Singaporeans are both beneficiaries and stewards of the reserves: Prime Minister Lee Hsien Loong at the Debate on the Motion on Public Finances
By Tham Yuen-C, Senior Political Correspondent, The Straits Times, 8 Feb 2024
Sacrifice and careful husbandry by earlier generations was how the Republic built up its nest egg of past reserves, and the current generation should see themselves as not just beneficiaries but also trustees who protect this inheritance for future Singaporeans, said Prime Minister Lee Hsien Loong.
The past savings were built up at a unique time in Singapore’s history when it could set aside budget surpluses, and if they are gone, it will not be possible to build them up again, he stressed.
This is why it is important to have the “right instincts”: to save where possible, to resist pressures to use the reserves, and to unlock them only when really necessary, he said.
PM Lee was speaking in Parliament on Feb 7, amid calls by opposition MPs for the Government to use more of the reserves.
“We must not erode the patrimony, this family treasure, which we have inherited from our forefathers, nor should we burden future generations with debt nor mortgage their future,” he added.
This compact of protecting the reserves has been forged across generations of Singaporeans, and had also been upheld across both sides of the House, he said.
He reiterated the Government’s long-held stance on the reserves in response to a call by Progress Singapore Party (PSP) Non-Constituency MPs Leong Mun Wai and Hazel Poa for the Government to review its current budget and reserves accumulation policies.
The two NCMPs had proposed that more of the reserves be used to “help present-day Singaporeans reduce their financial burdens and improve their quality of life”.
They were joined in this by Leader of the Opposition Pritam Singh and Workers’ Party (WP) MPs, who repeated their party’s position that using more investment returns would not jeopardise growth of the reserves.
Mr Leong said that in the face of the goods and services tax (GST) hike and rising cost of living, accumulating reserves at the current rate “hurts the welfare of present-day Singaporeans”.
PSP’s view is that current reserves are enough, especially if the Government is raising taxes “for the sake of maintaining the current rate of reserves accumulation”.
How much is enough?
But it is a misconception that a specific number can be deemed enough when it comes to the reserves, said PM Lee.
He recounted how Singapore first tapped $4 billion of the reserves in 2008 when the global financial crisis hit, to help employers pay Central Provident Fund contributions and protect jobs.
When the Covid-19 pandemic hit, some $40 billion was drawn from the reserves to fund assurance packages and pay for vaccines to save lives and livelihoods.
That is far from the worst thing that can befall Singapore, PM Lee added. He noted that the war in Ukraine costs the Eastern European country more than US$100 million (S$134 million) a day.
These examples are why there is no sensible answer to the question of how big a nest egg is enough.
“Looking ahead 50 years, can anyone promise that Singapore will enjoy another half century of peace and tranquillity? Or guarantee that someone will come to our rescue if we ever find ourselves in the same situation as Ukraine?” he said.
“We can never say for sure how much is enough, because we do not know what kind of crises we will face in the future, or how our investments will fare.”
But that does not mean Singapore should mindlessly save for a rainy day without regard for present needs, said PM Lee.
That is why the Government had enshrined in the Constitution the “50-50” rule, which allows up to half of returns from investing the reserves to be used for current spending.
This also happens to be about the right ratio to keep the reserves in proportion with the gross domestic product, PM Lee added.
With long-term expected real returns of the reserves currently at about 4 per cent, the Government can spend about 2 per cent and save the other 2 per cent. Singapore’s economy is expected to grow at about 2 per cent a year if things go well.
Keeping this balance means the Government can count on the reserves to provide one-fifth of its annual revenue – or around 3.5 per cent of GDP – without having to double the GST, said PM Lee.
Reserves spent on current generations
Among the points Mr Leong made was that too much money from the reserves was locked up in trust and endowment funds to pay for longer-term spending, at the expense of current generations.
Ms Poa, meanwhile, suggested that it was excessive to plough the proceeds of land sales back into the reserves, since land is sold on leases and is thus more akin to a renewable resource.
The Government’s policies therefore prioritised future generations at the expense of current Singaporeans.
Rebutting these arguments, Minister in the Prime Minister’s Office Indranee Rajah said that money in these funds was “not just for the far unknown future”, but was set aside to meet specific funding commitments for the benefit of today’s Singaporeans.
These include the over $2 billion disbursed each year from the GST Voucher Fund to help lower- and middle-income households defray their GST expenses, and money in the Pioneer Generation Fund and Merdeka Generation Fund that is drawn down regularly to support Singaporeans in those cohorts.
