GST revenue grew 6.2%, lagging government expenses which rose 8.6%.
A goods and services tax (GST) rate hike is probably long overdue, as the tax's revenue had already failed to keep up with the government’s expenses and could worsen in the near future, UOB said.
According to a macro note, since the last GST hike from 5% to 7% in 2007, the government’s expenses rose at an annualized rate of 8.6%, whilst GST revenue's annualized rate hit only 6.2%. The difference in the pace of growth is particularly pronounced from 2015 onwards.
How much the GST should be hiked "depends on the current and expected conditions of the economy," UOB said.
Based on data from 1H2017 when the GST revenue amounted to $5.26b, GST revenue could reach $6.04b if the tax rate was 8% instead of 7%.
That is a difference of $781m for half a year alone. For a full year, an 8% GST would likely bring an incremental $1.56b of GST revenue.
UOB economist Francis Tan said, "An 8% GST, if imposed in 2017, would narrow the gap between GST revenue and total expenditure considerably, whilst a 9% GST would almost close the gap."
UOB forecasts that the government will announce a hike in the GST rate by 1% point to 8% in Budget 2018 to set the stage for another 1% hike to 9% in Budget 2019.
The higher economic growth in 2017 will probably result in higher wage growth for 2018.
UOB said this should cushion some consumption cutbacks due to the GST increase.
"Even if the government decides not to raise the GST rate in Budget 2018, it is simply a matter of time before it will eventually happen," Tan concluded.
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