Analyzing Budget 2015 properly

By Donald Low

The Business Times has a good piece on the Budget, "Moving left? Let's set the context right" by Kelly Tay.

I agree with the writer: most of the MPs posturing and pontificating about fiscal sustainability simply don't understand how the Budget is presented. It is deliberately presented very conservatively - some revenues are excluded and some "expenditures" (such as the transfers to the endowment funds) really shouldn't be counted as expenditures.

This conservative way of presenting the budget balance was developed during the years when the government ran persistent surpluses. So it was in the government's interest then to try to understate the size of the surplus (or to overstate the deficit). This was meant to moderate the public's demands for more spending. I see that this conservative way of presenting the budget has now created the opposite problem: MPs mistakenly thinking that all this additional spending reflects an erosion of fiscal discipline.

The writer could also have highlighted the fact that the Singapore government doesn't borrow at all for spending - not even for capital spending. It pays for everything from current revenues (which includes the net investment return contribution). This is another example of extreme fiscal conservatism: it's like paying for your house without going into debt at all.

Third, all this hand-wringing about using more of the net investment returns (NIR) in quite unnecessary and almost entirely misplaced. The government doesn't borrow. In lieu of borrowing, it uses up to half of the investment returns from investing the country's past savings (or reserves). The principal is untouched.

Those MPs who think that using more of the NIR is problematic are effectively saying that they'd rather have this NIR ploughed back into our reserves and invested (almost entirely abroad). Given depressed interest rates globally (indeed, the global problem we face today is NEGATIVE real interest rates), that's quite a silly position to take. These MPs are effectively saying that the NIR should be invested in low (even negative) yield instruments abroad than be spent on our people today (although given how ignorant they are about fiscal matters, they probably don't realize this is what they're saying!).

Fourth, these MPs clearly suffer from the saliency bias.

The eye-catching Silver Support Scheme is most frequently highlighted as an example of the so-called shift to the left. Maybe so. But in terms of actual spending, it's a drop in the ocean - $350 million. That's just 0.1 percent of GDP. A 0.1% of GDP increase in social spending and these MPs are wringing their hands over fiscal discipline!? So why the disconnect?

I suspect it's because the Scheme is indeed quite significant - but not because of the scale of spending. It is significant because it signifies an admission by the government that, contrary to its assertions for most of the last 50 years, a significant segment of the Singaporean population won't be able to save enough for retirement on their own.

Meanwhile, fewer MPs point to the SkillsFuture Credit as an example of fiscal profligacy although the spending here is much larger than the Silver Support Scheme. Why is this?

I suspect it's because people generally assume that spending on skills and education represents a worthwhile investment while spending on the elderly represents consumption. Perhaps so, but given how much larger the spending for the SkillsFuture Credit is ($500 for every Singaporean above 25!), the scope for wastage and misuse (in the same way the PIC has been misused) is enormous.

A sensible guess would be that the wastage and leakage from the SkillsFuture would be much larger than with the much smaller Silver Support Scheme. That doesn't mean I don't support the SkillsFuture Credit, but it does mean that government ought to put more resources into monitoring how that credit is used than it should with the Silver Support Scheme. This is another example of the analysis and scrutiny that is missing from those MPs going on endlessly about fiscal sustainability.

Finally, there is something inherently flawed with the concept of sustainability.

If we think that there is a social need that should be met but that it cannot be financed sustainably by government, why should we think that the alternative - of having people finance those needs privately - would be more sustainable?

If government, with all its risk-pooling and demand aggregation capacity cannot finance that social need sustainably, it is almost certainly impossible that households would be able to do so. When MPs say that something cannot be financed sustainably by government, what's their alternative?

It cannot be those needs would be better financed by individuals or families. The only serious alternative is that those needs aren't financed at all, i.e. people cut back on their expenditures in areas such as healthcare, education or retirement spending.

I would like to see those MPs suggest concrete ways on how Singaporeans should cut back on their spending in these things since as a country we can't finance ever more of these things!

Mr Donald Low is Associate Dean (Research and Executive Education) at the Lee Kuan Yew School of Public Policy.

This article was first published as a note on Mr Donald Low's facebook page and TOC thanks Mr Low for the permission to reproduce the write up.