Internal and External Impact of a Corporate Tax Rebate and a GST Increase on Singapore

Answer

The two changes — a higher corporate income tax (CIT) rebate (effectively a fall in a direct tax) and a future rise in GST (an indirect tax) — pull the economy in opposite directions. Using the AD/AS framework, their internal impact falls on growth, unemployment and inflation, and their external impact on the balance of trade. The thesis is that the two measures’ internal effects largely offset, separated mainly in time, while both tend to worsen the balance of trade externally.

Internal impact of the CIT rebate — expansionary. A higher CIT rebate raises firms’ post-tax profits, encouraging investment $I$. As a component of aggregate demand, higher $I$ raises AD; with spare capacity the multiplier produces a multiplied rise in real GDP, delivering actual growth and lower demand-deficient unemployment.

Near full employment this could cause demand-pull inflation, but the risk is low in Singapore: a high marginal propensity to save (compulsory CPF) and to import gives a large marginal propensity to withdraw and hence a small multiplier, $k = 1/MPW$. Over the longer run the extra investment raises the capital stock and potential output (LRAS shifts right), so actual and potential growth rise together — non-inflationary sustained growth.

External impact of the CIT rebate — worsening balance of trade. Higher post-tax profits also attract FDI, raising demand for the Singapore dollar and causing it to appreciate. With appreciation, exports become dearer in foreign currency and imports cheaper in domestic currency; if the Marshall–Lerner condition holds, net exports $(X-M)$ fall and the balance of trade worsens.

Internal impact of the GST rise — contractionary. A higher GST raises firms’ costs of production at every output level, shifting short-run aggregate supply left. Real GDP falls (negative growth), demand-deficient unemployment rises, and the price level rises — tax-push (cost-push) inflation.

External impact of the GST rise — worsening balance of trade. Higher production costs raise the price of Singapore’s exports. Because export demand is price-elastic (many global substitutes), the quantity demanded falls more than proportionately and export revenue falls; meanwhile consumers switch to cheaper imports, raising import expenditure. Net exports $(X-M)$ fall and the balance of trade worsens.

Judgement. Internally, the two measures offset: the CIT rebate is expansionary, the GST rise contractionary, so the net internal effect is modest and turns chiefly on timing and magnitude. The rebate took effect in 2018, so its growth and employment gains come first, while the GST rise (2021–2025) delivers its contractionary effects later — and the demand-pull-inflation risk from the rebate is small given Singapore’s small multiplier and rising LRAS. Externally, however, both measures point the same way — a worsening balance of trade — through currency appreciation and lost export competitiveness respectively. The defensible overall verdict is that the package is, on balance, internally benign in the near term (growth-supporting, low inflation risk) but externally adverse, and that the GST revenue raised later serves a distributional purpose — funding redistribution toward inclusive growth — rather than a purely stabilising one. The net assessment therefore depends on the time horizon and on how the additional GST revenue is deployed.