SINGAPORE: Singapore should strive to remain fiscally prudent, even as it has drawn the equivalent of about two decades of fiscal surpluses from past reserves to help the country deal with COVID-19, said Deputy Prime Minister Heng Swee Keat on Friday (Feb 26).
“As a crisis response to COVID-19, we have drawn from the past reserves an amount equivalent to about 20 years of financial surpluses. It will be a challenge to also make good this amount drawn given the magnitude of the crisis,” said Mr Heng, who is also Finance Minister.
“This is the crisis fund function of the reserves. Nonetheless, we should strive to remain fiscally prudent to build back our reserves gradually.”
In his Budget speech last week, Mr Heng announced that the Government would draw on its past reserves for a second consecutive year.
This will fund the S$11 billion COVID-19 Resilience Package in Budget 2021, which is needed to tackle the immediate challenges that the pandemic presents, said Mr Heng in Parliament, adding that the measures are “extraordinary and temporary”.
The sum represents about 2.2 per cent of the country’s gross domestic product, Mr Heng previously said.
READ: Budget 2021: Expected deficit of S$11 billion; Government to draw on reserves for 2nd straight year
Despite the package, the overall amount the Government expects to draw from the reserves will only rise by S$1.7 billion, totalling up to S$53.7 billion for FY2020 and FY2021. This is because the estimated S$52 billion fenced off last year for the crisis will not be fully utilised, Mr Heng had said.
The Government expects to use S$42.7 billion of the S$52 billion, leading to a S$9.3 billion balance which offsets the sum for the COVID-19 Resilience Package.
While he had noted that it is expected that expenditure for the remainder of this term of Government will be funded without having a further draw on past reserves, the global outlook remains murky.
“I said in my Budget statement that we expect to fund the expenditure for the remainder of this term of Government without a further draw on past reserves. But the global outlook is highly uncertain, and we need to think ahead of how we can respond,” Mr Heng said in Parliament on Friday.
READ: Singapore can seize opportunities to emerge stronger amid pandemic, says DPM Heng after Budget debate
Mr Heng also emphasised that the Government does not take any decision on the use of reserves lightly.
Singapore’s reserves serve three important roles – as an endowment fund, a buffer against shocks and attacks on the financial system, and a “bulwark against crises of an extraordinary nature”, he said.
He also responded to NCMP Hazel Poa (PSP), who asked if it was time to make the national reserves “part of the national conversation”.
“Ms Poa also asked about the size of our reserves. Again, it is not in our national interest to disclose the size of the reserves,” said Mr Heng.
“Singapore is vulnerable to currency speculation and large capital outflows. Revealing the size of the reserves is akin to laying bare our defence plan, and will diminish the value of our reserves as a strategic defence. No responsible leader would do so.”
Mr Heng noted that NMP Hoon Hian Teck had “articulated well the difficult balance” Singapore needs to strike – stabilising the economy to avoid a sharp downturn, but also undertaking and investing in structural policies for transformation.
“Taking the longer-term view, we have to press on with these economic investments, secure the next decade of growth, and emerge stronger. If we hold back these investments, we will miss the opportunity to restructure, seize new opportunities and race ahead,” Mr Heng explained.
“If we fail to change, and our economic recovery is sluggish, it would have a long tail effect on our jobs and economic vibrancy, and affect Singaporeans adversely. It will also further worsen our fiscal situation.”
Mr Heng reiterated that should the public health and economic situation deteriorate further and Singapore’s fiscal situation turns out to be worse than expected, the Government may again have to seek the President’s approval for the use of past reserves to continue such economic investments.
“The President has expressed her understanding towards the Government’s approach, and will consider the Government’s specific proposals, should there be a need to draw on past reserves,” said Mr Heng.
“But if we are to draw on past reserves for the economic investments to emerge stronger, we should do our best to make good on the draw.”
These investments are expected to yield returns for the economy, which can give a “boost” to Singapore’s “tight fiscal situation”, allowing the Government to make good the amount drawn, Mr Heng added.
TWO CORE VALUES
In his speech, Mr Heng pointed out that the current Government abides by the same two “core values” as its forefathers – prudence and stewardship.
“First on prudence. We spend on needs, not wants, and we seek to get the best value out of our spending. We must be prudent because these finite resources are entrusted to us by Singaporeans,” he explained.
