AS SURE as doom follows gloom, when the economy takes a beating, so does consumer confidence.

Suddenly, wallets snap shut, and a clothing accessory gets tight, figuratively speaking.

A twice-yearly survey released last week by the Nielsen Company said consumer confidence in Singapore plunged to its lowest level in more than three years.

One knee-jerk response: Time for a temporary cut in the Goods and Services Tax (GST) to get shoppers to pump more money into the economy?

On Monday, the British government announced a temporary cut in its version of the GST - called value added tax - from 17.5 to 15 per cent.

Singapore's GST rate, significantly lower at 7 per cent, was raised from 5 per cent in July last year. The Government explained then that it was better to do it in good times.

But with times suddenly turning bad, does it follow that there should be some relief from GST?

In a street poll of 30 retailers and 100consumers by The New Paper, more than half from each group want a temporary cut.

But one observer said that reducing GST may not necessarily spur people to spend.

Safer to save

Mr Lam Kok Shang, executive director of indirect tax at KPMG, said: 'If the outlook is bleak, people are likely to think it's safer to have money in their pockets.'

That view is not borne out by our poll: More than half of the 100 shoppers said a lower GST would encourage them to spend more.

Some have argued that cutting GST would lighten the burden of Singaporeans, especially that of the lower-income earners.

Member of Parliament (MP) Inderjit Singh, who had asked if the Government had raised GST too hastily during the Budget debate earlier this year, said: 'The overall cost burden on Singaporeans has increased while we expect jobs to be cut.

'In such an environment, when everyone has become a little poorer, whether through job loss or through erosion of their investments, it is not a bad idea to trigger cost reduction.'

CIMB-GK economist Song Seng Wun said lower GST can also help businesses cut costs, and hopefully, help save jobs.

'If job creation or retention is the aim, cutting GST may be one way to do so.'

Finance Minister Tharman Shanmugaratnam said last week that the Government would not budge on its GST policy. Instead, it will give 'more targeted assistance to those who need it the most'.

Mr Lam agreed.

Tax reform

'When GST was introduced (at 3 per cent) in 1994, it was part of the tax reform process - a move away from direct tax (personal and corporate tax) to consumption tax,' he said.

'It was to attract inward investment. Our population is also ageing and people are dropping off the workforce faster, so the number of taxpayers will decrease.'

That means less revenue collected from income taxes. So more GST revenue is needed to fund social programmes such as Workfare.

Last year, corporate tax and personal tax added $9.3 billion and $4.55b to the coffers respectively. But GST revenue contributed $6.2b - thanks to the 2 percentage-point hike.

And don't forget, Mr Lam pointed out, higher GST allowed the Government to give tax cuts and rebates in its latest Budget package.

Indeed, every time GST has been raised (to 4 per cent in 2003, 5 per cent in 2004, 7per cent last year), the Government had always given tax cuts and rebates and GST offset packages.

It earned an extra $990 million last year due to the higher GST. A large portion went back to Singaporeans, Mr Tharman said, as part of the GST offset package.

But extraordinary times call for extraordinary measures, Mr Singh, who is MP for Ang Mo Kio GRC, argued.

He added: 'We are facing exceptional times and all of us, including the Government, could learn to manage with less income.

'We have recently changed our constitution to allow the Government to tap more of our reserves, so infrastructure projects don't have to stop with lesser collection of GST.'

UOB economist Ho Woei Chen does not think the Government will do a U-turn on its GST policy, but if it does, its main aim will be to help the poor rather than stimulate spending.

She said: 'Compared to the better-off, the lower-income group spends a larger proportion of their disposable income.'

Why not cut GST to benefit the poor and impose higher income taxes on the rich to help make up the shortfall in GST revenue?

After all, only about 30 per cent of Singaporeans pay income tax. In cutting its sales tax, Britain is raising the income tax-rate for high-income earners from 40 to 45 per cent in 2011. Mr Lam says it is not a good idea to up taxes for the rich.

'It's a move away from the tax reforms we have implemented,' he explained. 'Anyway, the high-income earners are already paying the bulk of income tax, and also pay 60 to 70 per cent of GST collected.

'For the lower-income group, targeted assistance works better. With the offsets and rebates, they end up with more disposable cash in their hands.'

But a GST cut does not have to be accompanied by a hike in personal and corporate tax rates, Mr Singh argued.

'We have a good tax system and the lower taxes will continue to attract talent and entrepreneurs to Singapore,' he said.

'As I said, the Government now has more income from the reserves.'

But while there are conflicting views on whether the rich or the poor gains more from a GST cut, one group of Singaporeans, as always, remains sandwiched - the middle-income.

Most not only pay income taxes and contribute to GST, but they are also not likely to qualify for 'targeted assistance'.

Mr Lam admitted it was always tricky when it came to the 'sandwich class'.

He hopes the Government will give at least a 10 per cent tax rebate with no cap in next year's Budget, which has been brought forward to January.

Mr Song said a GST cut would help middle-income earners significantly.

'If not, perhaps more direct assistance like cutting the maid levy.'

This article was first published in The New Paper on November 26, 2008.