Published Government Cash Surplus Numbers and Impact on Government's Fiscal Space and Decision on GST Rate Increase

17 Mr Liang Eng Hwa asked the Deputy Prime Minister and Minister for Finance (a) whether the Government’s published cash surpluses indicate that the Government has more fiscal space than it states in its Budget Statements; and (b) whether this reduces the need for the planned increase in GST rate.

The Second Minister for Finance (Ms Indranee Rajah) (for the Deputy Prime Minister and Minister for Finance): Mr Speaker, I thank the Member for his question as it highlights an area which some have misunderstood, leading to incorrect conclusions about our fiscal position and the need to raise the Goods and Services Tax (GST). Let me explain why.

There is a distinction between (a) cash receipts and (b) revenue that is available for spending.

Cash receipts reflect all the cash that comes in. Every year, the Department of Statistics (DOS) reports our cash receipts and indicates whether we have a cash surplus or cash deficit. But not all our cash receipts constitute revenue available for spending.

The largest difference between our cash receipts and revenue comes from the sale of state land. Such proceeds from land sales do not generate fresh revenue. They are simply a transformation of one asset to another – when land is sold, the asset is converted to cash. State land that are not due for immediate development are typically leased out for interim use. This yields revenue for the Government too, in the form of rental income.

So, selling land does not increase the Government’s revenue, and if we were to spend all the proceeds from land, it would deplete our store of wealth.

Think of a family that has a house. So long as the family owns the house, it can rent out some of the empty rooms to generate income. But if the family sells the house and uses the proceeds for day-to-day expenditure, it will soon have nothing left. However, if it invests the proceeds of sale wisely, it will still have the original sale proceeds, plus a constant stream of income from those proceeds. This income can then be used partially for expenditure and partially re-invested to help sustain both present and future members of the family.

Likewise, for Government budgeting, land sales proceeds are not considered part of our revenue and cannot be directly used for expenditure. Instead, they are invested and part of the investment income is used to support the spending needs of Singaporeans via the Net Investment Returns Contribution (NIRC).

The NIRC is now the largest single source of Government revenue, supporting about one-fifth of our spending needs. This is only possible because of the prudent and disciplined approach we have taken to building and protecting both our land and financial reserves.

In a recent social media post, the Workers' Party claimed that there is no need to raise GST because of the cash surplus. As I have explained, this claim is inaccurate and misleading. The bulk of our cash surpluses arise from land sales proceeds. Such cash proceeds do not create additional revenues for the Government and are therefore not a valid reason for holding off the GST increase.

Mr Speaker: Mr Liang Eng Hwa.

Mr Liang Eng Hwa (Bukit Panjang): Sir, I thank the Minister for her clarifications. Just one further related question. Under the Constitution, the Government is required to balance the Budget over the term of government. And so, I wanted to ask the Minister whether this requirement, does it lead to the Government typically being more conservative in the Budget during the early parts of the term, and then, distribute and spend a bit more in the later part of the term? Do we have that phenomenon because of that Constitution requirements?

Secondly, what is the Government's policy or the policy approach or principles in the way we distribute our accumulated surplus, accumulated during the term of government?

Ms Indranee Rajah: Mr Speaker, I thank the Member for his supplementary question. The Government seeks to run a balanced Budget over the term of government by spending prudently within the limits of its annual revenues and any accumulated surpluses. The Government has generally adhered to this in line with the Constitutional requirement. In general, this means that we avoid running deficits early in the term of government. This is not only to avoid a draw on past reserves, which should be reserved for exceptional situations, it also helps the Government to preserve fiscal headroom to deal with unexpected spending needs during its term of government.

However, in the event of a major crisis, the Government is prepared to run a deficit and seek a draw on past reserves regardless of which part of the term it happens to be in. And that is exactly what we have done this year because we have been facing one of the biggest crises of all. This year, the first full financial year of this term of government, we sought and obtained the President's approval to draw up to $11 billion for the continued fight against COVID-19.