As for funds set up to pay for large infrastructure projects, these help to smoothen the lumpy spending on such projects and ensure that future generations will not have to scramble to find money to pay for them, Ms Indranee said.
“This is prudent, thoughtful and responsible fiscal policy – not evidence of excess fiscal resources,” she added.
As for treating land sales as revenue, Ms Indranee said selling land did not generate wealth. Instead, it merely converted a physical asset into a financial asset.
The cash proceeds accrue to the reserves and are then invested to generate returns, which contribute to government spending. In this way, the proceeds of land sales are used indirectly in each year’s budget, she said.
Past savings are also a strategic asset during crises and emergencies. Thus, it would be imprudent to disclose the size of the reserves, she said in response to calls for greater transparency from PSP and WP MPs.
Take it to the ballot box
PM Lee noted that the growing political pressure to use more of the reserves was not new, and that it would always be tough to raise taxes.
Early in Singapore’s history, founding prime minister Lee Kuan Yew and his team had anticipated this, and that is why they had formulated a two-key system that required the president’s approval to unlock the country’s savings, he said.
When Singapore instituted the 50 per cent spending rule in 2001, the former prime minister intervened in the debate to remind the House that at the end of the day, the Government’s deepest obligation is to the future.
“Not just to the present; certainly not to the past,” said PM Lee.
He said that is why in taking care of today’s citizens, the People’s Action Party (PAP) Government is conscious to also safeguard the interests of young people not yet of voting age, future citizens not yet born, and the long-term interests of Singapore.
This ethos was in fact shared across the aisle in the past, he added, noting that former WP leader Low Thia Khiang had commended the Government for being prudent when it returned $4 billion to past reserves in 2009.
“Now I hear the opposition arguing that we should change the rules and draw more from reserves, and that of course they have no intention to raid the reserves, far from wanting to bankrupt Singapore,” said PM Lee.
“They say we can easily afford what they are proposing, I conclude their tune has changed.”
Mr Singh’s rejoinder was that different times call for different measures, which was why the PAP Government has said it is unlikely to return to the reserves the $40 billion it took out to deal with Covid-19.
Mr Singh, who is WP chief, also said the Prime Minister was cherry-picking what Mr Low had said.
PM Lee said the PAP is convinced that it has the right approach to stewarding the reserves.
Opposition parties who want to spend more should therefore put the issue upfront and campaign on it at the next general election, he said.
“Say you want to touch, you want to spend, you want to shift the rules,” he said. “Don’t pretend that you’re just as prudent, only more kind-hearted.”
The PAP will join the issue and convince Singaporeans that its way – taking a long-term view of the reserves, and striking the right balance between present and future needs – is the right one for Singapore, said PM Lee.
“We are confident that we will win the argument, and we’ll be able to get Singaporeans to do the right thing.”
PM Lee said he had spent 40 years of his life stewarding and safeguarding the reserves, and was now preparing to hand over to his successor a Singapore in good order, one that is more prosperous and more secure.
“I ask everyone to help them maintain the prudent policies that have served us well to keep Singapore on the right track, so that we can all continue to benefit from the nation’s success for many years to come,” he said.
Opposition MPs debate reserves accumulation and use: 6 key issues and the Govt’s response
By Jean Iau, Correspondent, The Straits Times, 8 Feb 2024
In a seven-hour debate, Parliament on Feb 7 discussed the question of Singapore’s national reserves and how much should be spent from them to meet today’s needs.
The debate involved 12 MPs and stemmed from a motion tabled by Progress Singapore Party (PSP) Non-Constituency MP (NCMP) Leong Mun Wai, who called on the Government to review its reserve accumulation policies to help Singaporeans reduce their current financial burdens.
Several opposition MPs, including Mr Leong and his fellow NCMP Hazel Poa, as well as Leader of the Opposition Pritam Singh (Aljunied GRC), raised issues about the past reserves.
In response, Prime Minister Lee Hsien Loong and Second Minister for Finance and National Development Indranee Rajah stressed the need to maintain and grow a healthy nest egg.
Here are some key issues raised by the opposition MPs, and the Government’s response to them:
1. The Government should be more transparent about Singapore’s reserves
Mr Leong said that as collective owners of the reserves, Singaporeans deserve to know precise information about the reserves, while Mr Singh argued that the Government should reveal figures to facilitate mature conversations on them. Mr Singh added that MPs currently vote on drawdowns of past reserves, without knowledge of how much is left over.
