Budget's generous payout reassuring to all S'poreans

This story was first published in The Straits Times on Feb 25, 2014

THE recently announced Pioneer Generation Package offers about 450,000 pioneers some relief with health-care costs for the remainder of their lives.

For the rest of Singapore, it provides a different type of assurance: the comfort of knowing the public coffers are so strong, this blockbuster scheme can be funded from a single year's Budget, without having to either dip into past reserves or raise future taxes.

Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam announced last Friday that the package - the biggest-ever one-off special transfer for a single measure - will be entirely financed by an $8 billion Pioneer Generation Fund set aside in this year's Budget.

This ensures that future generations will not have to worry about paying for the package, and that the fund can continue making payouts regardless of economic circumstances down the road.

That the whole package can be financed in a single Budget attests to the Government's fiscal prudence over the years, and indicates there is likely still space for the authorities to fund large social spending packages in the future as necessary.

Even after accounting for the mammoth Pioneer Generation Fund in this Budget, a modest deficit of just $1.2 billion, or a mere 0.3 per cent of gross domestic product, is expected.

Mr Tharman said last Friday that this is close to a balanced Budget and will not result in a draw on past reserves, as the Government has sufficient surpluses from recent years within the current term of government. In the last two years alone, the Government has booked overall surpluses of nearly $10 billion.

The funding for the package was also achieved without the need for any obvious trade-offs.

Although the Government helped pay for this year's Budget by taking more from investment returns on the past reserves - a record $8.1 billion - there was no mention of raising the cap for net investment returns contributions from the current limit of up to 50 per cent.

Under the current regime, the Government is allowed to take up to half of the net investment returns on the net assets managed by the GIC and the Monetary Authority of Singapore, as well as up to half of the investment income of Temasek Holdings.

As CIMB economist Song Seng Wun puts it: "I don't think they even reached anywhere near changing the cap."

The Government also did not raise taxes for companies, individuals or the well-off, moves which some experts had warned would dampen Singapore's economic competitiveness regionally.

Singapore's strong fiscal position today is a result of three main factors.

One is its robust economic recovery in recent years, which has paved the way for larger tax takings as households and firms earn and spend more. The strong economic expansion has also partly fuelled the need for cooling measures in the property and car markets, via higher taxes and fees.

This has resulted in a trend of bigger-than-expected fiscal surpluses in recent years. The Government originally budgeted for a $1.27 billion surplus in 2012, which turned into an actual surplus of $5.82 billion. Last year, an expected $2.42 billion surplus was revised to $3.92 billion.

In fact, even though a slight overall deficit has been budgeted for this year - which would be the first since 2009 - economists say this may also end up as a surplus, as the local economy is expected to ride on the global recovery and turn in another year of steady growth.

Another factor is Singapore's healthy reserves, the returns from which are a significant source of fiscal funding.

The third factor is that the Government has spent conservatively over the years - in some areas, some say perhaps too conservatively.

For example, Singapore's state spending on health care is below 2 per cent of GDP and is less than half the national health-care expenditure of about 4 per cent of GDP - still relatively low when compared with other developed countries.

But this could change in the coming years. Mr Tharman said in last Friday's Budget speech that Singapore's spending needs will rise "significantly" in the next 10 to 15 years, and that "government health-care spending for the population as a whole will grow".

The good news is that the Government clearly has the firepower to fund higher social spending amid rising health-care costs and an ageing population.

This could come in handy down the road, when there may be a need to help older Singaporeans too young now to qualify for the Pioneer Generation Package.

It will also give the Government fiscal space to keep up with the recent trend of higher spending on social development. Total expenditure on this sector has increased from 6 per cent of GDP in the 2008 fiscal year to 7 per cent of GDP for this year's Budget.

DBS economist Irvin Seah said Singapore's fiscal policy is shifting more towards catering for the elderly as the population is ageing. "If we don't make the necessary adjustments now and plan ahead, the financial burden on future Singaporeans will be heavy."

It is key to remember, however, not to take the nation's fiscal might for granted.

To preserve sustainable economic growth and strong tax revenues, Singapore will need to succeed in its current economic transformation. Otherwise, with lower rises in takings and higher spending, this year's feat of generosity towards our pioneers may not be so easily repeated.

This story was first published in The Straits Times on Feb 25, 2014

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