Reserves: Govt will not change stance on dipping into reserves

But the Govt is willing to review 50% cap on use of income from reserves

THE Government is open to using more of the income generated from the reserves to pay for higher spending levels in the years ahead, Deputy Prime Minister Tharman Shanmugaratnam said.

But it will not change its stance on dipping into the reserves because doing so will weaken the capability of the reserves to benefit future generations of Singaporeans, he said.

He also said that the tax system can be more progressive and flagged raising asset taxes as a pragmatic approach.

Mr Tharman was speaking to The Straits Times in a wide-ranging interview that covered topics such as politics, society and the economy.

Questions posed to him were generated by analysts and economists but readers of The Straits Times' Singapolitics current affairs website decided which of these he would answer. One of the top questions was on Singapore's long-term fiscal strategy: Given that spending will rise, was it time to start tapping on the reserves?

Mr Tharman said the main reason it does not draw down on the country's reserves is that the ability "to give Singaporeans benefit by drawing income from the reserves perpetually will be weakened".

"We'd be able to do it for some time but for future generations they will not have this advantage," he said.

Instead, the Government draws on the returns from investing the reserves under the Net Investment Returns (NIR) framework. Under the NIR, the Government can draw up to 50 per cent of the long-term expected real rate of return on the reserves invested as well as dividends.

And Mr Tharman said that the Government is not ruling out changes to this rule, which was last revised in 2008.

"We shouldn't rule out modifications over time, particularly when it comes to the point when we need more revenues," he said.

But he ruled out tapping on land sales for the Budget, noting that land is already part of the reserves."The real question is: Are we drawing enough with this 50 per cent rule? That's something we can relook over time."

The Government has dipped into the past reserves only once. In 2009, it obtained the President's approval to draw down $4.9 billion from past reserves to fund special schemes in the light of Singapore's worst recession since Independence. In 2011, it put back all the money - $4 billion - it used into the reserves.

In fact, even under the NIR framework, the reserves are actually growing at a slower pace relative to economic growth.

For instance, if the reserves generate a "reasonable" 4 per cent in real returns, which is what the typical global portfolio of equities and bonds earned annually over the last 20 years, the Government can take up to 2 per cent of these returns.

This means then that the reserves are growing at 2 per cent in real terms. Assuming the economy grows by 2 per cent a year, this means that the reserves are not growing relative to GDP growth.

Mr Tharman said that using the reserves in this way means that the majority do not pay income taxes and it allows the Government to keep the Goods and Services Tax at 7 per cent "for as long as we can".

He added that there is room for a more progressive tax system and noted the Government has moved on raising asset taxes in recent years. This year, taxes on more high-end property and cars were hiked.

"It used to be flat and two years ago we moved to a progressive schedule for property taxes," he said. "This year we made it even more progressive. I don't think that's the final step."

DBS economist Irvin Seah said any move to raise the contribution rates will probably be treated with a lot of caution, given the Government's conservative fiscal stance. "There is room to move but I suspect they will move with some caution as spending more of returns just means a lot less for the future," he said.