“Second, on stewardship. In the Unity Budget Round-Up in 2020, I said ... ‘We have a duty not just to those who make their views known today, but also the young and the future Singaporeans.
"They are not here today to represent their views, because they are not born yet. But we have a responsibility to them, and have to take decisions which are difficult for us, but which will safeguard their interests. In other words, we must be responsible stewards.”
Mr Heng noted how during the time of “high economic growth” in the 1980s, Singapore’s leaders managed fiscal surpluses “prudently”.
“Instead of finding ways to spend the surpluses and win popularity, they not only accumulated surpluses, but also took the bold step in 1991 to amend the Constitution, to require each term of Government to run a balanced budget,” he said.
“This is to ensure that future Governments do not make unrealistic promises, dip into our savings unnecessarily, and mortgage the future of our children. They knew the temptation of squandering the easy inheritance would be too great for some to bear.”
Mr Heng noted that Singapore is currently in a “new phase” of development, and cannot expect the same kind of “buoyant” GDP growth as in the past, given that its economy is now maturing.
“Our expenditure needs will grow as new needs arise, and as our population ages. At the same time, we must continue to invest to build a better Singapore for the future,” he said.
“We are once again confronted with hard choices. We must abide by our core values, and keep Singaporeans, now and generations to be born, at the heart of what we do.”
THE NEED FOR A GST INCREASE
Mr Heng also touched on the GST hike, addressing concerns from MPs and explaining why such a move would be necessary down the line.
The Government announced in Budget 2018 that it planned to raise the GST. However, Mr Heng said in last year’s Budget that the GST rate would not take place in 2021, in light of COVID-19’s effect on the economy.
In his speech last week, he reminded Singaporeans that while a GST hike will not take effect this year, it is still on the cards.
“We are not raising the GST rate now, as the economy is in the nascent stages of recovery. But we have been giving notice, since Budget 2018. The fact is that some of the structural increase in expenditures will hit us sooner rather than later,” Mr Heng said on Friday.
He also emphasised that a GST increase is “needed”.
“Members of this House must have the will and courage to make the same responsible choices as our forefathers did. We must be upfront – that if we want to spend more, we have to raise the revenue,” he said.
“First, acknowledge that if we want more social safety nets, it comes with costs. Second, work out sustainable resourcing. Do not make irresponsible promises which burden future generations. If these are recurrent needs, which have to be financed year after year, we must find recurrent revenues which we can collect year after year.”
There are a number of reasons why a GST hike is needed, pointed out Mr Heng. This includes increased healthcare spending to meet the needs of an ageing population in the future, he said.
He noted how Singapore’s spending over the past 15 years has grown by about 1.5 percentage points of GDP - roughly S$7 billion per year - in every 5-year period. This is about two-thirds of the current GST revenues, with half of the increase in spending for social support, Mr Heng said.
“We have shown that current taxes are insufficient to cover our spending needs. Since 2007, we have already increased various taxes to collect more from those with more means, which are then transferred to our lower-income,” said Mr Heng.
“All this while … the GST rate has remained unchanged at 7 per cent. We would be in a budget deficit if not for the contribution from reserves, in the form of Net Investment Returns Contribution or NIRC.
“Economic growth alone is not likely to raise enough revenues to meet our needs. The honest but hard conclusion is that we will need to raise more tax revenue.”
At the same time, Mr Heng said that the Government needs to consider "all available options" to raise revenues.
“We will continue to review additional options to complement a GST rate increase, but it is not realistic to hope for these to become alternatives to a GST rate increase, or to make the GST rate increase unnecessary,” he said.
The Deputy Prime Minister also acknowledged the concerns of MPs who noted in the Budget debate that the GST rate increase could impact Singaporeans.
Mr Heng said the Government has set aside S$6 billion for an Assurance Package, which will in effect delay at least five years of the GST rate increase for the majority of Singaporean households.
Lower-income Singaporeans will receive higher offsets of about 10 years' worth of additional GST expenses incurred, he added.
This package is in addition to existing benefits and transfers such as the GST Voucher scheme. These measures will keep overall taxes and transfers system “fair and progressive”, said Mr Heng.
“I share your concern. As I said before, as Finance Minister, I do not have any joy in raising taxes. I do it because I care for our future,” said Mr Heng.
“Let me assure members, and all Singaporeans, that we are committed to helping our people manage the impact.”