Reflections on Singapore reserves with changes to Norway GPF

Reflections on Singapore reserves with changes to Norway GPF

By Chris Kuan
The news that there will be changes in Norway’s Governance Partnership Facility (GPF) operating governance is a mine of information in regards to the way we should view GIC (Singapore’s investment company) and the contribution of reserves to the Singapore government’s budget.
First off. The rule change which allows the GPF to increase allocation to equities from 60% to 70% of its assets nearly mirrors how GIC is already investing, correlating to a reference portfolio which is 65% equities and 35% fixed income. GPF and GIC are broadly similar.
Second and more importantly, the real rate of return by which the Norwegian government is permitted to draw on the earnings into the budget is reduced from 4% to 3%. This is sensible in view of the global secular shift to lower returns, We are still at 4% in Singapore. However, the crux of the matter is that the Norwegian government can draw up to 100% of the real returns, that means if GPF earns a real return of 3% – the entire amount is available for spending. In contrast, the Singapore government only draw up to 50%.
Third. If not for the contribution from the GPF, the Norwegian government runs a fiscal deficit of 8% of GDP. The contribution comprised 20% of the total budget.
In 2016, the Singapore government drew S$14.7b from the reserves. Without this, the overall budget is a deficit of 2.8% of GDP instead of a surplus of 0.8% of GDP, excluding the unreported surpluses from land sales and retained earnings in the reserves. The S$14.7b contribution from the reserves equal 20% of the total budget, similar to Norway.
In both the cases of Norway and Singapore, the net addition to reserves exceeds the drawdown of the real returns on the reserves over the long run except for last year when a collapse in oil prices cause a net subtraction in Norway as oil revenues fell below the contributions from the real returns.
My conclusions are as follows.

1) The Singapore constitution rule that forbids a net fiscal deficit (again excluding surpluses from land sales and retained earnings) over a Parliamentary term is an unnecessary constraint given the recurrent nature of the non-reported surpluses,

2) that the contribution from our reserves restricted at 50% of the real return already make up 20% of the total budget does point to untapped revenue sources, e.g. taxes on capital income and higher rates on upper quintiles of income earners

3) following the Norwegian example, there should be plenty of fiscal space by increasing the permissible drawdown from 50% of the real returns to 100%. In other words, there is a lot of room to run a much bigger overall fiscal deficit (again excluding the recurrent additions to reserves).

As noted by others, there are plenty of untapped fiscal resources available to the Singapore government for the implementation of a meaningful social safety net and the alleviating of financial risks to Singaporeans, in particular pensions and healthcare.
Rules on deficits and contributions from the reserves are made for an economy and socio-economic imperatives of a time far different and less complex than today.
In view of the low global rate of returns, in light of social needs, there is little efficacy in retaining the remaining 50% of the earnings for the sake of increasing the reserves when land sales of non-recourse leases are recurrent.
Funding an increase in social expenditures help achieve buy-in from Singaporeans that they benefit directly from the reserves.

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