Does increasing social spending mean higher taxes?

By Leong Sze Hian

I refer to the article "Social spending – where will money come from?" (Straits Times, Sep 4).

How much total reserves?

It states that

"If you add the three pools of reserves up, you get about $800 billion. A very modest 2 per cent return on that comes up to $16 billion a year.

The Net Investment Returns (NIR) contribution last year was $7.91 billion. And even if we assume that the NIR contribution last year had hit the 50 per cent cap, activating the other 50 per cent of NIR would mean an additional $8 billion to the Government".

Only 2% return on reserves?

Since the total sum of Singapore's reserves is a secret, even if we assume that the above conservative estimate of $800 billion is correct, 50 per cent of the NIR assuming an average annualised return of say five per cent, would be about $20 billion.

Temasek 17%, GIC 6%, but NIR 2%?

This estimated NIR is not unrealistic, given that Temasek's and GIC's annualised returns have been reported at 17 (S$ terms) and around six per cent (US$ terms), respectively.

So, even if we spend a lot more on social spending, just the NIR alone may be sufficient, without even talking about the huge budget surpluses in the past, with about nine out of every 10 years in surplus.

Secrets of Singapore?

Of course, the fundamental questions as to why the percentage of the NIR used in a year, the sum of total reserves or the annualised return on the total reserves are a secret, remain.

Spend more, tax more?

As to

"As Prime Minister Lee Hsien Loong said in his Aug 26 National Day Rally speech, “nothing falls from heaven”.

So taxes will have to go up eventually to fund higher social expenditures – “not immediately” but within the next 20 years.

Annual health-care spending will double to $8 billion over the next five years. This year, the Government introduced the permanent GST Voucher, which pays out a combination of cash, conservancy rebates and Medisave top-ups, with more for older and lower-wage Singaporeans, to offset increases in the goods and services tax. This will cost the Government $680 million this year.

Also formalised in 2007 is the Workfare Income Supplement, which supplements low-wage workers’ income with cash and Central Provident Fund (CPF) top-ups. This cost the Government $260 million last year.

NIR alone enough for extra spending?

Plans are also under way to spend $60 billion over the next 10 years to improve the transport system. Even adding all of the above comes up to a total of only about $15 billion a year.

Don't include current expenditure as additional spending?

However, on closer scrutiny, one would realise that the above amounts includes current expenditure that we are already spending. So, the additional expenditure is actually only about $10 billion a year.

As explained above, the NIR alone may be about double this additional expenditure in a year.

Thus, the consistent rhetoric that if we spend more means we have to raise taxes does not seem to hold water, not to mention that we have so far not spent significantly more relative to revenue in the last decade or so.

Accounting treatment of Budget surplus?

With regard to

"But the Government also spent $8.58 billion of special transfers on programmes such as Workfare, and top-ups to various endowment funds, such as the Medical Endowment Fund"

This may be a fundamental issue with the way we determine our Budget surplus or deficit, because almost all countries would fund the social expenditure as an expense every year, instead of Singapore's never-ending annual transfers to top-ups to the various endownment funds. I understand that an arbitrary four per cent of an endownmwnt fund a year, is then used to fund MediFund, Workfare, etc.

The result of this may be that the Budget surplus may be significantly under-reported, compared to other countries.

If we change to what other countries do, there may actually be a lot more money that we can spend on social spending, on top of the NIR explained above.