If and when we have unexpected surpluses, we have used them in three ways. First, we share some of the surpluses with Singaporeans. In financial year (FY) 2018, we distributed up to $300 per Singaporean through the SG Bonus following an exceptional surplus in FY2017 due to unexpected market movements that resulted in higher Statutory Board contributions from the Monetary Authority of Singapore (MAS).

Second, we save for anticipated future needs such as the Railway Infrastructure Fund and the Coastal and Flood Protection Fund.

Last, any unutilised fiscal space becomes part of past reserves, which is invested and supports future spending needs via the NIRC.

Mr Speaker: Mr Louis Chua.

Mr Chua Kheng Wee Louis (Sengkang): Mr Speaker, firstly, I would like to thank Member Mr Liang for raising this question that we discussed during the Budget and, of course, the Minister for the elaboration.

A number of clarifications from me. Firstly, in the Parliamentary Question, it was asked about the fiscal space, and I recall in 2018, when the idea of the GST hike was first raised, if you look at the IMF Article IV report that was published at that point in time, and "looking at these taxes would reduce private income and consumption, especially of low-income households. A GST hike alone could lead to a lower path for GDP and private consumption, and limited external adjustment, relative to using more of the available fiscal space".

And, I think, again in 2019, the IMF also said that, "Singapore has tended to overperform with respect to its fiscal rule of a balanced Budget over the political cycle, contributing to a large build-up of net assets suggesting that Singapore has substantial fiscal space."

Mr Speaker, if we look at the situation in 2018 versus today, where we have COVID-19 in terms of what is impacting the cost of living, the question that I have is, is raising a regressive tax such as the GST really the best option for us in terms of raising revenues? Could there be other options that could be explored, for example, looking at the NIRC framework again?

And this also brings me to the second clarification, which I also raised during the debate earlier in February, in that if you look at our reserves position today, we are looking at having drawn down about 20 years' worth of surpluses – some Members have said that it is about 10 years. Where do our reserve stand today versus, say, last 10 years or five years? That would help us to adequately frame the context of this GST rise as well.

Ms Indranee Rajah: Mr Speaker, I thank the Member for his clarification. He opened by saying that we had discussed this topic during the Budget. Actually, we had not.

During the Budget, the Workers' Party, touched peripherally on the Budget. I believe Mr Louis Chua mentioned land sales. But what the Workers' Party did not say during the Budget debate, was what they had said in their social media post.

In their social media post, what they had actually said was that: "the Government says that the Government expects a deficit of $11 billion" and they said the deficit should only be $3.5 billion. So, effectively, in their social media post, what they are really saying is that the Government is not setting out the correct fiscal position.

The Government has set out the correct fiscal position. We do expect in this year, a deficit of $11 billion and we have explained why. So, essentially, in the social media post, what the Workers' Party had done was to point just to cash surpluses. And as I explained earlier, you cannot look just at cash surpluses to understand the fiscal position. You also need to look whether or not all of that constitutes revenue under our budgeting rules. And as for the reasons that I explained earlier, it does not. So, that was the first point that I wanted to respond to the Member Mr Louis Chua.

Then, the second point that he raised I think – well, he went through quite a lot of things but I think that the question that he ultimately came back to was, is the raising of GST the best option? I think after going through what the IMF said and so on, that was the question, and is it time to look at the NIRC formula again?

This has been explained in some detail by the Deputy Prime Minister during the Budget. In fact, this question should have been brought up during the Budget because then it would have given the Government the opportunity to explain the position.

But in summary, we all know, we are so badly constrained, because of COVID-19, we already have to go into actual reserves, we have to dip into actual reserves. It is no longer just a question of taking from income on the reserves. We are squeezed on the corporate tax front. Because of the economic situation, you can have a scenario where even your personal income tax is going to be affected. So, GST is one of the options that we have, but because we know that GST does have an impact on the lower income and the vulnerable, we take steps to deal with that.

So, as the Deputy Prime Minister explained earlier, actually 60% of our GST revenue comes from tourists and from the higher income. But we do know that middle income and lower income are affected, which is why we set aside the $6 billion Assurance Package, which will effectively buffer the majority of Singaporeans for five years against the increase and the lower income for 10 years.

