By Lynette Khoo

CUTTING the goods and services tax (GST) and personal income tax rates would not have had the major impact on consumer spending and the economy that some MPs believe, Finance Minister Tharman Shanmugaratnam said yesterday.

Explaining why these measures were not adopted, he told Parliament that the government did consider cutting GST but dropped the idea.

'We decided against it, not as a matter of philosophy, but because it would not have the desired impact on demand and on the economy, and also it would leave the lower and middle-income groups worse off,' he said.

Cutting the GST rate from 7 per cent to 5 per cent would not have eased business costs in a major way because the GST is passed through to consumers, leaving business margins unchanged, Mr Tharman explained.

And a GST cut would not have spurred consumer spending significantly, he said. For instance, the UK cut value-added tax before Christmas, but this did not trigger higher festive spending.

Experience in Singapore has been similar, Mr Tharman said. When the GST rate was raised from 5 per cent to 7 per cent in 2007, accompanied by offsets to cushion lower and middle-income people, there was no reduction in expenditure. Instead, consumption rose.

Importantly, the GST is a valuable source of funds for additional social support schemes, Mr Tharman said.

Keeping the personal income tax rate at 20 per cent was a great disappointment for many, but this rate is already very competitive, he said.

Compared with Hongkongers, most Singaporeans are already paying lower taxes, he pointed out. It is only at the very top end that the effective tax rate in Hong Kong is lower than that in Singapore. Nevertheless, the Ministry of Finance will continue to assess the issue to see if changes need to be made.

Several MPs spoke of the need for a higher personal income tax rebate during the Budget debate, but Mr Tharman said that this would not have had a major impact on consumer spending.

It is conventional wisdom that lower-income people tend to be more cash-strapped and spend most of any extra handouts, he said. Higher-income people, on the other hand, tend to save most of the benefits they receive.

Raising the $2,000 cap on the personal tax rebate would have benefited only the top 5 per cent of the resident work force - and at a high cost to revenue, Mr Tharman said.

For instance, raising the cap to just $3,000 would have cost the government an extra $100 million. And lifting it totally, as MP Inderjit Singh proposed, would have more than doubled the cost from about $500 million to $1.1 billion.

This is also why distributing GST credits is more likely to increase consumer spending, as they are given to lower and middle-income people who have a higher propensity to consume, Mr Tharman said. 'Our approach is to provide money quickly and give more to those who need it most.'

Rebutting criticism that the Budget did not adequately address individual needs, he said that the focus on securing wages, jobs and protecting CPF contributions are among key measures to help individuals.

He also took issue with the unemployment benefits proposed by some MPs.

Opposition MP Sylvia Lim, for instance, suggested a temporary 'Job Seeker Allowance' that could be means-tested and provide cash to the unemployed based on their last-drawn pay, subject to a $500 cap.

Mr Tharman said that the substance of such a benefit is already provided for people who lose their jobs, through the existing short-term means-tested Work Support scheme administered by Community Development Councils and HDB loan restructuring.

He said that the weight of evidence shows that unemployment benefits reduce the incentive to work and ultimately lead to a rise in the number of unemployed, and in unemployed staying out of a job longer. An OECD study found that a 10 per cent increase in unemployment benefits leads to a 7 per cent reduction in the number of unemployed people who return to work. 'We must be careful not to move towards a system of automatic broad-based unemployment benefits.'