What goes into balancing the Singapore budget?
by Ryan Ong
SINGAPORE has had an expansionary budget two years in a row now, so it’s not surprising the budget surplus will shrink a little. Most of it is caused by an urgent (read: expensive) need to upgrade our workforce; as we head into a future of further automation and digital trade, it’s unlikely that Singaporeans can manage first world costs of living by being an assembly worker or cleaner. But where does this money come from, what are the Net Investment Returns that supposedly fund it?
What goes into Singapore’s budget anyway?
The money from Singapore’s budget comes from two sources. The first is the government’s operating revenue, and the second is the Net Investment Returns Contribution (NIRC).
The operating revenue contributes the most to the budget, and is about 17 per cent of our Gross Domestic Product (GDP).
Operating revenue refers to money that the government gets on a consistent basis. For example, if money comes in from income taxes, that would be operating revenue; it happens regularly. But if a neighbouring country buys $10 million worth of purified water from us, that would be non-operating revenue (it’s a one-off event). So bear in mind the operating revenue is not all the money the government makes.
For financial year 2016, these are the components that made up the operating revenue (in order of size)
– Corporate taxes (21.4 per cent)
– Goods and Services Tax (16.9 per cent)
– Income taxes (16.1 per cent)
– Asset taxes (seven per cent)
– Fees and charges (5.3 per cent)
– Motor vehicle taxes (4.7 per cent)
– Customs and excise (4.6 per cent)
– Betting / gaming (4.3 per cent)
– Stamp duties (four per cent)
– Statutory Board contributions (three per cent)
– Witholding tax (2.1 per cent)
– Combination of other small, undisclosed fees and taxes (total up to 10.6 per cent)
The NIRC (described below) contributes a further two per cent of GDP.
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Hold on, what about land sales?
Member of Parliament (Aljunied) Sylvia Lim has mentioned that government land sales should be part of the revenue. This would ensure that, when the government does sell land, we all gain something out of it.
However, the Singapore government right now puts land sales under the NIRC (which I describe below). This means the budget can tap land sales revenues, but in a much more limited way than if it were considered part of the revenue.
Politics and I mix like pee in a glass of fine wine, so I won’t go there; you probably have your own opinions on how much we should tap land sales to fund the budget.
What is the NIRC?
Unlike many other countries, Singapore does not rely heavily on borrowing. Instead, we invest the monies collected by the government, and then use the return on the investments to fuel social spending, economic development, infrastructure, and so forth.
The NIRC has two components. The government can use:
– Up to 50 per cent of Net Investment Return (NIR) from Temasek Holdings and the Monetary Authority of Singapore (MAS)
– Up to 50 per cent of Net Investment Income (NII)
The NIR is the expected long-term real rate of return, on investments made through the Government of Singapore Investment Corporation (GIC) and MAS. The term “real” just means the projected rate of return takes into account the effect of inflation*.
The NII is composed of dividend payments, interest on loans issued by the government, or other sources of income derived from investing our past reserves. This includes the assets held by Temasek Holdings (but not GIC or MAS, as they are under the NIR).
(*A nominal return of five per cent today may translate to a return of only two to three percent by 2047, due to rising costs over time. NIR uses the real rate of return, as they are relying on expected long-term rates. Long-term generally refers to a period of 30 years or more).
What the heck is the difference? Why do we need NII and NIR?
The key difference here is that the NIR uses total returns. Total returns means capital gains, dividends, interest, and all the various ways of making money off an asset are included in the calculation. So, a highly simplified example:
Let’s say the Singapore government, through a fund, purchases a large share in a company that’s booming. After a short period, we sell off the shares in the company for a large profit (capital gain). However, there are no dividend payouts gained in this transaction. Now if we only had the NII, the government couldn’t tap the sizeable capital gains for use in the budget; because the NII is composed of things like dividend payments, and not capital gains.
(Well okay, there are probably ways they could if they really wanted to; but it’d involve a lot of red tape, transferring money back and forth, and probably 70 hours of useless meetings).
It’s much more complex than this, but the simplest explanation suffices: it lets the government access money that they couldn’t easily tap for the budget otherwise.
The second reason is that the NIR is based on expected returns, rather than actual returns. This prevents our budget from becoming a roller-coaster ride.
Income sources like dividends (from the NII) are subject to fluctuations. Dividends are paid out based on how well a company is doing. If the budget were solely pegged to it, we would end up with huge budgets on a good investment year, and tiny budgets on a bad investment year. That would be a real pain for a number of reasons.
Here’s one example: dividend payouts tend to shrink when times are bad, such as in the middle of a global crisis (ala 2008/9). Now in situations when companies are folding and unemployment is rising, we would need a bigger budget to help, by supporting domestic businesses or launching public infrastructure projects to provide jobs. We’d also need more social support, to deal with factors like high retrenchment. The last thing we’d need is a a smaller budget, which would compound an already bad situation.
Aren’t we being presumptuous about how well our investments will perform?
It’s true that no forecast is 100 per cent accurate, when it comes to investments. But the key thing to note is that we’re not borrowing – the money that comes from the NIRC is a contribution on top of the government’s operating revenue. What we’re spending, when we tap the NIRC, is an excess earned from our investments. We won’t go bankrupt or see our economy collapse, even if the long term returns are below expectations.
In fact, an argument could be made that 50 per cent is too little. If we spend a more of this excess, maybe we’d have fewer senior citizens collecting cans for recycling, or skipping kidney dialysis because of the cost. A poor Singaporean can’t eat the budget surplus.
Featured image by Sean Chong.
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