by Chris Kuan
Nobody in the world does fiscal conservatism the way the VVSPs (very very serious people) in the Singapore government does it. No debts, that is sinful. No deficits we must live within our means. Social spending must be limited, got very very slippery slope. Must always have surplus. Reserves must forever be going up, never mind it is more than 250% of Gross Domestic Product (GDP).
"Interest-Growth Differential and Debt Limits in Advanced Economies" is a typically dry and very cheem working paper from the International Monetary Fund (IMF) released in April. But in it, the IMF is basically saying everything the Singapore government and the fiscal conservatives around the world, tell you about government debt is wrong.
For advanced economies with progressive tax systems and reasonable debt management, if debt rises too high, defaults may never happen and their capacity for incurring debt can be infinite. The key is debt servicing – as long as debt can be serviced affordably, debt need not be paid down. It can be refinanced and the increase in Nominal GDP allows more debt to be incurred and refinanced so long as the cost of debt is below Nominal GDP over the long run. And indeed over the long run, cost of debt in advanced economies are below Nominal GDP by as much as 1.2 percentage point.
This paper follows last year paper in which the IMF opined that paying down debt (i.e. fiscal consolidation) is not the optimum fiscal stance vis a vis trade-offs in the economy. Before this, there is another paper regarding fiscal space – the amount of fiscal headroom a country (excluding reserves, Singapore has very very large fiscal headroom).
Be it as it may, the cumulative research in recent years ought to make us think about the pervasive macro-economic narratives of the Singapore economy. Principally and unsurprising the narrative is excessively one sided.
Little is made of the vast trade-offs in the pursuit of fiscal conservatism, the more extreme the conservatism the bigger the trade offs and Singapore's fiscal conservatism is extreme. The trade-offs? Lack of social protection, high inequality, excessive (than need be) dependence on external demand, lack of truly transformative investment for the future economy just to name a few.
In the meantime, the government refuse to use its enormous fiscal headroom to incur debt to invest in the economy and the welfare of the people (therefore wasting a key resource) runs a persistent surplus and accumulate reserves for an undefined tomorrow. And the Mainstream Media published letters that warned us about Greece as if we hold Greece not Switzerland as our standard for the VVSP in the government.