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Source : centralbussinessdistrict.com.

Use returns from reserves instead of raising tax rates

by Chris Kuan

Going by the Prime Minister Lee Hsien's speech, tax rates will inevitably be raised to meet increasing needs from investments in the economy and the infrastructure, and from social expenditures.

By saying so, the PM has also inevitably deliver yet another bodyblow at an enduring governing myth – that we can have low taxes plus good level of investments on the economy/infrastructure and yet pursue extreme fiscal sustainability in the nation's finances, all at the same time. No, we cannot. It is increasingly obvious.

But of course, old habits die hard. So the solution to increasing expenditures is to raise taxes when the most obvious solution is not to raise taxes but to amend the constitutional rule allowing the sitting government to tap the investment returns from our reserves to fund expenditures.

Presently, Net Investment Returns Contribution permit the government to tap 50% of the expected long-term inflation-adjusted returns earned from reserves. An amendment to move to 100% release around $14b, 3.3% of GDP, nearly 20% of this year's expenditures into the budget.

That's twice the amount the government already spent on healthcare. For those who buy narratives without thinking, no this will not deplete the reserves because the reserves themselves are untouched, only the earnings are used.

Furthermore, the reserves can continue to increase because of land sales and most importantly because public housing leases revert to the state at zero after 99 years (industrial leases much shorter).

Of course, to move to 100% use of the real returns (like in Norway), an amendment to the constitution is required. But here is the question - the government is quick to amend the constitution over the Elected Presidency, so why not on this serious matter of tapping more from the reserves to avoid a tax hike on citizens?

Moreover, why are we not having a debate over the size of the reserves, the betterment of social outcomes we can achieve with the returns and the negative socio-economic consequences of the extreme fiscal sustainability that led to huge surpluses going into the reserves?

Certainly, the reason is when the PM talks about "trust:, it is as if he is directing a one-way traffic as it seems he does not trust having open discussions with Singaporeans