Singapore did not start with much. In 1959, when the People’s Action Party (PAP) Government first took office, Dr Goh Keng Swee was appointed Minister of Finance. He immediately discovered that the Treasury was bare. He had to implement immediate austerity measures, including pay cuts for civil servants and ministers.

It was only by the early 1980s, after two decades of nation-building, that we started to accumulate a nest egg of reserves. At that time, our forefathers considered what to do. Because they anticipated that the political pressure to spend these reserves would grow; and that if these hard-earned savings were not properly protected, they could be easily and unwisely spent – and once gone, it’s gone. And they felt that they had to do everything they could to guard against this.

In 1984, at the National Day Rally, Mr Lee Kuan Yew talked about how the reserves could be frittered away by a profligate government, spending money that it had not itself earned, within a single term. He proposed a simple principle: If a government wants to spend, it must first raise the money – whether by raising taxes, or making shrewd investments, or some other direct, open, proper means; but not by drawing down on the past reserves that it had inherited. And to guard against a rogue government raiding the reserves, Mr Lee mooted the idea of a president elected directly by the people, who would have the constitutional power and the moral authority to safeguard the reserves and be able to say no if the government wanted to spend it for an unwise purpose. That was the concept of the “second key”.

Four years later, in 1988, the PAP Government published the White Paper on the Elected President scheme. Professor S. Jayakumar oversaw the drafting and I helped him with it. We made the elected-president proposal a central issue in the 1988 General Election. After the election, in January 1991 we amended the Constitution to create the elected presidency. And Mr Wee Kim Wee, who was then already president, took on the new custodial powers and became the first president who wielded the second key.

We designed a whole system to protect the reserves, wherever those reserves might have been. The second key applies to the Government, especially the Ministry of Finance (MOF), but also to what we call the “Fifth Schedule” entities – MAS (Monetary Authority of Singapore), Temasek, GIC, CPF (Central Providend Fund), JTC, HDB. Why did we do this? Why did we include these six entities? MAS – because those are our official foreign reserves. Temasek – those are our GLCs – government-linked companies. GIC – it doesn’t have very much money of its own, but it is the manager of the Government’s money, of MOF’s money. CPF – which is Singaporeans’ savings, not really the Government’s money, but if you have a rogue government, this too will be at risk. And then JTC and HDB because they own and manage land: for industrial, housing, and for other uses. Land has value, and in Singapore, land is often very valuable. Therefore, we must protect our land, and not allow a government to do anything with it that is a covert form of giveaway. That was how we started.

Our first priority was to keep the capital sums in the reserves safe. We had not thought very deeply about exactly how much of the income to spend. We just took a standard accounting view – that the income from the reserves would be the interest and dividends that we earned on our investments. We called this the net investment income (NII) and we decided that the government of the day could spend 100 per cent of the NII. But in practice, we did not spend any of the NII, because we were still running comfortable Budget surpluses.

Later, when Mr Ong Teng Cheong was elected president, he questioned this rule. He asked: Why do we allow ourselves to spend 100 per cent of the NII? He argued, correctly, that we should also set aside something for the future. Because as the years pass, as the economy grows, if your reserve amount remains constant, it gets smaller relative to the economy. And you ought to allow the reserves also to grow. So the question is: How much to provide for the future, while also enabling the present generation to benefit from the reserves?

The 50-50 rule

There is no magic rule to this, but we arrived at a split of 50-50. There is a certain simplicity and fairness to that; a natural division that we settled on between the President and the Government. It is simple, it is intuitive, and everybody can understand it. We split the difference between now and the future. And so in 2001, Parliament passed a constitutional amendment to protect 50 per cent of NII, and add that to the reserves. And the other 50 per cent, the government of the day could spend – 50 per cent for the present, 50 per cent for the future.

Over the next decades, as we gained experience operating the safeguards, we progressively refined them. I have been closely involved in this process, first working with Prof Jayakumar under Prime Minister Goh Chok Tong, then later on as PM. Over time, we realised that NII may not be the best measure of what you should be able to spend. Because when we invest, we do not just look at income from dividends and interest – we also expect to make capital gains, which are often more important than dividend payouts.

For example, if you had bought Facebook shares at their IPO (initial public offering) in 2012 at a price of US$38, you would have had their value gone up 12 times – because Meta closed at US$455 on Feb 6. But you would not have received one cent of dividends. Meta is about to pay its first dividend in March. So in that circumstance, can we say that the return from the investment is zero? No. We decided that we should consider not just the interest and dividends, but also include capital gains and capital losses as well. That means spending on the basis of overall investment returns – capital gains and losses, plus in earnings, plus income, interest and dividends – instead of just investment income.

