Budget 2026: Cigarette Taxes, AI, and the Shape of Singapore To Come
Every year, the Budget speech provides a glimpse of the governmentās priorities and what might be on the horizon for the public. This year, the focus is clearly on national resilience, which is a timely theme given the uncertain, edge-of-collapse world we're navigating.
As always, there are efforts to cushion the blow: vouchers, rebates, and other small forms of relief to ease the burden of rising costs. But thereās also a long-term vision in the form of the National AI Council, chaired by Prime Minister Lawrence Wong, signaling that AI is no longer just a buzzword for startupsāitās now a central piece of national strategy.
And then, there are the taxes.
In Singapore, taxes do more than just fund the government; they influence behavior by making certain choices pricier. In Budget 2026, we see this most clearly with a sharp increase in tobacco taxes, changes to corporate tax rebates, and adjustments to car ownership rules.
But beyond these changes lies a bigger question: What kind of citizens is the government nudging us to become in this volatile era? Health-conscious? Less reliant on cars? More prepared for the future? And who feels the weight of these shifts the most?
Manu Bhaskaran, a seasoned economist and partner at Centennial Asia Advisors, shares his thoughts on how these tax changes function as behavioral policy in Singapore. In this Q&A, he discusses who these taxes aim to influence, who might be left unaffected, and what they reveal about the stateās evolving views on responsibility, restraint, and citizenship.
What do the measures in Budget 2026 suggest the government is trying to communicate to Singaporeans right now? And is there an underlying message thatās being left unsaid?
The budget signals a focus on the long-term, particularly on adapting to AI. This marks a shift from last yearās focus on addressing immediate concerns through support measures like CDC Vouchers for households. Budget 2026 treats AI as an economic and strategic imperative that Singapore cannot afford to ignore.
What assumption do you think policymakers are making about AI that you find less convincing?
AI is a highly complex and evolving field. Even experts are uncertain about its productivity benefits and when they will be realized. Itās also unclear which sectors will benefit most or lose out. Policymakers are making their best guesses in a fog of limited knowledge.
One key policy focus is re-skilling the workforce, which is a step in the right direction. However, Singapore needs to make sure itās offering the right training programs and building a vibrant ecosystem of local firms that can absorb re-skilled workersāespecially since most Singaporeans work for SMEs.
What do the tax changes in Budget 2026 reveal about what the government wants Singaporeans to become in the next phase?
There are several notable tax shifts this year, including the corporate tax rebate and significant increases in "sin taxes" like tobacco duties.
Speaking of tobacco, the 20% hike in excise duty is a strong signal. Will it lead to meaningful behavioral change, or is Singapore already at a point of diminishing returns?
A steep increase like this will have an impact, especially since the previous hikes were 15% and 10%. It could also drive low-income smokers to seek out smuggled tobacco, which would likely increase smuggling.
However, the deterrent effects of higher prices will likely be felt strongly, particularly by younger Singaporeans who are already moving away from smoking.
Smoking rates have been steadily decreasingāaccording to the 2024 National Population Health Survey, only 8.4% of Singapore residents smoked daily, down from 8.8% in 2023, hitting an all-time low. Itās worth exploring whether illicit trade has played a role, but we must ask: are further increases in tobacco taxes worth the potential rise in smuggling and higher living costs?
What has worked, and what hasnāt, when it comes to using taxes to curb undesirable behaviors in Singapore?
It may be time for Singapore to reassess its reliance on price-based measures like taxes, ERP (Electronic Road Pricing), COEs (Certificates of Entitlement), and utility surcharges to change behavior. These costs are now some of the highest in the world.
For instance, do higher ERP charges and COE fees effectively reduce congestion? The evidence is unclear. Even if congestion has been reduced, does it justify the higher costs imposed on citizens?
We might have reached a point where these price-based measures are simply increasing the cost of living and business without yielding significant benefits. In my view, the government should audit these measures and assess their actual impact on the economy and consumer behavior.
Ideally, we need taxes that encourage positive behavior without imposing excessive costs on the economy.
Whatās the difference between taxing something harmful (like cigarettes) and taxing something aspirational (like car ownership)?
The distinction is more nuanced than it might seem. For transportation policy, we're not technically taxing car ownership per se; instead, policies like ERP and COE are aimed at reducing congestion and maintaining smooth traffic.
The challenge is to find more direct tools over time to address these policy goals rather than relying on indirect methods.
What unexplored policy tools might work better or more fairly in Singaporeās context? And why might policymakers be hesitant to explore them?
In the case of smoking, why not allow alternatives like heated tobacco and nicotine pouches, which have been shown to reduce health risks? These products could be regulated and taxed, offering a safer alternative to cigarettes.
To tackle congestion, why not consider raising vehicle parking fees? A more positive approach might be improving last-mile connectivity. Many people living in private estates find it inconvenient to access MRT stations. Public light buses, like those used in Hong Kong to connect far-flung housing estates to metro stations, could be a model worth exploring.
Should sin taxes be based on risk, not just moral disapproval?
This is an interesting argument with merit. However, the reality is that policy decisions are often influenced by moral considerations, not just risk. For example, prison sentences not only deter crime but also signal societyās moral stance on actions like spousal abuse or scams targeting vulnerable people.
Societyās views evolve over time. For instance, we once banned gambling outright, but now itās allowed under strict regulation. Similarly, attitudes toward smoking have changed, and the role of sin taxes reflects both a health-related and moral perspective.
