Budget debate: S'pore will not change approach to reserves as it has to think of next generation, says Lawrence Wong

Finance Minister Lawrence Wong warned against the temptation to take the easy way out by spending more of the country's reserves. ST PHOTO: LIM YAOHUI

SINGAPORE - Singapore will stick to its current approach of husbanding its reserves because it has to consider the needs of the next generation, said Finance Minister Lawrence Wong on Wednesday (March 2).

He warned against the temptation to take the easy way out by spending more of the country's reserves, stressing that Singapore must ensure it has the resources to protect itself if need be.

"It begins with something small; let our standards slide a little, just tweak the parameters a little. What harm does it do?" Mr Wong said in a speech to round up the debate on this year's Budget, where he rebutted points made by MPs from the Workers' Party (WP) and Progress Singapore Party (PSP).

"But over time, these small things add up. Then it becomes politically very challenging to roll back any benefits and to raise taxes, or even to talk about it. And the country ends up quickly in a downward fiscal spiral."

The WP and PSP had called on the Government to adjust the Net Investment Returns Contribution (NIRC) framework to recurrent spending to be raised to 60 per cent from the current 50 per cent, and include a proportion of proceeds from land sales into recurrent revenue.

These would be alternatives to raising the goods and services tax (GST) from 7 per cent to 9 per cent, they said.

In response, Mr Wong said it is not responsible for MPs to push for changes in the rules at the first sign of need, taking the easy way out to avoid raising taxes.

If Singapore's NIRC had been 20 per cent less than what it is today, the GST rate would need to go up to 11 per cent - instead of 9 per cent - to meet the funding gap, he said. In other words, drawing more NIRC now means the next generation would have to pay more in taxes.

He also reiterated that the Government does not publicise information on the full extent of Singapore's reserves for strategic reasons. But it will put out as much information as possible on fiscal projections, including key expenditure drivers.

"I can't help but feel that the persistent requests for more information are red herrings. They are distractions from the key problem at hand," he said, adding the main issue is that of increasing revenue through taxes to meet future expenditure needs.

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He also set out the Government's approach to proceeds from land sales, which are currently ploughed into Singapore's reserves. Half of the overall expected long-term real returns are then spent through the Net Investment Returns framework.

This is done because land sales do not involve the creation of new wealth, but represent the conversion of a physical asset to a financial one, Mr Wong said. By not directly spending proceeds from land sales, Singapore thus avoids several pitfalls.

First, land prices move in cycles and can be volatile, creating too much uncertainty for the Government to plan long term. And if a government becomes too reliant on land sales to fund spending, it will have a vested interest in keeping land prices high - which will ultimately hurt the economy and Singaporeans.

In contrast, the current strategy provides a stable and sustainable income stream over time, he said.

Mr Wong reiterated the importance of saving up for future generations, noting that Singapore has tapped about $37 billion from its reserves over the past two years and will continue to draw on them this year to keep up the fight against Covid-19.

"We are not out of the woods yet, and I would say that we will not be able to put back what we have drawn down from the past reserves any time soon," he said.

It is especially important to ensure that Singapore has sufficient resources to deal with whatever lies ahead, he added, given that the world is likely to become less hospitable for small countries.

"I say we continue to husband our reserves, keep faith with the generations after us, and ensure that they too will always have access to this rainy day fund to meet any emergencies - and importantly, a steady stream of income for their future needs."

WP MP Leon Perera (Aljunied GRC) then asked when it would be reasonable to review the rules governing Singapore's national reserves, and if there is an optimal level of reserves that Singapore is aiming to accumulate.

He also took issue with Mr Wong's use of the word "cavalier" to describe the opposition's suggestions to change the rules, noting that the ruling party has itself changed these rules in the past. The rules were amended in 2008 to create the NIRC framework, and again in 2015 to add state investment firm Temasek to the framework.

"And if that wasn't cavalier, why is it cavalier when the Workers' Party now suggests doing that?" Mr Perera said.

Mr Wong replied that Singapore would likely have to experience a very disruptive event with permanent effects in order to once again relook rules on the use of its reserves.

At that point in time, the Government would very carefully study its options because there are deep implications for inter-generational equity in changing the rules, he said, adding: "Essentially, resulting in our next generation having to pay more taxes."

Mr Wong asked why the WP feels it is acceptable to turn to the reserves to raise revenue when Singapore has other tax options, including raising the GST while offsetting its impact on the less well-off.

"Why turn to the reserves when we have all these options, and why make the GST into the last resort?" he said. "Reserves - OK. Future generations - never mind, let's do it. But GST - cannot touch. Why take that approach?"

Mr Wong said the WP chose not to support this year's Budget based on a "misguided view" that GST hurts the poor, even though the Government has explained why it does not. He asked if the party was opposing the Budget because of political reasons, instead of looking at the facts.

"The Workers' Party is entitled to their views and to... not support the Budget," he said. "But it will not stop me, as Finance Minister, from doing what is right, and it will not stop this government from continuing with all our efforts to build a better Singapore."

This article has been edited for clarity.

Watch Finance Minister Lawrence Wong's full speech in Parliament:

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