by Vincent Low
Retired banker Chris Kuan, who spoke at forums organized by oppositions on Singapore’s reserves as well as the estimated long-term return of our reserves, made several postings on his Facebook page recently to rebut some of the budget speeches made by PAP MPs.
Not surprisingly, many MPs from the People’s Action Party spoke on Tuesday (27 Feb) to support the government position of capping the limit of the NIR framework to 50 per cent. That is to say, only up to 50% of the expected long-term real returns from investing our reserves will be used by the government for budgetary spending.
Academic like Donald Low has estimated that by increasing this limit from 50 to 60%, there would no necessity for the government to increase GST, which burdens the people considerably.
MP Liang Eng Hwa (Holland-Bukit Timah GRC) said that the 50-50 split is “a fair balance” between current and future generations. “Rather than use more of the returns for current spending, we should let the power of compounding returns do the work by re-investing the other 50 per cent so as to grow the principal amount of the reserves and contribute to bigger value of the NIRC (NIR contributions) in the future,” he said.
“It is always tempting to go for the short-term painless solution. Our forefathers were resolute in not taking this easy path and so should we,” added Mr Liang, who is also chairman of the Government Parliamentary Committee (GPC) for Finance and Trade. “Going forward, we need bigger NIRC to keep our tax system competitive and importantly, progressive as well.”
Echoing Liang, MP Henry Kwek (Nee Soon GRC) described Singapore as a “small boat in a large ocean”. He cited the example of how Singapore’s reserves served as “an anchor” that provided “much needed stability” during the global financial crisis in 2008.
Amid lingering risk factors, “the only certainty is that bigger and larger financial storms will eventually come to our shores”, Kwek added. “If our reserves fail to keep up with our growing economy, maybe not at the next crisis but a few crises down the road, our reserves may not be of a sufficient size to anchor the bigger Singapore economy then.”
MP Foo Mee Har (West Coast GRC) also cautioned that the high dependency on investment returns represents a “significant vulnerability” for Singapore given the volatility that comes with any investment portfolio.
She noted that NIRC has more than doubled from $7 billion in FY2009 to an estimated $15.9 billion in FY2018, making it the largest contributor to the Government’s coffers, above any single tax. “To ensure a sustainable fiscal position, there may be a need to consider a limit upon which Government spending can tap NIRC to avoid over-dependency,” she said.
Re-investing returns not the only way to grow reserves
Responding to Liang, Chris wrote on his Facebook page saying that reinvesting returns is not the only way to grow our reserves, which Liang seems to be so fixated.
Chris wrote, “Seem all very reasonable except the utter and complete fixation of reinvesting the returns as if this is the only way to grow the reserves.”
“Land sales revenues and risk premium earned from investing over $400b of debt proceeds owed to CPF and holders of Singapore Government Securities, never seems to see the light of day in budget debates year after year,” he lamented. “It is always about reinvesting the returns to grow the budget and this in face of repeated warnings from our own reserves managers that returns from global assets will remain low.”
“Repeat – we can spend more of the long term inflation adjusted returns from the reserves to help the vulnerable, the poor and those who fall through the cracks and yet have what Mr Liang wishes which is ‘Going forward, we need bigger NIRC to keep our tax system competitive and importantly, progressive as well’,” he added.
Over exaggeration by MP Kwek
Responding to Kwek’s speech about “small boat in a large ocean” and the reserves served as “an anchor” which provided stability during the 2008 financial crisis, Chris noted that the stabilization package is actually only a tiny portion of our total reserves. This is despite that the 2008 financial crisis was supposed to be a global meltdown.
During the financial crisis, PM Lee discussed with President Nathan on the need to draw down from the reserves. A formal request was made to Nathan on 19 Jan 2009 and the letter arrived at the President’s Office on 20 Jan. Nathan quickly gave his approval on 21 Jan, all within 3 days from the time the government notified Nathan. $4.9 billion was drawn down with the majority being used in the Jobs Credit scheme. In the end, the final amount drawn by the government was $4 billion and this amount drawn was returned back to the reserves in 2011.
Hence, in actual fact, only 0.4% of our reserves (assuming it is $1 trillion) have been used to “anchor” the 2008 financial crisis, which was returned back in 2011. Kwek has essentially over exaggerated the matter.
“So again how much does the government wants to deny citizens’ welfare and how much does it want citizens to sacrifice to keep growing the reserves?” Chris asked.
“It is easy to talk about ‘anchor’, ‘caution’, ‘prudence’, ‘stability’ when you do not actually put any numbers to what you are saying and you do not even acknowledge the socio-economic consequences of this relentless reserves accumulation,” he added.
“This kind of speech is more pure wind than solidity, mere decorum for the most important day in the Parliamentary calendar.”
Ms Foo forgets that NIRC is based on long term returns
With regard to Foo’s caution that high dependency on investment returns from the reserves represents a “significant vulnerability” since there would be volatility in any investment portfolio, Chris countered that volatility is on a year to year basis.
“The NIRC on the other hand is based on long term EXPECTED real returns, that is to say it is based on the reserves managers’ expectation of what the long run investment performance would be, short of year to year volatility,” Chris pointed out.
“Ms Foo is a banker but I would be harsh if I say she should know this – she is probably not in capital markets or asset management,” he added.
Relentless reserve accumulation practised by the PAP government
The relentless reserve accumulation practised by the PAP government is not free. Ultimately it comes from the sacrifices from Singaporeans through paying all the direct and indirect taxes plus high property prices which include the high land prices sold by the government.
Chris said, “The PAP keeps telling Singaporeans there is no free lunch. Indeed so, there is also no free lunch when it comes to this relentless reserve accumulation – there are sacrifices, denial of welfare, acceptance of inequality among others.”
“Whatever the MPs say about prudent budget, fiscal sustainability and not spending more of the NIR, they should at least acknowledge the socio-economic costs of their fixation,” he added. “That will at least make the Budget debate more interesting for Singaporeans to make informed value judgment.”
Retired Chief Ecnomist of GIC agrees with Chris Kuan
Retired Chief Ecnomist of GIC, Yeoh Lam Keong, agrees with what Chris has written. Commenting on Chris’ Facebook page, Mr Yeoh praised Chris, “Well said and explained Chris Kuan!”
“The reserves grow annually not just from investment income, but also from accumulated budget surpluses, massive land sales, and sterilized balance of payments surpluses (also consistently very large fractions of GDP every year),” Mr Yeoh noted.
“But to be fair to the honorable members of the PAP house, they do not have access to this information which in most other advanced countries would be public knowledge and information.”
Mr Yeoh questioned that not knowing the numbers behind our fiscal resources, how can there be intelligent public (or even deep official) debate about what important social policy Singapore can afford, or what extra taxes and revenues might be needed to sustainably fund them?
As such, Mr Yeoh deemed that Singapore is just in a state of policy drift and is unable to plan for or consistently implement and fund long term future adequacy and readiness in various policies like healthcare, social security, public housing, etc.
“How then do we generate the open and rigorous public discourse needed to make intelligent policy decisions about such key areas that will determine our national economic security and social well being or make difficult policy trade offs and choices with social consensus, cohesion and conviction?” he asked.