Tax, Benefits and Singapore’s barely useful triple A rating

3457

By: Chris Kuan

Singapore government narrative of high European taxes without any reference to benefits makes for poor debate on welfare. To take a much more balanced approach to the issue, let us check with the UK Office of National Statistics for an appreciation of how much the British paid in taxes in relation to benefits received.

Benefit spending

In 2014, the social expenditures in direct transfers to households are given below.
1The total expenditure of £257b equal over 14% of GDP. In Singapore GDP equivalent, that is nearly the entire government budget. Not included are benefits in kind such as subsidized education and healthcare. The UK government spent £125b or 8% of GDP on the latter. Singapore government’s healthcare spending is 2% of GDP today. As a matter of interest given the recent debate over unemployment insurance, the UK government spend just 0.16% of GDP on unemployment benefits, far less than the amount spent on the People’s Association.

Tax = Benefit = Lower Inequality

This chart divides British households by 20% of total households or quintile according to income and provides the taxes paid and social transfers received in cash and in kind.
2The 3 lowest quintiles representing 60% of households received more benefits than taxes paid. The 2nd richest quintile received less benefit than tax paid by about £5,000 (S$10,000). Only the top or richest quintile received significantly less benefit than tax paid. As a whole, the British received nearly the same amount of benefits as taxes paid. When the Singapore government warn of poor value for high taxes, they are referring only to the wealthy.

European tax and spend policies are meant to reduce income inequality. So the Gini coefficient is reduced from 0.51 before tax and social transfers to 0.33 after tax and social transfers, not as low as the Scandinavians because tax and therefore benefits are both lower. This is especially notable in pensions where a low state pension from age 65 is meant to be supplemented by private employee pension (which can be used from age 55).

Fiscal Deficit

Since nearly all taxes paid by the British people are returned through social transfers, why is there a fiscal deficit in the UK, like most 1st world countries (in 2014, £ 71b or 4% of GDP)?
Like its neighbours, the UK economy comprised 60% of wages. Revenues from other sources are insufficient to cover other expenditures such as public services, defence, public investments. Higher corporate and wealth taxes in theory may raise revenues but this will slow the economy which negates the revenue raising effect.

Benefit Reduction or Debt

The budget choices are:

  1. Reduce expenditures including social transfers but this means households get much less benefits than taxes paid, with the impact hardest on the low and middle income.
  2. Borrow to cover the shortfall.

The UK has one triple A rating to Singapore’s three. It is still highly rated despite its fiscal deficits and like any 1st world economy, the government is able to borrow at the lowest possible cost. This is a crucial consideration because the state exists in perpetuity whereas people have a horizon limited to a lifetime. It means the government can aggregate demand, insure and fund against social risks over an infinite horizon which result in far lower costs than any individual is able to do.

As long as deficits are not excessive, borrowing puts the state’s credit ratings and its lowest possible borrowing costs to use instead of enacting huge reductions in social expenditures and accepting high inequality. In any open society, excessive benefits cuts and the resulting large increase in inequality are politically untenable. If this is a cost in financial terms or in slower economic growth, then it is paid for social peace and equality.

Usefulness of Singapore triple A ratings

Singapore’s debt to GDP ratio of 110% is higher than the UK’s 90% (and falling). But the constitution forbids the spending of debt proceeds, including CPF which resulted in all of the debt invested. It means debt is not incurred directly to provide for government expenditures. Singaporeans do not derive any direct benefit from debt other than the excess returns from investing debt goes into the reserves from which a portion of the earnings supplemented the budget, even so not specifically for social expenditures.

Despite being backed by the nearly 10% of GDP a year long term budget surpluses, the triple A ratings have little direct to benefit to households. The surpluses are not without consequences to households since they are derived from land sales at increasing prices and denial of social benefits both leading to inadequate retirement and healthcare funding, and to an acceptance of high levels of inequality.