more pressing when considering that corporate income tax, at about a fifth of operating revenue, is the largest contributor to the government's coffers.
In FY14, operating revenue totalled S$61.3 billion, while corporate income taxes were just under S$13.5 billion. In FY15, revenue is estimated to S$64.3 billion, but companies are expected to barely pay more - corporate income taxes are to only increase by S$20 million.
"Given the current economic slowdown, one would expect corporate income taxes to stay relatively flat or even drop from previous years for FY16 or perhaps FY17," said Koh Soo How, Asia-Pacific indirect tax leader at PricewaterhouseCoopers Singapore.
On top of that, recent policy moves like property cooling measures will tighten stamp duty receipts as a source of revenue for the government, added KPMG's Mr Tay.
But while the impact of an economic slowdown in 2015 on government revenue will continue to be felt this coming financial year, specialists note some mitigating factors that may help lift revenue figures.
For example, the government has increased the top marginal tax rates of individual taxpayers from 20 per cent to 22 per cent on income earned on or after Jan 1, 2016. This is expected to boost tax revenues by at least S$400 million a year.
At the same time, the expected returns of Temasek Holdings will be factored into the net investment returns (NIR) starting FY16. This is expected to increase the total NIR contribution from about 2 per cent of GDP to about 3 per cent on average over the next five years.
These approaches would be crucial in ensuring that the government can continue to spend on infrastructural projects and social expenditure.
Increase in total expenditure was at about 6 per cent per annum from FY10 to FY13, but grew by 10.6 per cent in FY14, and an estimated 19.3 per cent in FY15, said EY's Mrs Chung-Sim. This is largely due to healthcare initiatives such as MediShield Life and infrastructure investments in Changi Airport Terminal 5 and rail lines.
Additionally, a focus on fiscal prudence in FY16, which also is the first term of the new government, will help curb expenditure.
Taken together, efforts in tightening purse strings and opening up revenue streams are expected to help the government usher in a razor-thin surplus - if there is even one at all - in FY16, after an expected S$6.67 billion deficit for FY15, economists predict.
OCBC's Selena Ling sees a FY16 budget surplus of S$0.37 billion, while Irvin Seah at DBS predicts S$0.4 billion. HSBC economist Joseph Incalcaterra sees the government only managing to break even in FY16.
This article was first published on March 15, 2016.
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