Whenever the need to raise taxes is mentioned, the natural question arises of why Singapore does not tap more of its reserves, Finance Minister Heng Swee Keat acknowledged yesterday.
But it has been drawing on the financial reserves for the past decade, he pointed out.
Now that the economy is maturing and the population ageing, "we must husband this resource carefully, prudently and responsibly", Mr Heng said, laying out why taxes, such as the goods and services tax and tobacco excise duty, will have to be raised instead. The full size of the reserves is never revealed for strategic reasons, but it is estimated to be over $1 trillion.
The net investment returns contribution (NIRC) framework allows the Government to spend half of the long-term investment returns generated by the Monetary Authority of Singapore, Temasek Holdings and GIC, the three entities that manage and invest the reserves.
Some have called for more of the investment returns to be used.
But Mr Heng said this may erode Singapore's savings in the long run. If all the returns are used instead of being ploughed back into the reserves, the principal sum will not be able to grow at the same rate as nominal gross domestic product and will stagnate over time.
As Singapore's economy grows, the NIRC's share of the GDP would eventually drop.
"The impact of this will not be trivial, given that our Budget now relies on the NIRC as our largest source of revenue," said Mr Heng, noting that this has more than doubled from $7 billion in financial year 2009 to an estimated $15.9 billion in the upcoming financial year.
In a more extreme scenario where Singapore spends more than its investment returns, "we will eat into our nest egg".
"Doing so would mean that our reserves will shrink over time, generating a progressively smaller stream of income in the years that follow, till eventually our reserves are exhausted," said Mr Heng.
"This is not the Singapore way."
The reserves also give Singapore long-term economic stability and the means to weather crises. This is important for Singapore, he noted, as a small and open economy with no hinterland or natural resources.
During the 1997 Asian financial crisis, for example, Singapore's reserves and strong economic fundamentals kept the Singapore dollar stable even as currency speculators were attacking other regional currencies, said Mr Heng. The reserves anchored Singapore's economy in the 2008 global financial crisis by backing a $150 billion guarantee for all bank deposits here, and funded $4 billion for the Jobs Credit Scheme and Special Risk-Sharing Initiative in 2009.
"We can never predict where or when the next crisis will come. But we know, when the next crisis hits, we will be able to weather the storm because we have our reserves."