By Chris Kuan
Our constitutional arrangements in regards to the national finance may not be future ready. Yesterday, I mention that the budget debate should be about the fiscal space provided by the positive impact of the large excluded revenues and their recurrent nature in the reserves.
Here is a IMF definition of “Fiscal space – is a multi-dimensional concept reflecting whether a government can raise spending or lower taxes without endangering market access and debt sustainability”. This simple definition especially regarding debt sustainability ran against the government’s fiscal sustainability concept of surplus here, there and everywhere that we are drowning in surpluses.
Having fiscal deficits and debts do not exclude fiscal sustainability. Otherwise, there should only be 2 countries that would be rated AAA – Norway and Singapore. There are 9-10 others who either had deficits, neither long-term surpluses nor sovereign reserves. The amount of fiscal resources available is not, in the government’s narrative restricted to taxes and fees earned and the restricted contribution from the reserves. It includes a level of borrowing that does not endanger debt sustainability (i.e. ability to access markets).
According to IMF analysis, for Singapore, debt will need to rise by 193% before there is danger of default, 70% before caution is advisable. There are 9 other countries with even bigger headroom than Singapore – not all AAA rated. In other words, excluding the reserves, Singapore has headroom to increase debt by $280b or by 70% of GDP before caution is advised and many AAA rated countries have less headroom than us.
What this means is that Singapore has enormous fiscal space, probably the 2nd largest. Bear in mind excessive deficits are harmful but so are excessive surpluses because it means not enough is invested in the local economy and in the welfare of citizens. In Singapore, much of it is leaked externally through overseas investments.
A proper debate on fiscal sustainability should take all these factors into consideration. It should be to what extent the government can run an operating deficit to support increased social expenditures and the local economy given the contributions from the reserves not as the MPs would have it, more restrictions.
Norway has a more flexible approach, allowing an operating deficit of 8% of GDP. That again shows the enormous headroom available to Singapore. Deficit spending financed by debt should never be excluded from the debate especially when the cost of debt is low enough (to a AAA rated country) to be less than the marginal return to economic growth resulting from debt incurrence.
All these are critically important considerations in the new normal of no more than 3% GDP growth. Standing in the way, of course, is the constitution that:
- Forbid deficit spending
- Restrict the amount of earnings from reserves to be used for spending
But the constitution arrangements over national finances were built to safeguard the economic catch-up phase – it may not be future ready for a radically different Singapore. Excessive caution is as bad as excessive laxity.