Ms Indranee said: “Just as our defence forces do not reveal the full extent of our weaponry and military capabilities, it’s not in Singapore’s national interest to disclose the full size of our reserves.”
She noted that there is some publicly available information on the reserves from the Monetary Authority of Singapore (MAS), Temasek and GIC, but added that the reserves are a strategic asset and hence all the information about them should not be disclosed.
2. Reserves are being accumulated at a faster rate than necessary
Mr Leong said his party expects Singapore’s substantial reserves to continue to grow.
Ms Indranee said that if Singapore were truly over-accumulating its reserves, the Net Investment Returns Contribution (NIRC) would be growing at a much faster rate than the gross domestic product (GDP). However, the NIRC has remained stable at about 3.5 per cent of GDP.
“In truth, we are not at all over-accumulating our reserves. If we slow down the pace of saving, the value of our reserves will diminish over time,” she said.
“The fact of the matter is that our spending needs are growing and these need to be funded. We do not have a lot of fiscal space, contrary to what PSP suggests.”
3. The NIRC’s 50-50 formula should be tweaked
Workers’ Party MPs said Singapore should not touch the principal of the past reserves and instead argued for a larger share of up to 60 per cent of the Net Investment Return of the financial reserves to be allocated to the yearly budget, up from 50 per cent currently.
Ms Indranee said the current formula strikes a balance between Singapore’s current and future needs by spending 50 per cent of the investment returns while putting the remaining 50 per cent into the reserves to grow for the future.
She said: “In a crisis, we can draw on our reserves, but having such solid reserves in itself also means that we have a rock on which to anchor ourselves in turbulent times.”
PM Lee said the reserves helped Singapore protect lives and livelihoods during the Covid-19 pandemic, and that the pandemic was far from being the worst thing that can happen to Singapore.
“If we find ourselves at war like Ukraine, how much is enough?” he said, noting that the war with Russia is costing Ukraine US$100 million (S$134 million) a day, and that the country is heavily reliant on support from America and Europe.
“Looking ahead for 50 years, can anyone promise that Singapore will enjoy another half-century of peace and tranquillity? Or guarantee that someone will come to our rescue if we ever find ourselves in a situation like Ukraine’s?”
4. Singaporeans today are not enjoying the full benefit of NIRC as money is locked up in endowment and trust funds
Mr Leong said some money in the Budget goes towards endowment and trust funds for future spending.
Ms Indranee said that on the contrary, the monies that the Government put in funds are not just for the far unknown future, but resources set aside to meet funding commitments that are benefiting Singaporeans today.
For example, more than $2 billion is disbursed yearly from the GST Voucher Fund for the GST Voucher scheme to help lower- and middle-income households defray goods and services tax (GST) expenses. Other examples include the funds for the Pioneer Generation and the Merdeka Generation packages.
There are also funds to meet longer-term commitments, especially where expenditure is large and lumpy, said Ms Indranee. For example, the Changi Airport Development Fund funds the development of Terminal 5 and other aviation facilities.
Ms Indranee said that by setting these monies aside, the Government can smoothen out lumpy spending. It can also give Singaporeans assurance that support will be available in the future, and that they will not have to scramble to find the money only when it is needed.
5. Reserves accumulation comes at the expense of CPF savings
Ms Poa said that the higher rate of returns achieved on Central Provident Fund (CPF) savings and the lower interest rate paid to CPF members contribute further to building of the reserves, and argued that these returns could have been paid out to CPF members.
Ms Indranee said there is no assurance that GIC’s returns will exceed CPF interest rates in the shorter term, and there have been years where GIC’s returns fall below CPF interest rates, but the Government does not cut CPF interest rates.
Where GIC has earned returns higher than CPF interest rates, this is used to cover for the many years of low interest rates, and when GIC earns returns below CPF rates.
“This ensures that Singaporeans do not experience fluctuating CPF rates and will continue to receive stable rates to grow CPF balances for retirement adequacy,” she said.
6. Proceeds from land sales should go into annual budget, not reserves
Ms Indranee said that there are several pitfalls to this suggestion.
First, land sales are affected by property cycles, which are volatile and difficult to predict.
This would mean government revenues could fluctuate with the market, making it more difficult for the Government to plan for the long term.
Second, when the Government relies on land sales to fund spending, it could develop a vested interest in keeping land prices high to maximise revenues.
