Spending more than half of the returns from investing Singapore’s reserves is a “slippery slope”, said Senior Minister of State for Law and Finance Indranee Rajah on Tuesday (Feb 20).
Speaking on the sidelines of a REACH dialogue on the Budget, Ms Indranee explained why the Government chose to raise the Goods and Services Tax (GST) instead of increasing its spending of the Net Investment Returns (NIR) to above 50 per cent.
Under the NIR framework, the Government can spend up to half of the expected long-term investment returns generated by the Monetary Authority of Singapore, Temasek Holdings and GIC.
Increasing the spending above 50 per cent means using up more money and putting less into the principal sum, Ms Indranee said.
“We think that 50 per cent is a fair figure. If you start going down the slippery slope then after a while you have to make your principal work a lot harder. And then you are also not assured that you will be able to get consistent returns all the time, you don't know what the investment market will be like.
“The better thing to do if you want to ensure consistency, stability and sustainability … is to continue to tap, but keep it at 50 per cent and then also introduce the increase in GST,” she said.
Elaborating in a Facebook post late on Tuesday night, Ms Indranee said the suggestion that the Government use more of the returns – say, 60 per cent instead of 50 per cent – "assumes various things".
The first is that an additional 10 per cent of the NIR will give the same amount as a 2 percentage point GST increase. The second is that returns generated by the reserves will remain the same.
"However, even with the NIR framework (which essentially smooths out volatility by taking a longer term expected return), long term investment returns can still vary or fall. We can never eliminate investment risk," she said.
Using more of the reserves also assumes that Singapore will never need to draw upon the principal amount of reserves – which is “not a wise assumption” given that it had to do so in 2009 during the global financial crisis, she added.
Ms Indranee said that the greater the percentage of NIR Singapore uses, “the more the risks are magnified”.
"We take 50 per cent to be fair and prudent - use half now and leave half for the future. We should continue this for as long as we can in order to both preserve and grow our inheritance," she said.
At the REACH dialogue, held at the National Museum and which Ms Indranee co-hosted with REACH chairman Sam Tan, she was also asked if the announcement of the GST hike - planned for between 2021 and 2025 - was a bit early.
She said this was to give Singaporeans more time to prepare, "so they can arrange for their finances".
"It was also so that people will know, looking forward, what the landscape will be like. We wanted to be upfront and transparent with the population," she added.
Ms Indranee said she hoped Singaporeans would understand that at the end of the day, when the GST goes up and the money is collected, the funds are still returned to Singaporeans – in the form of developments in healthcare, infrastructure, security and education. She also reassured Singaporeans that there are offset packages as well as enhancements to the GST voucher scheme to help them adjust to the changes.
Other topics discussed during the session included the need to increase the foreign domestic worker (FDW) levy from April 2019. Mr Tan, who is also Minister of State in the Prime Minister’s Office and for Manpower, pointed out that there are currently 240,000 FDWs in Singapore, with that number set to grow.
“Every month, the Manpower Ministry receives a few thousand applications for FDWs. We did a projection, if it's based on the current trend, before 2020 the number of FDWs may hit 300,000."
Beyond 2020, the figure may climb to 400,000 to 500,000, he said, adding that Singapore should not be overly reliant and dependent on FDWs.
Around 100 REACH contributors, youths, professionals, managers, executives and technicians (PMETs), as well as grassroots, union and business leaders attended the feedback session on Tuesday.
Mr Tan said that REACH will organise another 12 feedback events to reach out to different segments of Singaporeans.