We also studied how other institutions which had built up large endowment funds managed them, particularly US Ivy League universities like Yale and Harvard. Harvard has the biggest fund. Yale has quite a big fund, but Yale has a model which is very successful and well respected. We learnt how they implemented consistent spending rules, how they smooth out the draw on funds, because from year to year the fund performance can be volatile.

We must understand this. We can project 4 per cent long-term expected returns. Next year, what would you earn? God only knows. It can be plus 10 per cent, it can be minus 10 per cent. Hopefully after 20 years, it is something like what you projected, but really, it’s volatile from year to year. You have to find some intelligent way to smooth it out, so that you can spend steadily and not be whiplashed.

I met Mr Leonard Baker, who chaired the Yale Investment Committee, to understand how Yale did it. We studied them, we modelled our rules on these ideas, taking into account our political and constitutional context, which makes it much more complicated for us to implement than for a US university. In 2008 we amended the Constitution again, to specify that the Government would spend out of net investment returns (NIR) instead of NII. But we kept the 50 per cent rule: the Government could spend 50 per cent of NIR, instead of 50 per cent of NII. We called this amount, which the Government can draw from the reserves and add to the annual Budget to spend, the NIRC (net investment return contribution). This is how we arrived at today’s system of spending half of investment returns and saving the other half, after decades of refining and improving the system, testing it out, making sure that it works as intended.

It Is important to put into context just how valuable an asset our reserves are to Singapore. As you have heard, the NIRC accounts for one-fifth (20 per cent) of government revenue. It is around 3.5 per cent of gross domestic product (GDP) – more than what we spend on any single ministry, more than we spend on defence, more than we spend on education, more than we spend on health – 3.5 per cent of GDP every year.

As far as the Ministry of Finance is concerned, it arrives. We don’t have to raise taxes, we don’t have to collect fees. The MOF just has to make sure that Temasek, GIC and MAS are run properly. And every year, you should be able to get 3.5 per cent of GDP. How does that compare with our other revenue sources? It is about equal to corporate income tax revenues, 1.4 times personal income tax revenues, and 1.3 times goods and services tax (GST) revenues.

Supposing we did not have NIRC out of the reserves. Then what would we do? You have a choice: You can double corporate income tax, you can more than double personal tax, or you can roughly double GST – so instead of 9 per cent it may be 18 per cent or 20 per cent GST. That is what the NIRC has enabled us to do. That is the burden which the NIRC has taken off Singapore taxpayers.

We are here today because our forefathers had the prudence to build up the reserves, the vision to anticipate the political pressures to spend them, and the imagination to design the two-key scheme to protect the reserves for succeeding generations. This is what stewardship means.

Despite the constitutional protection, the pressure to draw on the reserves will still be there, especially as spending needs grow. Hence the repeated questions and demands. How much do we have? Do we have too much? Are we saving too much? Can’t we save just a little bit less? This is far from the first time this subject is being discussed. The opposition will swear they are being responsible, and give many plausible reasons to draw on the reserves. Surely spending a little bit more, just a little bit more, won’t break the bank? Surely it’s okay to talk about the income or the returns and we don’t touch the principal. Surely we can treat land differently from other assets, no need to price it fully? Once we take that mindset, we are going down a deep hole.

How much is enough?

How much is enough? To me, that is the wrong question to ask. It is a misconception that when it comes to our reserves, there is such a number – say $X billion – that is enough. Then you have more than $X billion in the reserves, we have too much; we have less than $X billion in the reserves, we have too little. There is no such number. 

We can have no idea what the future holds: what crises we will run into, how much we will need. When the global financial crisis came in 2008 to 2009, we tapped our past reserves for the first time. We made a Resilience Package, $20.5 billion, of which $4.9 billion was earmarked to come from past reserves. We implemented the Jobs Credit Scheme to help employers pay CPF and to protect jobs. We had a Special Risk-Sharing Initiative to encourage banks to lend, and the Government would share the risk of lending. In the end, we actually took $4 billion from past reserves. The economy revived much faster than we expected, and the Government fully returned this $4 billion by the end of its term.

In the crisis, we also used past reserves to guarantee deposits in commercial banks. We ring-fenced $150 billion for this purpose. And we said that we would put aside $150 billion from the reserves to back this guarantee. It’s not just words, it’s got real heft behind it. Thankfully, no banks failed, and we did not have to touch the money. But it was critical that we did that. And we could deliver a credible guarantee to bolster confidence in our banking system, and probably prevented a run. The deposit would have disappeared from our banking system and gone overseas. The banking system would have crashed. The exchange rate would have crashed. Those people who say it didn’t happen, it can’t happen – I say, get real. So was $4 billion enough?

