Singapore is not "oversaving" — in fact, the national reserves are growing at a rate that is "barely keeping pace" with economic growth, said Deputy Prime Minister Lawrence Wong.

“Some people think… just take more from the NIRC (Net Investment Returns Contribution), what harm does it do? The other misconception is we already have so much, so what's the harm?”

But the investment returns being channelled back into the national reserves is key to building up the country's coffers in the long run, Mr Wong said.

“If we don’t have anything going back into the reserves, the value of the reserves will diminish over time.”

Mr Wong was speaking to CNA in interviews for a brand-new series called Singapore Reserves Revealed.

Under the NIRC framework, the Government can spend up to 50 per cent of the net investment returns on net assets invested by GIC, the Monetary Authority of Singapore and Temasek — the three entities that manage and invest Singapore’s reserves — and up to 50 per cent of the net investment income derived from past reserves from the remaining assets.

There have been calls by opposition parties for the Government to increase the proportion of the NIRC that can be used for recurring expenditure needs.

The Workers’ Party, for one, had proposed drawing 60 per cent of the NIRC for government spending, up from the current 50 per cent, as one of the alternatives to raising the Goods and Services Tax (GST).

Previously, Cabinet ministers, including Mr Wong, have defended the current framework as fair and that Singapore needs to continue with its approach as part of considering the needs of the next generation.

In its 2022/23 annual report released last month, GIC said its 20-year annualised real rate of return came in at 4.6 per cent for the year ended March 31. This was up from 4.2 per cent in the previous financial year, and its highest since 2015 when real returns hit 4.9 per cent.

In his interviews with CNA, Mr Wong raised an example of the country's reserves earning a return of 4 per cent, after adjusting for inflation.

“If we take half, it means 2 per cent goes into the Budget (and) 2 per cent goes back into the reserves.”

With the Singapore economy growing at about 2 per cent each year, it means that the “reserves (are) keeping pace, barely, with our economy”, he said.

“So, it’s not as though we are oversaving.”

ORIGINS OF THE 50-50 RULE

As part of the series, CNA was given exclusive access to a secret vault where the Government stores its gold reserves. Financial influencers also took part in an Ask Me Anything session with Prime Minister Lee Hsien Loong where he was asked, among other questions, who knows the exact amount of reserves which Singapore has.

"Well, the ministers overseeing the finances of the Government, which means the minister for finance and there’s a small team who are also involved and the PM will know this," Mr Lee said.

"The officials in Ministry of Finance will know this, who are involved in managing the reserves. And the president and the Council of Presidential Advisers will also know this because they are overseeing this and they are regularly briefed and they can ask any questions which they want."

In his interview with CNA, Mr Lee also said the 50-50 proportion of the NIRC framework is something that Singapore should keep.

“You could say nothing is forever. That is true. But when you have made a commitment, I will not come back and reopen the subject the next day.”

On how the 50-50 spending rule first came about, Mr Lee noted that it was the idea of former President Ong Teng Cheong. Mr Ong served from 1993 to 1999 as Singapore's fifth President.

“When we first decided to lock away the reserves and introduce the elected President, we had not given a lot of thought to how to treat the income from the reserves, and we did not really have a very clear distinction between income from the reserves and investment returns," said Mr Lee.

“So we just said: ‘Well alright, we lock up the principal sum and the income from the reserves, you can spend it.’ All of the income. But when we said income, what we meant was interests and dividends… and we didn’t think of what happens when you have capital gains, for example.”

Mr Ong had looked into this and asked why all the investment income was being spent and not have some be set aside for the future, Mr Lee recalled.

“Then the question is, what is the formula for now, between now and the future? Mr Ong said: ‘Why not we just split it half — 50-50. Half for now, half for the future, and therefore you spend half of the net investment income’,” said the Prime Minister.

“So, fair enough, we accepted that and we amended the Constitution,”

This rule was put in place in 2001. The Government explored further ways to improve the system, such as moving to the net investment returns (NIR) framework in 2008 to include capital gains in the definition of returns and the use of a calculation based on long-term expected real returns, as opposed to present returns.

RESERVES BEING USED IN OTHER AREAS

The NIRC supports about one-fifth of the Government’s spending.

Since 2016, the NIRC has been the largest single contributor to the Budget. However, collections from corporate income tax overtook the NIRC in FY2022/2023, totalling S$23.1 billion, based on the latest government financial statements released in July. The NIRC contributed S$22.4 billion.

“Sometimes we think that the reserves are there only for future emergency,” said Mr Wong in his CNA interviews. “But in fact, the reserves are also an endowment providing for today’s needs and all of us are benefiting from it right now.”

Mr Wong, who is also Finance Minister, said Singapore runs a “structural deficit” of about 3 per cent of gross domestic product in its primary fiscal balance.

This gap is currently covered by the NIRC. Without that, Singapore “would have to cut back on almost 3 per cent of GDP of spending”, he added.

“That's a lot. It will mean less public housing for Singaporeans. It will mean less infrastructure. Our trains, our buses — we will have to cut back on services,” said Mr Wong.

“This is tightening of the belt to an extent that no one has ever felt before.”

The reserves are also being tapped for a range of other needs, such as special drawdowns in times of crisis.

Singapore first tapped its reserves in 2009, taking out S$4.9 billion to support the economy through the global financial crisis. Over a decade later, it drew on the reserves on three separate occasions during the Covid-19 pandemic between 2020 and 2022 — using about S$40 billion in all.

“The only alternative would have been to borrow, which is what most other countries do,” said Mr Wong, who was co-chair of the country’s Covid-19 multi-ministry task force.

“When you borrow, you have great uncertainty. And therefore, I think it would have impacted the swiftness and the decisiveness of our response,” he added.

Citing how Singapore was the first in Asia to secure the Pfizer-BioNTech’s Covid-19 vaccine, Mr Wong said the reserves had played “a critical role” in making that possible.

“I have no doubt that without the reserves, we would have ended up with more lives lost to Covid-19, and certainly we would have ended up with a much higher unemployment.”

The country’s reserves also play a key role in funding major infrastructure and land reclamation projects, such as the Tuas Port.

Noting that land reclamation projects are “costly” with benefits only apparent over the long run, Mr Wong said: “Without the use of past reserves for land reclamation, we would likely end up borrowing or using our own current resources. That would certainly be a bit of a constraint.”

However, he stressed that one “should not get the mistaken idea that this is a draw on reserves”.

“Because when we use past reserves to create new land, the land is also protected as past reserves. And when we create the land and eventually sell the land for development, those land proceeds go back to the reserves again,” Mr Wong said.

“So from that point of view, it’s really just a conversion of assets from finance to land, and then back to finance.” CAN

Source:
courtesy of TODAY

by TANG SEE KIT

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