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Associate Dean of LKY School: No need to increase GST if use 10% more from investment returns

by Vincent Low

Currently, under the Singapore's Net Investment Returns (NIR) framework, the government can spend up to 50% of the long-term expected real returns on the relevant assets (i.e, our reserves) managed by GIC, MAS and Temasek.

Associate Dean of LKY School of Public Policy, Donald Low, wrote on his Facebook page yesterday (19 Feb) showing that by increasing the current NIR spending limit of 50% to 60%, there would be no need to increase GST, which Minister Heng has just announced in Parliament.

Yesterday, Heng announced that Singapore's GST will be increased from the current 7% to 9% after 2020.

Proposal to increase the NIR spending limit from 50% to 60% to offset the need for GST increase

In his write-up, Mr Low noted that the size of the Budget surplus for FY 2017 is "stunning". "$9.6 billion is nearly enough to finance a large ministry, like the Ministry of Health," he noted.

He also noted that with the current rule of spending up to 50 percent of the NIR, it means our reserves are still growing quite considerably every year.

"The question naturally arises: why can’t we tap more of the net investment returns to finance increasing needs, instead of resorting to a GST increase?" Mr Low asked. "After all, what or who are we saving for, considering that future generations of Singaporeans are likely to be better off than the current generation of Singaporeans entering retirement."

The PAP government has argued against using 100 percent of the NIR. Heng said that if we did this, "the principal sum of reserves will stagnate over time, and the NIRC as a share of GDP will consequently fall as our economy grows".

However, just because 100 percent is not prudent doesn’t make 50 percent right either, Mr Low argued.

He said, "There’s nothing scientific about spending just 50 percent of the investment returns. Why not 60 percent, or even 70 percent? We’d still be adding to the principal of the reserves."

The NIR contribution is estimated to be $15.9 billion for this coming FY. Mr Low calculated that if the spending limit was raised to 60 percent, presumably the NIR contribution this year would be just over $19 billion.

"The additional $3 billion every year, increasing at the rate at which the reserves are growing, is almost exactly what the 2 percentage point increase in GST would yield—in perpetuity," he explained.

"So even if we accept that the projected increase in spending after 2021-2025 would require a revenue increase equivalent to a 2 percentage point increase in GST, the question is why doesn’t the Govt increase the NIR spending limit from the current 50 percent to, say, 60 percent instead?"

Who is Donald Low?

Mr Donald Low is Associate Dean (Research and Executive Education) at the Lee Kuan Yew School of Public Policy. Besides leading the School’s executive education efforts, he also heads its case study unit. His research interests at the School include economics in public policy, inequality and social spending, behavioural economics, public finance, organisational change, and governance and politics in Singapore.

Prior to his current appointment, Donald served fifteen years in the Singapore government. He held various senior position, including the director of fiscal policy at the Ministry of Finance and the director of the Strategic Policy Office at the Public Service Division. He also established the Centre for Public Economics at the Civil Service College of Singapore to advance economics literacy in the Singapore government.

Donald is the editor of Behavioural Economics and Policy Design: Examples from Singapore (2011), a pioneering book which details how the Singapore government has applied ideas from behavioural economics alongside standard economics in the design of public policies. His most recent book, Hard Choices: Challenging the Singapore Consensus (2014), raises searching questions about the long-term viability of many aspects of governance in Singapore, and argues that a far-reaching and radical rethinking of the country’s policies and institutions is necessary, even if it weakens the very consensus that enabled Singapore to succeed in its first 50 years.