And with respect to the last question, I think, whether when we look at our reserve position – we have already explained all of that in the Budget statement and Round-up speeches; it is not necessary for me to go into that. But essentially, our formula for spending of the returns is a fair one – 50% of returns. It is no magic to this formula but it is a fair formula: 50% for today's generation and another 50% for tomorrow's generation.

Mr Speaker: Mr Louis Chua.

Mr Chua Kheng Wee Louis: Thank you, Mr Speaker and I thank the Minister for the elaboration. The first point is that, during my speech, I did set out, in terms of the revenues and expenditures as well as how I arrived at some of these numbers.

But I think the question is also about whether or not, looking at this NRIC framework, that is something that we can revisit again. I agree with Minister that, because of COVID-19, this has actually impacted a lot of Singaporeans, a lot of corporates. And all the more, I think a regressive tax such as GST, should be something that we should reconsider. Because while the Assurance Package could offset the impact of the increase of 2% for a number of years, I think this is going to stick with them basically for the rest of their lives.

And if you look at, I recall Minister Lawrence Wong mentioning in 2018 that, we should never say never. So, if you look at the past amendments to the Constitution that we have done: in 1991, this was when the reserve protection framework was introduced; in 2001, we had the Net Investment Income framework; in 2008, NIR framework; and in 2015, Temasek Holdings was included the NIR framework as well.

So, given the impact of COVID-19 and all on the livelihoods of Singaporeans, the man on the street, could we not look at the NIRC framework again, as perhaps another measure, given where our reserves have been.

Ms Indranee Rajah: Mr Speaker, again, I thank the Member for his supplementary question. In essence, what the Member is saying is this: he is saying that you have the NIRC framework, can we not re-look it? We all know that things are not set in stone always, but we also know that when it comes to a matter of public policy and when you have frameworks, especially frameworks for expenditure, you cannot just chop and change every other year.

So, it would make instructive reading for Members and anybody who is interested in this, to actually go back to the time when we did set up the framework. This was dealt with in the speech by the Prime Minister when we did the amendments and it is a very instructive speech. Let me just read some parts of it.

He said, "Parliament is considering an important Constitutional amendment to our reserves framework. The immediate issue before us is just a formula change. How much income can the Government draw from the past reserves? We are changing the formula. The new formula will allow us to spend somewhat more. But the deeper significance of this amendment is to establish a more sustainable and equitable basis for spending out of the investment returns. Sustainable and equitable, so that we have resources which can benefit both the present generation and future generations. While we spend for our needs, we also put aside a solid buffer for contingencies, for the proverbial rainy day. That is the deeper meaning. But the most fundamental significance of this amendment is that it reaffirms the importance of protecting our reserves...".

In that speech, the Prime Minister takes us through the history of how originally it was just protecting the principal amount; then after that, we had the NII framework and we spent a 100% of that. Then, we went to 50%. The last amendment really encapsulated the formula that we want to use, the principle, which is that, on the returns, we use 50% for now, 50% for later.

So, I cannot say whether 50 or 100 years from now, we change that. But we should not do is just every year or every two years, when something looks like the the scenario will need a bit more expenditure, we just change the framework so easily. The framework took a long time to come to and was very carefully considered and thought through, tried and tested, many steps. And once we have a framework in place, you should not easily change it. But, and this is the real point, which I have mentioned, we know that there is an impact on lower income and middle income, which is why we have taken the steps that I mentioned earlier.

The Member talks about how the buffer or the Assurance Package will last for five years and 10 years, but the impact will be longer than that. Do not forget we have also said that we will enhance the permanent GST Voucher Scheme when the GST rate is raised. This will provide a permanent cushion for lower and middle income households, even after the temporary support ends. And also, over five and 10 years, there is time for incomes to rise.

So, it has been thought through very carefully, understanding that there is an impact on middle income and lower income, but we have taken the steps to ameliorate that, to buffer that, to make sure that they are okay.

But this still brings me back to the point I started off with, which is that it is not correct to suggest that because, we have a certain amount of cash surpluses that we therefore, that our fiscal position is better than we have stated or that we do not need to raise GST.