Singapore’s widening income gap has been identified by Prime Minister Lee Hsien Loong as one of the country’s key fault lines. Despite exceptional levels of wealth in the Southeast Asian financial hub, it has among the highest levels of income inequality among the world’s advanced economies.
Its Gini coefficient – which measures the degree of inequality within a country where zero is complete equality and one is maximum inequality – rose to 0.478 in 2012. By comparison, Denmark, among the world’s most economically equal countries, had a Gini coefficient of 0.248 as of 2011.
In order to address the income gap, the government could introduce another round of the GST (government service tax) Voucher Special Payment to help low and middle income residents cope with the rising cost of living, in addition to a possible enhancement of schemes such as the Workfare Income Supplement, according to analysts.
Healthcare in the spotlight
In addition to further enhancements of some existing schemes, there could be more generous funding on healthcare to defray the rising costs in this area, said experts, especially for the older generation.
The government’s annual healthcare expenditure is expected to remain on an upward trajectory to reach $8 billion in fiscal 2016, from an estimated $5.6 billion in 2013, according to Citi.
(Read more: Do rising Singapore bankruptcies signal trouble ahead?)
By international standards, government healthcare expenditure in Singapore is low, with out-of-pocket expenses comparatively high. The country’s healthcare expenditure stood at an estimated 1.5 percent of gross domestic product (GDP) in 2013, far below the average of 7.7 percent in high-income economies as of 2010.
The elderly will receive targeted support through the ‘Pioneer Generation’ package, which will assist the country’s approximately 450,000 citizens over the age of 65 with subsidies for outpatient treatment and help with premiums for the new national insurance scheme, MediShield Life, among other things.
Who will pay for increased spending?
Higher social spending costs will likely be borne first by tapping the returns on the country’s fiscal reserves, with higher income taxes for the rich a last resort, said Wei Zheng Kit, economist at Citi.
“Rather than taxing incomes, which would erode the incentive to work harder and reduce Singapore’s competitiveness vs Hong Kong (where both top personal and income tax rates are lower than Singapore), the government would likely prefer to first tax consumption in our view,” Wei said, citing the example of motor vehicle taxes.
(Read more: Is Singapore set for an Icelandic-style crash?)
Francis Tan, economist at UOB, who agrees raising the income tax for the wealthy is unlikely, says one possibility is for the chargeable income at the top tiers of the income brackets to be lowered.
“For example, those with an annual income of $320,000 and above are taxed at the maximum 20 percent rate currently and the chargeable income could be lowered to, say, $300,000 or even $280,000. The effect will be an increase in the tax base without affecting our tax competitiveness,” Tan said.
However, fiscal prudence practiced by the government means that the “goodies” would have to be provisioned for, he added.
(Read more: Higher wealth taxes on the cards for Singapore?)
Singapore’s fiscal position is likely to be stronger than originally expected – with the budget surplus exceeding 1.5 percent of gross domestic product or at least $5.5 billion Singapore dollars for fiscal year 2013 ending in March, according to bank estimates.
—By CNBC’s Ansuya Harjani. Follow her on Twitter:
@Ansuya_H
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