Budget 2018: Why Calls To Use More of Singapore’s NIRC Make No Sense
Last week, Parliament concluded the Committee of Supply Budget 2018 debates. If you happened to be on an Antarctica expedition and still not know what is happening, you can catch up on Budget 2018 announcements and views on DollarsAndSense.
Perhaps more interesting than the debates that happened in Parliament were the debates that the average Singapore citizen is having both online and offline. The knee jerk reaction of pundits whenever any tax increase is announced is to point out ways to make up for the expected revenue gain. In the past, people have suggested cutting defence spending and minister salaries.
This year, the idea of using a larger proportion of proceeds from investing Singapore’s reserves, under the Net Investment Returns Contribution (NIRC) framework, has caught on.
It is easy to see why. This appeals to both our self-interest and altruistic sides: no one likes to pay more taxes and we all feel for our lower-income compatriots.
Here at DollarsAndSense, we hope to clarify misunderstandings we see expressed online and offer a dollars and cents perspective on the debates.
What Was Announced
One of the headline announcements in Budget 2018 was that GST will be raised from 7% to 9% sometime between 2021 to 2025.
The government’s case for raising taxes was to fund projected increases in spending in the years to come, in particular, for healthcare and infrastructure.
The impending challenges of Singapore’s ageing population is well-known. It is also a fact that healthcare expenditure has been going up – both public spending by the government as well on an individual level. There is a concerted, multi-pronged effort to reign in these costs, such as changes to full riders for integrated shield plans.
On the infrastructure front, Singapore is investing for the future to make it more attractive for companies to do business and create good jobs here. Multi-year major endeavours projects include the Deep Tunnel Sewerage System (for recycling water), overhauling the existing electrical grid network, transportation upgrades, and rejuvenating towns and neighbourhoods.
What You Need To Know About The NIRC
Napkin calculations (which are the kind of math you can show on Facebook posts) seem to show that by using a larger portion of the NIRC, we can avoid having to increase the GST. Let’s look at what the NIRC is actually made up of before making up our minds.
As you probably know, Singapore’s reserves are being invested by three entities: The Monetary Authority of Singapore (MAS), Government Of Singapore Investment Corporation (GIC), and Temasek. Their investment parameters differ, but the main goal is to generate returns on Singapore’s reserves to preserve its value, and to provide Singapore with recurring income for spending today or investing for the benefit of current and future generations.
Each year, the Net Investment Returns Contribution (NIRC) to the budget consists of two parts:
1) Up to 50% of the Net Investment Returns (NIR) on the net assets invested by GIC, MAS and Temasek; and,
2) Up to 50% of the Net Investment Income (NII) derived from past reserves from the remaining assets.
NIRC is currently the largest single source of government revenues:
Source: Budget 2018
As the policy stands today, the government can spend up to 50% of each year’s NIRC, while the rest will be added to the reserves and reinvested.
Why Not Use More of NIRC?
What is important to note is the Net Investment Returns (NIR) portion of the NIRC is made up of actual income as well as long-term expected returns from past reserves. Apparently, expected rates of return (and not actual investment income) are used “to provide some smoothness over the years in the amount of NIR that can be spent”. In other words, it gives a little more stability to revenues for government spending so you avoid having a situation where you have plenty of money to spend in a bull market, and then having much less money the following year during a bear market.
However, because the NIR consists of projected, unrealised profit, the government might actually be counting chickens before they hatch. Sure, the chickens will most likely hatch eventually. And we are not doubting that the government has a strong cashflow position. But if we were to spend more of the NIRC during each fiscal year, then we may find that the cash is not actually there when we need it, since projected, unrealised returns are counted as part of revenue returns.
Another point that needs to be considered is that without the contribution by NIRC revenues, Singapore’s spending has actually exceed operating revenues (money collected from taxes and other earnings from current assets). Choosing not to increase taxes and banking on the NIRC continuing to give “better than average” returns is very risky as a country.
Any investor knows that no matter how brilliant the investment managers are at MAS, GIC and Temasek, their portfolios are still exposed to market volatility and risk. We can all recall the years in the early 2000s when Temasek saw a net decline in their portfolio value.
Why The Need To Maintain/Grow Reserves: Strategic
There are questions about why Singapore is so adamant about ploughing so much back into our reserves. Figures from the IMF were thrown about to argue that the Singapore government is unnecessarily keeping so much reserves, when they could deploy the money to ease the financial burden on Singaporeans today.
From an economic point of view, having a large reserve, also known as a “war chest”, serves a strategic purpose. It allows Singapore to tide over crises without needing to rely on others and even give us the ability to extend help to others from a position of strength.
Though we are a small nation, our reserves allow us to punch above our weight globally. In the 2008 financial crisis, the Singapore government guaranteed every dollar deposited in banks here to instil confidence at a time when the global financial crisis was wrecking havoc on companies and banks. It worked because everyone knew that Singapore had the financial resources to back up the guarantee.
Why The Need To Maintain Reserves: Strong SGD
As explain by Heng Swee Keat, Singapore controls and protects the value of the Singapore dollar through setting the exchange rate policy. Large reserves of foreign currency and other assets allow us to defend against speculative currency attacks, which has happened to large nations like Britain and neighbouring countries like Thailand.
The strong Singapore dollar protects what we can buy with our currency and is the reason we enjoy today allows us to afford imported goods and go on holidays.
Choosing to keep smaller reserves in order not to increase the tax burden on people today might seem like a compassionate thing to do, but if Singapore’s currency floats and is devalued, everyone suffers, especially the most vulnerable.
So if there is a choice to pay little and maintain the value of the rest of my money, I would say: “Where do I pay?”
Why Grow Reserves: You Get More, Tomorrow
The reason why the NIRC has grown over the years to become a key pillar of revenue for Singapore is because over the past few decades, Singapore has continued to grow the size of reserves, while continuing to collect taxes and maintain a balanced budget.
We are all familiar with the principle of saving and investing: the more you don’t use today, the more you will have to spend tomorrow.
It is already projected that we will need to spend more in the coming years. If we don’t do something to address this in a sustainable way, and instead choose to kick the can down the road, in a few years (or at most a decade), we will end up needing to increase taxes even more by then.
While Singapore’s economy is still relatively strong, it makes sense to stash away as much money as we can so that it grows and more is available to us when we really need it.
Why Not Touch Reserves: Responsibility For The Future
We would like to leave you with this thought: Unlike financial planning as an individual, where you budget for a specific amount of years based on your life expectancy, Singapore as a nation does not have a limited lifespan.
Singapore and Singaporeans will continue to be around for the next 50 years, 100 years, and so will the need to take care of our children, and their children.
Our current generation is extremely fortunate, enjoying a standard of living and access to opportunities that are the envy of most around the world.
There is no telling what the future holds, but being prudent to safeguard and conserve as much resources when we can is an approach that has served us well thus far.
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