The next crisis, Covid-19, when it hit us, that was on a different scale altogether. We sought the President’s approval, successively, to draw up to $69 billion from past reserves – for medical facilities, testing, vaccines, support schemes and assurance packages. We saved lives, and we saved livelihoods. In the end, we actually drew down about $40 billion. It’s not likely that we are going to be able to put $40 billion back into the reserves any time soon. Again, in Covid-19, our reserves were a tremendous advantage. It gave us confidence, and gave others confidence in us. We had the financial muscle to do everything we needed to do, without getting heavily into debt, unlike so many other countries.

The Ministry of Health could concentrate on its duties. The Ministry of Education could concentrate on its arrangements. The Ministry of National Development and Ministry of Manpower could look after the dormitories. You do what you need to do, the resources will be forthcoming. It’s a tremendous luxury. Without the reserves, would we have dared to pre-order vaccines, even before they were tested and proven, and produced? Would we have been able to pay up to 75 per cent of salaries in the crisis, in the Jobs Support Scheme, to protect workers and to prevent companies from closing? So we drew down $40 billion in the end. Is $40 billion enough?

Covid-19 will not be our last pandemic, nor our most serious one. And it is far from being the worst thing that can happen to us. If we find ourselves at war, like Ukraine, how much is enough? The war is costing Ukraine over US$100 million (S$134.7 million) a day. The country relies heavily on US and European support. The US has committed over US$100 billion in humanitarian, financial and military support. And now, another US$60 billion is being debated. The administration wants to do it. The money is desperately needed in Ukraine. Not just money but guns, weapons, ammunition, everything.

Europe has also committed almost US$100 billion so far and just committed an additional €50 billion (S$72.6 billion) in grants and loans over four years, with a lot of angst and debate, and internal disagreement. Hungary had strong views to the contrary. Without this external funding support, Ukraine’s war is over. How long more can the US and Europe sustain this support for Ukraine? Looking ahead for 50 years, can anyone promise that Singapore will enjoy another half century of peace and tranquillity? Or guarantee that someone will come to our rescue if we ever find ourselves in the same situation as Ukraine?

So back to the question – for Singapore, how big a nest egg is enough? There is no sensible answer to this question. We can never say for sure how much is enough, because we do not know what kind of crises we will face in the future, or how our investments will fare.  

But that does not mean we should mindlessly save every dollar we earn, without regard for present needs. Instead, our mindset should be to treat past reserves as a precious resource that generations of Singaporeans have built up. Starting with the Pioneer Generation, but continuing with the Merdeka Generation, and with the later generations till this day. And it is a resource. How much? It doesn’t matter. Whatever the amount, we have put it aside as a nest egg, a rainy day fund. We draw on half the investment returns to supplement our Budget every year. The rest we touch only in times of exceptional need, or during crises, with special permission from the president. If during one term of government we happen to accumulate a surplus, then we add to the reserves. And hopefully, we can maintain the nest egg and keep on growing it gradually year after year, not just for this generation but for future ones as well.

The spending rule we have settled on, and enshrined in the Constitution, is 50-50. Half for now, half for the future. As I explained earlier, this is fair and just, and it also happens to be about the right sustainable proportion to keep the reserves in proportion with the GDP.

Let’s assume a long-term expected real return of roughly 4 per cent. It’s roughly that. You can see from GIC’s numbers. MAS’ is slightly lower. Temasek’s is slightly higher. But based on the 4 per cent, the 50-50 rule means we spend 2 per cent, we save 2 per cent. It means the reserves should grow by about 2 per cent per year. Because there is no other place for the reserves to grow. (Not) land, because it’s a conversion; the Budget, because it is not in the surplus; and borrowing, issuing government securities, because that is not really our money. It’s borrowed and one day it will be claimed. And foreign exchange, that’s also not really our money, because just as people can bring money to be deposited in Singapore banks, they can take the money out of Singapore banks any time. So just because the balance is sitting there, it doesn’t mean you can take it home.

So based on the 50-50 spending rule, 2 per cent goes back into the reserves, the reserves will grow, all things going well, 2 per cent per year. And our economy, all things going well, will also grow, about 2 per cent per year. Because my workforce is flat, my productivity, if I work very hard, I get 1.5 per cent productivity growth a year. So to make 2 per cent, 2.5 per cent, is already working very hard and doing quite well. In other words, on present settings with our present policies, the reserves will be growing about 2 per cent per year. The GDP will be growing about 2 per cent per year.

