Reserves ‘important for long-term stability’

SINGAPORE — Acknowledging that an impending Goods and Services Tax (GST) hike will invite a “natural question” why the Government was not tapping more on the reserves instead, Finance Minister Heng Swee Keat pointed out on Monday (Feb 19) that this has, in fact, been done over the last decade.

Stressing the need for Singapore to maintain a sizeable kitty, he also reminded Singaporeans that the reserves have afforded the country with the means to weather crises such as the 1997 Asian financial crisis and the 2008 financial crisis.

Recent changes to the Net Investment Returns (NIR) framework allowed the Government to spend up to half of the long-term expected real returns from the assets managed by GIC, the Monetary Authority of Singapore and Temasek Holdings.

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The changes took effect in financial year 2016, and since then, the Net Investment Returns Contribution (NIRC) has overtaken corporate tax to become the largest single contributor to the Government’s coffers.

Over the last decade since the implementation of the NIR framework, the NIRC will more than double from S$7 billion in FY2009, to an estimated S$15.9 billion for the financial year ending March 31 next year. GST and personal income tax are expected to constitute S$11.4 billion each towards the Government's operating revenue for FY2018, while corporate income tax is set to contribute S$15.1 billion.

“We are able to supplement our revenues with the NIRC today because our predecessors judiciously set aside the savings from the strong growth during Singapore’s earlier stage of economic development,” said Mr Heng.

With Singapore facing a maturing economy and ageing population, it is important to “husband this resource carefully, prudently and responsibly”, he stressed.

Noting that the other half of the expected NIR is kept in the reserves so that it can grow in tandem with Singapore’s economy, Mr Heng said that if the NIR is fully spent by the Government of the day, the principal sum of the reserves will “stagnate over time”. As a result, the NIRC as a share of the GDP will fall as the country’s economy grow.

This is not a “trivial” matter given that Singapore’s Budget relies on the NIRC as its largest source of revenue, Mr Heng reiterated.

“In a more extreme scenario, if we spent more than our investment returns, we will eat into our nest egg,” he said. “Doing so would mean that our reserves will shrink over time, generating a progressively smaller stream of income in the years that follow, till eventually our reserves are exhausted.” Pointing out that this is not the “Singapore way”, Mr Heng reiterated that Singapore does not have any natural resources, and its reserves have contributed to the long-term stability of its economy.

In 2009, the Government had to tap on past reserves for the first time, drawing a total of S$4.9 billion to introduce measures including the Jobs Credit Scheme and the Special Risk-Sharing Initiative to cushion the impact of the recession on workers and businesses.

Noting that Singapore will always be vulnerable to fluctuations in the global economy and financial markets, Mr Heng said: “We can never predict where or when the next crisis will come. But we know, when the next crisis hits, we will be able to weather the storm because we have our reserves.”