SINGAPORE - The Goods and Services Tax (GST) is likely to be raised by two percentage points in Budget 2018 as Singapore's spending needs continue to grow, according to DBS senior economist Irvin Seah.

He expects a staggered hike implemented over two years to help cushion the impact on households.

His predictions follow comments by Prime Minister Lee Hsien Loong, who recently said that Singapore will be raising its taxes as government spending grows. This sparked speculation among economists and tax specialists about the format and timing of the tax increase.

Higher tax revenues are unlikely to come from raising corporate tax rates, given the need for Singapore's economy to stay competitive, Mr Seah noted in a report out on Tuesday. Personal income tax rates for top-income earners have also been recently adjusted.

This makes GST the top candidate, especially since Singapore's rates are relatively low compared with its regional peers.

"The GST is perhaps the most direct and effective tool in terms of raising tax revenue. It has a relatively broader tax base and it is also the second-largest source of revenue, just behind the corporate income tax," said Mr Seah.

"Hiking the GST is politically challenging given its regressive nature. In this regard, timing is crucial. With the next general election due in 2020, policymakers will have to act fast."

He estimates that a one percentage point hike would raise tax revenue of about S$1.6 billion to S$1.8 billion, equivalent to about 0.4 per cent of Singapore's nominal gross domestic product.

Singapore needs to hike taxes to meet growing needs, particularly in healthcare and infrastructure, Mr Seah said.

Singapore's Budget spending has been higher than operating revenues since the 2015 financial year. The primary deficit for the 2017 financial year, projected to come in at S$5.6 billion, could also be the deepest on record, he noted.

"Continuously widening deficits are not sustainable. This explains the need to find new sources of revenue and/or lower spending."