I REFER to Monday's article, 'Making the case for GST roll-back', by Dr Basant K. Kapur. Dr Kapur suggests that the Government should stimulate domestic demand by reducing the goods and services tax (GST) by two percentage points. I disagree.

First, he argues that 'this year's Budget proposal to increase GST credits and to target them at the less well-off is not likely to provide as broad-based a stimulus to consumption as an across-the-board two-percentage-point reduction in the GST'.

However, offering credits to lower-income earners would likely create a greater multiplier effect as they have a higher marginal propensity to consume, especially on necessities. Furthermore, lower-income earners are more likely to consume domestic goods, hence reducing import leakages.

Second, the increase in GST was announced only two years ago as part of Singapore's reform of its tax structure away from direct taxes towards indirect taxes to improve its competitiveness. We should thus show resolve and continue with difficult restructuring, even during a downturn.

Taking a longer-term view would increase the confidence of investors in Singapore's policies. In addition, a cut in GST would increase administrative costs for both firms and the Government. Moreover, due to political sensitivities, it would be difficult to restore the GST increase when the economy picks up.

Third, as small firms with a turnover of less than $1 million need not register for GST, a cut in GST would not help such firms. As business for such small firms is exactly what is needed to increase domestic demand, a cut in GST would not meet this objective. A tax credit would better serve this purpose.

Lastly, even if both a decrease in GST and an increase in GST credits result in the same multiplier, an increase in GST credits is more equitable than a reduction in GST. This is because, while a cut in GST benefits both low- and high-income earners, high-income earners would benefit by a larger extent than low-income earners as the former consume greater quantities of everything in absolute terms. Providing low-income earners directly with cash would enable them to meet their needs better.

In conclusion, while I agree with Dr Kapur that there is a need for demand measures to stimulate domestic consumption, a cut in GST is not necessarily the best demand measure, for the reasons I have outlined.

Wang Xin Min (Ms)

This article was first published in The Straits Times on January 30, 2009.