SINGAPORE, Feb 24 ― Singapore took another step toward Western welfare systems and further from low-tax models like Hong Kong.

With the first increase in its top income tax rate in decades, the Southeast Asian city’s budget yesterday revealed policy makers’ latest step to address a widening wealth gap. While the richest 5 per cent face higher levies, beneficiaries will include senior citizens who will get bigger payouts.

The move, which still leaves Singapore with among the lowest tax rates in developed nations, comes amid speculation the ruling party that’s dominated the city in its 50 years since independence may call an election this year. The budget of Prime Minister Lee Hsien Loong’s government attempts to address rising discontent over living costs and a widening wealth gap after the last vote showed diminishing support for his party.

“Getting the wealthy to share some of the burden is probably preferred to a goods and services tax increase that affects everyone,” said Wai Ho Leong, an economist at Barclays Plc in Singapore. “It sends the right signal that tax increases are likely to be part of the mix of revenue boosting measures they will use to fund these spending increases.”

Singapore will raise its top marginal tax rate to 22 per cent from 20 per cent, while others among the top 5 per cent of earners will also see a bigger bill, Finance Minister Tharman Shanmugaratnam said in his budget speech in Parliament. The move restores the top tax rate to the level it was a decade ago, when the island cut it to attract more foreign executives.

The Singapore dollar was little changed at 1.3596 against the US currency as of 10.21am local time. It slipped to a near two-week low of 1.3633 yesterday as the budget was unveiled. The spread between between two-year and 10-year interest-rate swaps narrowed to 106.5 basis points, the tightest since February 13, from 110 basis points yesterday.

Living expenses

In addition to previous measures to help needy Singaporeans, the finance minister unveiled a benefit for low- income elderly from the age of 65 who will receive a payout every quarter to help with living expenses.

“The personal income-tax adjustment is one example of how we are trying to broaden the tax base, and also have an element of redistribution and equity,” Singapore’s Second Minister for Trade and Industry S. Iswaran said in a Bloomberg Television interview with Haslinda Amin today. “So keep the burden on the middle-income group low, and try and do redistribution transfers towards the lower income group.”

It’s the first increase in the highest marginal personal tax rate in the last 30 years, said Ajit Prabhu, a tax specialist at Deloitte Singapore. Hong Kong charges a flat rate of 17 per cent for income exceeding HK$120,000 (RM56,150). Singapore’s adjustments will affect those making at least S$160,000 annually, and will apply starting with income earned in 2016.

Staying competitive

“We have assessed that it should not significantly dent Singapore’s competitiveness,” Shanmugaratnam said. “Tax rates are not the only way we stay competitive.”

The move to increase tax rates is part of efforts to avoid sustained annual budget deficits as policy makers boost spending on infrastructure and health care. The government is also tapping the capital gains of state investment company Temasek Holdings Pte for added revenue.

“We must remain an attractive place for world-class teams to be in,” Shanmugaratnam said, adding that the international race for talent is real.

The government will extend about S$7.5 billion to businesses over three years to help them cope with rising costs, and making changes to the national pension system to benefit older and middle-income workers, he said.

Overseas labour

The government will defer increases in foreign worker levies to give companies more time to adapt to years of restricting the supply of overseas labour, the finance minister said. The next scheduled increase was to take effect in July this year, and will now be postponed to at least 2016.

Prime Minister Lee has tightened the inflow of foreign workers since 2010 as he encourages companies to boost productivity while reducing their reliance on cheap overseas labour. The move has raised business costs, prompting some manufacturers to move operations off the island.

“While we are adjusting the pace of our foreign worker measures, we are not changing the direction,” Shanmugaratnam said. “It remains crucial for Singapore that we restructure towards reducing our reliance on manpower, and find new and more innovative ways of doing business.”

The government will spend S$26 billion in the next five years on public transport, while expenditure on health care will exceed S$13 billion in 2020. It will provide personal income tax rebates worth S$717 million this year, while raising duties on gasoline for the first time in more than a decade.

Social spending

“I don’t think the aim of the taxes is to punish the rich,” Vikram Nair, a member of parliament from the ruling People’s Action Party, said in an interview after the speech. “We have increased social spending this year and we anticipate increased social spending for many years to come and that has to be paid for in some way.”

Singapore’s budget deficit for fiscal year 2014 was about S$130 million compared with an initial estimate of S$1.2 billion. The last time it had a shortfall was in 2009, when it took steps to stimulate the economy during the global financial crisis.

Shanmugaratnam projected a gap of S$6.7 billion in the fiscal year starting April 1, or about 1.7 per cent of gross domestic product. Singapore won’t draw on past reserves to fund the deficit, he said.

The administration is constitutionally required to keep a balanced budget over its term in government. The current one was elected in 2011, when Lee’s ruling party won with the smallest margin of the popular vote since independence in 1965. The next elections must be held by January 2017.

Lee made his first appearance in Parliament after he underwent surgery last week to treat prostate cancer. ― Bloomberg