SINGAPORE - While Singapore will look to borrow for long-term infrastructure, it has to resist doing so for recurrent expenditure.
If not used productively, borrowing can often lead to high debt and low growth, which would affect investor confidence, businesses' cost of funding and the country's long-term growth, Deputy Prime Minister Heng Swee Keat said on Friday (Feb 26).
Responding to MPs' support for borrowing for long-term infrastructure, he stressed that the Government's approach to borrowing is a carefully calibrated one.
There is good debt and bad debt, which Ms Foo Mee Har (West Coast GRC) had noted, but the key difference is what is done with the debt proceeds, Mr Heng said.
The Government is currently already borrowing, under the Government Securities Act and the Local Treasury Bills Act, he added. "But instead of spending the proceeds, we invest them for long-term returns, which is used to repay our debt."
In response to the question by Associate Professor Jamus Lim (Sengkang GRC) if Singapore could borrow more to fund soft capital like education, Mr Heng said that Singapore had to refrain from doing so for such recurrent expenditures.
In many countries, there is a tendency to expand the scope of what constitutes soft capital beyond the original intentions, he noted.
"When used to fund increases to government subsidies or social transfers, it is really more recurrent spending. Borrowing continuously for them will just lead to ever higher debts, which have to be repaid by future generations."
Interest rates are low for now, but this can change quickly and when they change, existing debts have to be refinanced and a higher interest rate could quickly worsen the fiscal situation, Mr Heng said.
Prof Lim had said he was "happy as a clam" that the Budget's fiscal strategy included elements which he had raised previously, but Mr Heng pointed out that he had announced that the Government was studying borrowing in 2019, before Prof Lim had entered Parliament. “But I’m glad he shares our views. So perhaps if you read more of our past Budget statements, you’ll be even happier.”
He added: "Borrowing is not a form of revenue. Borrowing gives us cash for liquidity planning but it does not create free monies for spending. Today's debt is paid for by tomorrow's growth and tomorrow's generation."
Replying to Ms Foo and Dr Lim Wee Kiak (Sembawang GRC) on the safeguards for borrowing and how borrowing under the new Significant Infrastructure Government Loan Act (Singa) bonds may impact Singapore's credit rating, Mr Heng said that Singapore will set $90 billion as a borrowing limit.
This limit is sized based on the expected expenditure of major, long-term infrastructure projects over the next 15 years, and any increase of this limit will require legislative amendments which are subject to parliamentary approval, he added. Other safeguards such as a limit on interest costs will also be put in place, and more information will be provided when the Bill is presented in Parliament later in the year, he said.
The key is to use debt equitably and sustainably, Mr Heng said, adding that the Government would study the suggestion by Mr Liang Eng Hwa (Bukit Panjang) of a one-off, special purpose borrowing to help Singapore emerge stronger from the Covid-19 crisis.
Debate over borrowing for soft capital
Mr Heng and Prof Lim later crossed swords when the Workers' Party MP asked why the minister "remains dismissive of soft capital".
"The key I think, is ultimately that we invest what we end up borrowing... and while I agree that we shouldn't allow recurrent expenditures to be lumped into soft capital, it's easy to allow recurrent expenditures of all forms," Prof Lim noted.
Rather, he added, the crux is that we always evaluate how a given project is defined as soft or hard capital in its ultimate investment and repayment potential.
Mr Heng replied: "Let me say that in parliamentary debates, please do not put words into my mouth. I did not dismiss soft capital. You said I was dismissive of soft capital, I did not. I said that we have to be careful."
He added that Singapore has to be cautious about soft capital precisely because it is soft - it can morph into various shapes and over time, and everything becomes a capital investment.
Mr Sitoh Yih Pin (Potong Pasir) also weighed in, suggesting that one of the reasons why Singapore is quite comfortable to borrow now is because of its fairly large reserves and the confidence that its rate of return from the reserves in the long term is going to exceed its cost of borrowing.
In reply, Mr Heng noted that even if Singapore's fiscal situation is good, it may not even be enough for it to fund the lumpy infrastructure investment required. Borrowing means that the cost is shared with various generations, and at this point, it is efficient to do so because interest rates are ultra low, he added.