Singapore Budget 2018: A Tale of Two Taxes

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In light of Budget 2018, we look at Singapore’s implementation of a carbon tax and increase in tobacco excise tax. Will these policy measures achieve their intended effects?

While the announcement of a future hike in Goods and Services Tax (GST) dominated the headlines of this year’s Budget, examining two other tax measures — the implementation of a carbon tax and the 10% increase in tobacco excise tax — can provide insights into the policy workings of the Singapore government and how it chooses to address pressing issues.

 

Carbon Tax: The Lowdown
As part of the 2016 Paris Agreement within the United National Framework Convention on Climate Change (UNFCCC), 194 signatory countries — including Singapore — have agreed to take action in curbing greenhouse gas emissions[i].

A taxation policy tool implemented by an increasing number of countries, the carbon tax aims to disincentivise greenhouse gas emissions by industries by putting a “per unit” price to the burning of fossil fuels, namely coal, petroleum and natural gas. (An alternative carbon pricing strategy, more effective for larger nations or trading blocs, is a trading scheme where the total level of greenhouse gas emissions per year is capped[ii]. In this system, low emitters can sell their extra carbon allowances to larger emitters.)

In the recent Budget, Singapore’s Finance Minister Heng Swee Keat announced that the Republic will start imposing a carbon tax of S$5 per tonne from 2019 to 2023 for facilities producing 25,000 tonnes or more of greenhouse gas emissions. This tax will also be implemented across all sectors.

 

No Grounds for Concern
According to the government, a flat tax applied across all sectors will “encourage emissions reductions where it is most cost effective and provides businesses certainty in the tax rate regardless of their emissions levels”[iii]. For a government that prides itself on efficiency, this move is likely to minimise administrative burden on the part of businesses, although the government noted that some firms still expressed concerns about the impact of the carbon tax on their competitiveness.

To this, Assistant Dean (Research) and Associate Professor Scott Victor Valentine of the Lee Kuan Yew School of Public Policy offers a resounding reply: “With the carbon tax, the industries’ concerns about crippling competitiveness are largely exaggerated. At $5 per tonne, this would only increase their average energy bill by about 1%. By extension, even at $15 per ton, this would only increase energy costs by 3%. The cost of oil has been known to increase by more than this overnight and businesses still manage to stay in business! My point is that higher energy costs of the proposed magnitude will not significantly impact business fortunes.”

If the financial impact on businesses and industries is minimal with a $5 per tonne carbon tax, then wouldn’t the reduction of greenhouse gas emissions be marginal as well? To this, Prof Valentine says that as a first step, “Singapore is wise to gain some experience in this, and a small carbon tax is a good way to do so”. Indeed, Minister Heng additionally stated in his Budget speech the government’s intention to increase the tax to a rate of “between $10 and $15 per tonne of emissions by 2030”.

 

The Case for Upstream Measures
At the same time, the Singapore government also asserts that imposing a carbon tax upstream — targeting industries at the point of emissions rather than households and consumers — will bring about economy-wide coverage.

Prof Valentine agrees while raising skepticism about the effectiveness of energy-saving measures targeted at downstream implementation. “Energy demand is highly inelastic, meaning that it would take a pretty hefty hike in energy cost to alter consumer behaviour. Let’s look at it from the perspectives of people in Singapore. The average electricity bill in Singapore is about $100 per month. Will you radically alter your usage behaviour if your bill goes up to $101 or even $103? This is the magnitude of the proposed carbon tax,” he says.

The professor cities Japan as an example: “After the Fukushima nuclear plant disaster, the Tokyo municipal authorities launched a campaign to encourage people to conserve energy for fear of lack of capacity to supply peak demand. Despite widespread publicity, including the campaign challenged being aired regularly on television, the campaign only managed to encourage a 15% reduction in household energy use.”

Also, with the projected $1 billion to be generated in carbon tax revenue in the first five years[iv], the Singapore government also has the opportunity to extend the mileage of their efforts on climate action. Prof Scott reasons that, if the government commits to channeling the revenue from carbon tax into campaigns to further encourage energy conservation, or to support investment in more energy-efficient equipment across sectors, then the carbon tax may prove even more effective in reducing energy demand and achieving environmental goals as part of the Paris Agreement.