The balance is the same every year. It’s not getting bigger and bigger, more and more reserves while the GDP languishes. And so the contribution to our Budget, NIRC, will be the same every year, about 3.5 per cent (of GDP). And if you look at our Budget – the past five years’ Budgets, all of the figures are published – you will see that it has been about 3.5 per cent a year. It hasn’t gone 3.5 per cent, 4 per cent, 5 per cent, suggesting that I have more and more money in the kitty. It’s about there. And so if I keep on doing this, I will keep on being able to do this, and spending 3.5 per cent from the reserves every year, saving me a doubling of the GST. I think that’s a good thing. And that is the way to protect our nest egg. This is the right thing to do.

Spending within our means

Singaporeans are facing higher costs of living. Our spending needs have gone up, and we need more programmes to cater to and look after an ageing population. And the Government does have many programmes to help Singaporeans cope with the cost of living. In fact, we have covered not just the present generation and the younger generation, but also the older generation too, because we have the Pioneer package, and the Merdeka package. We have not forgotten the people who brought us here.

But each generation must spend within our means, and each generation has been able to spend within our means. It does mean that from time to time, we have to revise our taxes, raise some of them. Like the GST, which we have just raised to 9 per cent. And we have powerful reasons for doing so, which have been extensively debated.

Our spending needs have gone up – especially for healthcare and the ageing population. And we know that we will need the money sooner rather than later. Why do we do this? It’s not just for the fun of it. Nobody relishes a tax increase. Not even the Ministry of Finance. Why should the Government volunteer unnecessarily to do something which it knows is going to be unpopular? But if it has to be done, we will do it and that is what it means to take responsibility for governing a country.

We got here because of the careful tending of our forefathers. Despite the difficulties and challenges which they faced, they still put savings aside, so that we can enjoy this resource today. And we are better off for it, and grateful to them for it. Now, we too should fulfil our obligation to our children and grandchildren, to protect their interest in this nest egg. This nest egg is the money of the people of Singapore. It belongs to this generation. It belongs to future generations too, and we have a responsibility to both. And if we fulfil that responsibility, in time our children and grandchildren too can benefit from a steady stream of returns from the reserves, and also have an umbrella that can protect them, come a rainy day.

We must not erode the patrimony, this family treasure, which we have inherited from our forefathers, nor should we burden future generations with debt nor mortgage their future. We are beneficiaries of our forefathers’ sacrifice and vision. But we are also trustees, protecting this inheritance for future generations. It is not just for us, and we have a responsibility to our children and grandchildren. This is the ethos and compact which generations of Singaporeans have forged. And it is one that in fact has been upheld across the aisle in Parliament.

During the global financial crisis, we brought forward the FY2009 Budget to deal with the crisis. We had a crisis Budget. This was a Budget where we had the Jobs Credit Scheme. And we were going to draw $4.9 billion from the past reserves. In the Budget debate, Mr Low Thia Khiang questioned why the Government wanted to draw down on past reserves instead of using savings from the Government’s current Budget.

“What is unusual of our Resilience Package is that the Government will be using our past reserves to fund two main components of the package – the Jobs Credit Scheme, and Special Risk-Sharing Initiative”, he said.

“Past reserves are a strategic asset meant for use in times of need, especially when the Government faces financial constraints due to unprecedented circumstances which require the Government to respond in the interest of the nation. Hence I am surprised that the Government has chosen to set up a precedent in asking the President for approval for a drawdown of our past reserves when it has enough savings from the current term of Government to fund the entire Resilience Package, and the resulting Budget deficit which the Finance Minister has estimated.”

It was a very reasonable question. Actually, it was a very polite objection and Mr Low was right that he raised it and we debated it. 

And our answer was, we are doing this so that we have dry powder, and there are current reserves which we may well need later. We put that aside. If we need to, we will use it. As it turned out, fortunately we didn’t need to.

Two years later, in 2011, when the Government paid the $4 billion back to the past reserves, Mr Low spoke again. He did the honourable thing and commended the Government. He said in the Budget debate again in 2011: “In conclusion, sir, the Budget this year has done one thing right. It has prudently put back into the past reserves the $4 billion that the Government took in 2009.”

This is how a responsible opposition conducts itself. There was a common commitment to safeguard our past reserves because of a shared recognition that they are a strategic asset only to be used for unprecedented circumstances.

The opposition has argued that we should change the rules and draw more from reserves, and that of course they have no intention to raid the reserves, far from wanting to bankrupt Singapore. They say we can easily afford what they are proposing. I conclude their tune has changed. The changes they are proposing are not simply policy changes, but require amending the Constitution to draw and to spend more from past reserves, which are protected by the President.

