Tharman gives assurance of fiscal sustainability

Singapore

IN seeking to build a fair and inclusive society, Singapore has built a system that will endure through generations - and certainly beyond each election cycle.

That was Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam's assurance to Parliament on Thursday, when he wrapped up this year's Budget debate - which, over the span of two-and-a-half days, saw lawmakers raising concerns about fiscal prudence and sustainability.

"Fairness is not just about what we do today, how we distribute taxes and benefits, who takes what share. It's not just for the current generation. We must build a fair and inclusive society for today's generation, our children's generation, and generations into the future. That's the difficult task," said Mr Tharman.

This, he noted, must be sustained for the long haul, and not merely for "one election at a time".

In his one-and-a-half hour speech, Mr Tharman took pains to address concerns raised by various Members of Parliament (MPs) who had wondered whether Singapore can afford to hike public expenditure at such a rapid clip. Others had flagged the slight deficit of S$0.13 billion in FY2014, and FY2015's estimated deficit of S$6.67 billion.

Highlighting the government's "healthy" financial position, Mr Tharman reiterated that for this year, the deficit is almost entirely due to funds being set aside for future investments - whether for infrastructure at Changi Airport, or for other endowment and trust funds.

"It's not a deficit of spending over revenues. It's a deficit because we're setting aside funds that we've earned in this term of government for the future," said Mr Tharman.

He also assured parliamentarians of his view that Singapore must "never cross the red line of failing to balance our budget within each term of government", referencing specific rules written in Singapore's Constitution that prevent this from happening, or an exhaustion of the reserves.

He said that this is "enshrined as part of our political culture, no matter who is the government".

Mr Tharman also emphasised that the government has been prudent in its budgeting, even when there has been a temporary boost in revenues. Instead of spending those revenues in the current term - a move other governments sometimes make - Mr Tharman noted that Singapore has set these aside.

"That should remain the way we go about fiscal planning in the future . . . Don't spend all of it immediately. That way we avoid feast and famine in our spending," he said.

As for the sustainability of spending returns derived from Singapore's reserves, Mr Tharman put to rest fears that the government is disadvantaging future generations.

"The net investment returns (NIR) framework in fact underlines our commitment to preserve the value of our reserves, and to allow it to grow with the economy over the long term . . . We have a steady stream from our NIR contributions, which will be sustainable well into the future," he said.

Earlier in the Budget debate, some MPs had asked if Singapore's reserves can cope with future spending needs; others expressed anxiety about setting up unrealistic expectations to such a degree that the reserves are eventually depleted.

However, Mr Tharman said on Thursday: "The rules on the reserves ensure that the reserves will not be depleted, and they will benefit both current and future generations. We have prepared ourselves in advance, and that must remain the way in which we plan for our budgets in the decades to come."

Under the NIR rules, the government can only spend up to 50 per cent of the expected long-term real returns of all three investment entities. These are Temasek Holdings, GIC and the Monetary Authority of Singapore (MAS).

Mr Tharman pointed to various safeguards under the NIR framework which mandate prudence, including: spending based on real (instead of nominal) returns, so that international purchasing power is preserved; using expected long-term returns rather than actual returns, which provides for stability; smoothing the asset base to discount the latest changes in prices from a boom in asset markets.

In addition, Mr Tharman allayed fears that the inclusion of Temasek, GIC and MAS under the NIR framework would impact their approach to investments.

"It is not a dividend policy in disguise that determines how much cash Temasek has to pay the government each year. And if anything, by focusing on expected long-term returns, we ensure that at no time in the future does the government put pressure on our investment entities to sell assets, realise capital gains, and pay more dividends. It keeps their investment strategies independent of the spending rule of the government."

Even as he noted the inevitable rise in government expenditure over the long term - driven largely by healthcare and infrastructure needs - Mr Tharman also reminded the House that based on current projections, the revenue measures introduced in Budget 2015 leave Singapore "in a good position for at least until the end of this decade".

Rounding up his speech, Mr Tharman stressed how a fair and inclusive society is ultimately about more than just the government's economic or social strategies.

"It's not just about what we do from one Budget to the next, not just about seizing new economic opportunities and strengthening social security. Most importantly, it is about how we relate to each other as a people - the respect we extend to every citizen for the effort they have put in, and the care that we extend to one another."

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