SINGAPORE - Rising healthcare costs are expected to drive up government spending in the years ahead.

It is expected to increase from about 18 per cent of gross domestic product (GDP) now to 19 per cent to 20 per cent in the financial years (FY) 2026 to 2030, and possibly exceed that by FY2030, a Ministry of Finance (MOF) paper said.

The current total revenue, which comprises operating revenue and Net Investment Returns Contribution, is lower, at about 18.5 per cent of GDP. This is not enough to cover the projected increase in government spending.

To help close this gap, tax changes announced in Budget 2022 will contribute about 0.7 per cent of revenue.

The new projections up to FY2030 were part of an occasional paper looking at the fiscal implications of the medium-term challenges facing Singapore that was released on Wednesday.

While the authorities said previously that the Budget 2022 tax changes were meant to cover the increase in healthcare and social spending costs, this is the first time detailed numbers have been pulled together to show how these moves are likely to ensure a more balanced budget.

The measures announced in 2022 include confirming the timeline of the goods and services tax (GST) hike from 7 per cent to 9 per cent, increases to the top marginal personal income tax rate, as well as changes to property tax and fees for those purchasing luxury cars.

The paper noted that the new projected numbers for expenditure and revenue assume current policy measures. They do not take into account possible future policy moves to enhance economic competitiveness or strengthen the social compact – which may require additional revenues – and hence are not meant to be precise forecasts or predictions.

“Instead, their value lies in providing the context for policy reviews or adjustments, and serving as a common starting point for discourse on fiscal policy,” stated the report.

Healthcare spending 

The projected increase in spending is driven primarily by healthcare costs.

These are likely to increase from about 2.3 per cent of GDP currently, excluding Covid-19-related spending, to 2.9 per cent to 3.5 per cent of GDP in FY2026 to FY2030, the paper said.

The lower end of the range assumes that cost management strategies are successful in moderating the rise in healthcare costs, while the upper end assumes growth stays the same as the past decade, said the paper.

It noted three major factors driving the increase in healthcare expenditure.

First, an ageing population means older patients are more likely to have multiple medical conditions and complications, and require more medical attention and longer hospital stays.

Between 2013 and 2018, the Ministry of Health’s expenditure on the long-term care sector increased from $296 million to $723 million.

Second, there are higher utilisation rates of healthcare, after adjusting for the impact of ageing. This is due to rising incomes, greater accessibility of high-quality healthcare services, as well as changing lifestyles and increased screenings that lead to earlier diagnoses of chronic diseases.

For instance, the prevalence of hypertension among Singapore residents, based on a standard population, rose from 19.8 per cent in 2010 to 31.7 per cent in 2019 to 2020.

Third, the cost per unit of healthcare has increased. Newer treatments that improve life quality and lifespan cost more per treatment, such as cancer drugs, on which public spending has increased from $110 million in 2016 to $275 million in 2021. The manpower costs of healthcare staff are also expected to continue rising.

To moderate the increase in healthcare costs, the paper said the Government has been making efforts to have patients treated in the most appropriate location by medically competent teams at the lowest possible cost. 

For example, the recently launched Healthier SG campaign means a pivot towards preventive care that could potentially moderate the growth of healthcare spending.

Ensuring more value for money, such as by negotiating better prices for drugs, could also bring down costs.

Rising expenditure will also stem from policies that the Government has already committed to. The Progressive Wage Credit Scheme and enhanced Workfare Income Supplement Scheme will cost more than $9 billion over FY2022 to FY2026. In addition, the annual spending on early childhood education within the next few years is expected to more than double, from around $1 billion in 2018.

These moves are expected to cost about 0.2 per cent of GDP each year, said the report.

Infrastructure spending

Infrastructure spending is also a substantial component of government spending and is expected to increase from about 4 per cent of GDP now to about 4.4 per cent of GDP by FY2026 to FY2030. 

But the fiscal impact is expected to remain at about 4 per cent of GDP. This is due to the Significant Infrastructure Government Loan Act introduced in 2021 to allow the Government to borrow to pay for major national infrastructure projects.

The paper also noted that on the whole, Singapore’s government spending is relatively small compared with other advanced economies. Economies such as France, Germany and Britain spend over 40 per cent of their GDP, while Hong Kong’s numbers are closer to Singapore’s at about 20 per cent, according to 2019 data.

“This reflects our focus on fiscal prudence and cost-effective spending. The Government intervenes upstream and invests for the long term to build capabilities and achieve policy outcomes with comparatively less spending,” it said.