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Singapore to tax sin instead of the wealthy

Elderly people gather to play a checkers game next to their housing area in Singapore
Roslan Rahman | AFP | Getty Images
Elderly people gather to play a checkers game next to their housing area in Singapore

Singapore's government appears to have stage-managed an enviable feat in its latest budget: combining increased social spending while avoiding a tax hike for the wealthy.

"Achieving quality growth and an inclusive society go hand in hand," Tharman Shanmugaratnam, deputy prime minister and finance minister, said.

The new social programs to support healthcare and education, combined with new measures to boost company productivity "will help average Singaporeans as well as those with lower incomes, improve their standard of living over time," he said.

(Read more: Cost of living a major worry for young Singaporeans)

While some of the spending expands existing programs, such as healthcare subsidies, others offer fresh funding, such as a 1,200 Singapore dollar (around $950) a year payment to families to help in covering the cost of care for disabled elderly relatives.

On the other end of side of the equation, the government is introducing higher duties on betting, tobacco and liquor.

Tobacco taxes will rise by 10 percent, liquor taxes will rise by 25 percent across the board and the betting duty rates will rise to 25-30 percent of gross bets at Singapore Pools, effective immediately.

(Read more: New jobs laws take bite out of Singapore food outlets)

"I'm…surprised that pressure on the government to squeeze more from wealthier households means higher sin taxes, rather than through wealth taxes, which were expected to be tweaked," Song Seng Wun, an economist at CIMB said.

The boost in social spending comes as the city-state faces increased discontent over social inequality and a rising cost of living. Despite exceptional levels of wealth in the Southeast Asian financial hub, it has among the highest levels of income inequality among the world's advanced economies.

Its Gini coefficient – which measures the degree of inequality within a country where zero is complete equality and one is maximum inequality – rose to 0.478 in 2012. By comparison, Denmark, among the world's most economically equal countries, had a Gini coefficient of 0.248 as of 2011.

(Read more: Can Singapore safely deflate its property market?)

Rising healthcare costs have been a particularly touchy issue. By international standards, government healthcare expenditure in Singapore is low, with out-of-pocket expenses comparatively high. The country's healthcare expenditure stood at an estimated 1.5 percent of gross domestic product (GDP) in 2013, far below the average of 7.7 percent in high-income economies as of 2010.

Economists say it is a balancing act for the government: showing that it is keen to address wealth inequality while maintaining the country's appeal to foreign businesses on which it relies to fuel economic growth. This is particularly important given the population's aging demographics.

Some of the new healthcare funding will come from plans to increase employer contributions to workers' medical savings accounts. The government plans to pick up at least part of the tab for this increase for the first year, to ease the transition for companies.

(Read more: Do rising Singapore bankruptcies signal trouble ahead?)

Analysts don't expect the increase to the employer contribution – essentially raising corporate taxes – will affect Singapore's competitiveness compared with Hong Kong.

"The corporate tax rate is still among the lowest in the world," said Irvin Seah, senior economist at DBS. In addition, the government spending to increase worker productivity, in part through additional education and training spending, could be a boon, he noted.

"If you have a more productive workforce, it will be a draw for companies because it can enhance the overall proposition for investors," Seah said.

(Read more: Higher wealth taxes on the cards for Singapore?)

George McFerran, managing director for Asia-Pacific at eFinancial Careers added companies may try to offset the cost in other areas. "We might see that passed on to employees in bonus reductions or wage slowdowns. I think companies' hiring plans are much more strategic, so I don't think it'll have an enormous impact (on hiring decisions)."

In addition, McFerran believes that had the government increased wealth taxes, it would have hurt its competitiveness against low-tax Hong Kong.

All of the new spending will push the county to a projected 1.2 billion Singapore dollar (around $950 million) budget deficit for the next fiscal year, or 0.3 percent of gross domestic product, compared with the previous year's S$3.92 billion surplus.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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