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Understanding the budget

by Chris Kuan

Not an Instagram influenza, am too old for it. Here is my bit to explain the various levels of the budget as requested by a number of you.

The starting level is the total amount of revenues and the total amount of expenditures.

The former are the taxes, charges and duties. The latter consist of the Operating Expenditures i.e. what the government spends to run the state and Development Expenditures, i.e. what the government invests in developing the economy. The Revenues minus the Expenditures = the Primary Surplus / Deficit. (in 2017 budget, 68.67b - 71.39b = -5.62b)

At the next level, the government accounts for expenditures called Special Transfers going into various trust funds and endowments such as CPF Medisave top-up funds, GST Voucher Funds, Service and Conservancy Funds, Wage Credit Scheme. The Primary Surplus / Deficit minus Special Transfers = the Basic Surplus / Deficit. (-5.62b - 2.57b = - 8.19b)

At the Overall Budget Level, the government subtracts top-ups for endowment and trust funds e.g. Changi Airport Development Fund and National Research Fund.

Then the government adds the Net Investment Return Contribution, the inflation-adjusted earnings from the reserves the Constitution permits the government to spend. Basic Surplus / Deficit minus Top-ups to Trust Funds and Endowments plus Net Investment Return Contribution = Overall Budget Surplus Deficit (-8.19b -4.01b + 14.11b = + 1.91b)

Notice 3 glaring omissions on the revenue side - nowhere are land sales revenues, the remaining 50% of inflation-adjusted earnings from the reserves and the excess earnings from investing the proceeds of debt issued to the Central Provident Fund (CPF) and bond investors accounted in the budget.

On the expenditures side, those resulting from transfers and top-ups to trust funds and endowments do not mean the amounts are spent in the fiscal year as most of it is accrued over many years e.g. 20 years for the PG Fund. Hence actual disbursement is less than the expenditures accounted in the budget.

Furthermore, the government has a nasty habit of referring to whichever level of the budget process according to the narrative it wants to put out.

For example, if it wants to talk a good book about how prudent and fiscally sustainable it is, the government refers to the Overall Budget Surplus / Deficit which is nearly always a surplus. A deficit year usually means the government send out a pre-election goodie bag by spending the accumulated surplus earlier in the Parliamentary term.

But when it wants to warn the voters not to expect too much handouts, then the government refers to the Basic Surplus / Deficit which in the last decade or so is nearly always in a deficit (offset at the Overall Budget level by the Net Investment Returns Contribution). As said, the Budget is an intensely political process.

In view of the 3 levels of the Budget, the easy assumption is that major items omitted from the Budget, i.e. land sales revenues and investment earnings from reserves, are not disclosed. But fiscal and macroeconomic matters are neither simple not straightforward. They are disclosed, sort of, in the Budget process within the estimates of revenues and expenditures.

On page 3 of the Revenue Estimates after going past 2.5 pages of taxes, charges, fees, duties, fines and forfeiture, we come to the line item, Investment and Interest Income which provides estimates for interest and dividends earned, 10.5b for 2017.

The number appears low but is not surprising because interest and dividends generally form much smaller part of total investment returns which includes realized and unrealized gains and losses from financial assets. These are missing but yet the Net Investment Returns Contribution is based on investment returns, not just investment and interest income.

On the same page, one line item down is Capital Receipts - you will find Sale of Land as a sub item, 8.2b for 2017. It is rather surprising to me that in the next page, this amount is reported under the Ministry of Law, not the Ministry of Finance (MOF) or the Ministry of National Development whereas the Investment and Interest Income are correctly reported under the MOF.

Why are these items omitted from the Budget? The answer is simply they are considered as already part of the reserves. In this regard then the revenue derived from land sales becomes not as revenues as most of us considered it is but as a movement within reserves, i.e. from one type of reserves, land, to another type of reserves, financial.

The problem I have with the government view of the reserves is that the government does not put a market value to its land holding or at best account it at cost. As such, the profits realized from selling the land at market price from cost price should be considered as revenues not simply as a movement within the reserves.

The government is again having it both ways. Needless to say, according to the International Monetary Fund, this way of reporting land sales together with the investment earnings is non-compliant to its global standards.

This article was first published as two Facebook posts and reproduced with permission