Some people say it is harder for this generation to abide by the same tight fiscal rules as before. They say that now growth is slower, and the cost of living has gone up, which are true. But our forefathers who put aside the surpluses which grew into the reserves were much less well-off than us. To put it bluntly, much poorer than us. Our standard of living is double or triple what our forefathers lived with. And yet they saved up surpluses for the future, whereas now we hear arguments that we should draw more from the reserves, on the basis that we need the money more urgently today. There is a Chinese saying: 创业难，守业更难， 败家轻而易举. Hard to start, even harder to keep it going, but all too easy to ruin and to lose everything. 

Mr Lee Kuan Yew and his team had anticipated this outcome, this political pressure. They knew that there would always be many worthy, heart-tugging causes demanding government resources. Every MP has pet causes which he champions. We all want more things to be done. But we also know and Mr Lee knew that money would always be not enough. He knew that it would always be politically tough to raise taxes. That is why he and his colleagues designed and implemented the two-key scheme.

Securing the future of the country

Some of Mr Lee’s senior colleagues told him that in locking up the reserves, he was trying the impossible. Their philosophy was: If a generation wants to spend the money, somehow they will get their hands on it and they will do it. Mr Lee disagreed, and decided he had to try his best. It is up to us and for us now to prove that we can protect the nest egg, and that Singaporeans are capable of being prudent and responsible well beyond the founding generation. We are responsible, as forefathers one day, of generations yet to be born.

The Government is elected not just to take care of the citizens today, but also to secure the future of the country. The PAP Government has always done both. But in taking care of today’s citizens, we are very conscious to safeguard the interests of young people not yet voting, future citizens not yet born, and the long-term interests of Singapore. In 2001, when we instituted the 50 per cent rule applied to NII and amended the Constitution, Mr Lee intervened in the debate because some MPs were proposing good causes to spend the money on, particularly old people. And he reminded everyone in Parliament, he said: “At the end of the day, whom do we owe our deepest obligation to as a government? To the future. Not just to the present; certainly not to the past.”

We must protect the past reserves. It is our precious resource, our strategic advantage. It is a great source of comfort and reassurance that if we run into a jam, or find ourselves in a tight spot – which is bound to happen every so many years and not so many years – we will have one extra card to play. We will not be destitute. Other countries admire and even envy what we have, but they find it very hard to emulate what we have done.

It was only in Singapore, only in those circumstances, only with that history and that generation, and that phase of nation-building that we could do it. If it is gone, we would not be able to do it again either. Therefore, as for ourselves, we too must make a conscious effort to keep our system working. Singaporeans need to have the right instincts – save when we can, resist the pressure to touch it, and use only when we really must. Each of us must see ourselves as stewards and trustees, taking care of the interests of present and future generations. That is the way to keep to this discipline, to keep this rule, and to keep this system – with two keys – working well.

Ultimately, in a democracy like Singapore, on big issues like this, it is the people who will decide. The PAP is convinced this is the right approach for Singapore. As long as the PAP Government is in power, this is what we will do.

If any other political party thinks that this is not the right approach, if they truly believe that we should dip into our reserves more, then bring it to the ballot box. Put it upfront. Say you want to touch, you want to spend, you want to shift the rules. Don’t pretend that you’re just as prudent, only more kind-hearted. Campaign in the next general election on this issue. Ask voters for a mandate to form the government, change the Constitution, dismantle the second key. Put this squarely to the people, and let them decide.

The PAP will convince Singaporeans that our way is the right way for Singapore. I believe Singaporeans believe us. The Institute of Policy Studies survey was not just a survey of trust in the PAP Government in general. It says in the case of the PAP Government, the statement was modified to refer to the level of trust in it to manage the reserves. In other words, Singaporeans have high confidence in the PAP Government’s management of the reserves. Therefore, we are confident that we will win the argument, and we’ll be able to get Singaporeans to do the right thing. 

Taking a long-term view of the reserves, and striking the right balance between present and future needs – these are vital responsibilities of any Singapore government. I have spent 40 years of my life stewarding, safeguarding and improving this system, continuing the work of those who had come before me. Now, I am preparing to hand over to my successor in good order a Singapore which is more prosperous and more secure.

I ask everyone to help them maintain the prudent policies that have served us well to keep Singapore on the right track, so that we can all continue to benefit from the nation’s success for many years to come.

• This is an edited transcript of the speech by Prime Minister Lee Hsien Loong in Parliament on Feb 7 during the debate on public finances.