 

Tobacco Excise Tax: The Lowdown
As indisputable as the effects of greenhouse gas emissions on the environment is the harmfulness of tobacco smoke on the human body. In this year’s budget, the government decided to hike the existing excise duty on all tobacco products by an additional 10% with immediate effect. With this, the tax on a typical packet of 20 cigarettes now works out to be around 60% before GST, according to the Ministry of Finance[v].

In increasing the tobacco excise tax, the Singapore government is again showing the same kind of efficiency in implementing the necessary policy tool to achieve its objective — this time to “discourage the consumption of tobacco products,” says Minister Heng.

Decades of research supports this move; the National Cancer Institute and World Health Organisation (WHO) both state, with statistical evidence, that increasing tobacco taxes and the price of tobacco products is “the single most consistently effective tool for reducing tobacco use”[vi]. Not only can a higher price point encourage current smokers to quit or smoke less, it can stop young people from taking up smoking, says Visiting Professor Tikki Pang of the Lee Kuan Yew School of Public Policy.

 

Not a Standalone Measure
While the WHO states in their media factsheet that, on average, a 10% increase in tobacco prices may lead to a 4% decrease in tobacco consumption in high-income countries, Singapore shouldn’t, and most likely wouldn’t, stop at this latest tax measure.

In the meantime, a concerted governmental effort is under way to further curb smoking in Singapore: the point-of-sale display of tobacco products has been banned[vii]; the Ministry of Health is considering legislating standardised plain packaging and enlargement of graphic health warnings[viii] on tobacco products; a Bill to raise the minimum legal smoking age from 18 and 21 has been tabled[ix].

 

A Progressive Approach to Policymaking
Like in environmental policy, measures against smoking should continue to grow in scope and reach. Beyond the purview of healthcare, Singapore’s National Environment Agency (NEA) has stepped in by progressively expanding smoke-free zones[x], something that Prof Tikki believes they should continue to do.

He adds that law enforcement also have an important role to play. “At the same time, raising prices of cigarettes may lead to increased smuggling and black-market availability, so surveillance may need to be stepped up.”

Agreeing on the necessity of a multi-pronged approach is Associate Professor Phua Kai Hong of the Lee Kuan Yew School of Public Policy. “The tax hike is just one way to discourage smoking. This serves more as a stop signal to people that smoking is not good for them”

“To be really effective, a multi-pronged approach should function as a complete traffic system, with an array of policy tools that serve as control devices to move a goal ever closer to its destination.”

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[i] http://unfccc.int/paris_agreement/items/9485.php

[ii] http://www.straitstimes.com/singapore/environment/carbon-taxes-how-other-countries-price-them

[iii] https://www.reach.gov.sg/participate/public-consultation/national-climate-change-secretariat/nccs/climate-change-strategy-and-carbon-pricing

[iv] http://www.businesstimes.com.sg/government-economy/singapore-budget-2018/singapore-budget-2018-singapore-to-slap-carbon-tax-from

[v] http://www.straitstimes.com/singapore/health/tobacco-tax-hike-may-not-cut-number-of-smokers-experts

[vi] http://pubdocs.worldbank.org/en/772321493843936672/1-Tobacco-Taxes-the-Poor-FJC-18-April-2017-Chaloupka-PLENARY-3.pptx

[vii] https://www.moh.gov.sg/content/moh_web/home/pressRoom/pressRoomItemRelease/2016/singapore-enhances-tobacco-control-measures.html

[viii] https://www.moh.gov.sg/content/moh_web/home/pressRoom/pressRoomItemRelease/2018/public-consultation-on-standardised-packaging-and-enlarged-graph.html

[ix] http://www.straitstimes.com/singapore/new-bill-to-raise-minimum-smoking-age-to-21

[x] http://www.nea.gov.sg/corporate-functions/newsroom/news-releases/smoking-prohibition-to-be-extended-to-more-educational-institutions-and-public-service-vehicles-from-1-october-2017