Ms Indranee argued that by accruing land sales proceeds to the reserves, investing them and using 50 per cent of the investment returns through the NIRC, the Government is spending from land sales proceeds, but indirectly rather than directly.
“This provides a stable and sustainable stream of revenue and avoids the pitfalls of direct expenditure of the land sales proceeds,” she said.
Past reserves precious resource built up over generations to secure Singapore’s future: PM Lee
How big a nest egg is enough for Singapore? We can never say for sure, because we do not know what kind of crises we will face in the future, or how our investments will fare.
Singapore did not start with much. In 1959, when the People’s Action Party (PAP) Government first took office, Dr Goh Keng Swee was appointed Minister of Finance. He immediately discovered that the Treasury was bare. He had to implement immediate austerity measures, including pay cuts for civil servants and ministers.
It was only by the early 1980s, after two decades of nation-building, that we started to accumulate a nest egg of reserves. At that time, our forefathers considered what to do. Because they anticipated that the political pressure to spend these reserves would grow; and that if these hard-earned savings were not properly protected, they could be easily and unwisely spent – and once gone, it’s gone. And they felt that they had to do everything they could to guard against this.
In 1984, at the National Day Rally, Mr Lee Kuan Yew talked about how the reserves could be frittered away by a profligate government, spending money that it had not itself earned, within a single term. He proposed a simple principle: If a government wants to spend, it must first raise the money – whether by raising taxes, or making shrewd investments, or some other direct, open, proper means; but not by drawing down on the past reserves that it had inherited. And to guard against a rogue government raiding the reserves, Mr Lee mooted the idea of a president elected directly by the people, who would have the constitutional power and the moral authority to safeguard the reserves and be able to say no if the government wanted to spend it for an unwise purpose. That was the concept of the “second key”.
Four years later, in 1988, the PAP Government published the White Paper on the Elected President scheme. Professor S. Jayakumar oversaw the drafting and I helped him with it. We made the elected-president proposal a central issue in the 1988 General Election. After the election, in January 1991 we amended the Constitution to create the elected presidency. And Mr Wee Kim Wee, who was then already president, took on the new custodial powers and became the first president who wielded the second key.
We designed a whole system to protect the reserves, wherever those reserves might have been. The second key applies to the Government, especially the Ministry of Finance (MOF), but also to what we call the “Fifth Schedule” entities – MAS (Monetary Authority of Singapore), Temasek, GIC, CPF (Central Providend Fund), JTC, HDB. Why did we do this? Why did we include these six entities? MAS – because those are our official foreign reserves. Temasek – those are our GLCs – government-linked companies. GIC – it doesn’t have very much money of its own, but it is the manager of the Government’s money, of MOF’s money. CPF – which is Singaporeans’ savings, not really the Government’s money, but if you have a rogue government, this too will be at risk. And then JTC and HDB because they own and manage land: for industrial, housing, and for other uses. Land has value, and in Singapore, land is often very valuable. Therefore, we must protect our land, and not allow a government to do anything with it that is a covert form of giveaway. That was how we started.
Our first priority was to keep the capital sums in the reserves safe. We had not thought very deeply about exactly how much of the income to spend. We just took a standard accounting view – that the income from the reserves would be the interest and dividends that we earned on our investments. We called this the net investment income (NII) and we decided that the government of the day could spend 100 per cent of the NII. But in practice, we did not spend any of the NII, because we were still running comfortable Budget surpluses.
Later, when Mr Ong Teng Cheong was elected president, he questioned this rule. He asked: Why do we allow ourselves to spend 100 per cent of the NII? He argued, correctly, that we should also set aside something for the future. Because as the years pass, as the economy grows, if your reserve amount remains constant, it gets smaller relative to the economy. And you ought to allow the reserves also to grow. So the question is: How much to provide for the future, while also enabling the present generation to benefit from the reserves?
The 50-50 rule
There is no magic rule to this, but we arrived at a split of 50-50. There is a certain simplicity and fairness to that; a natural division that we settled on between the President and the Government. It is simple, it is intuitive, and everybody can understand it. We split the difference between now and the future. And so in 2001, Parliament passed a constitutional amendment to protect 50 per cent of NII, and add that to the reserves. And the other 50 per cent, the government of the day could spend – 50 per cent for the present, 50 per cent for the future.
Over the next decades, as we gained experience operating the safeguards, we progressively refined them. I have been closely involved in this process, first working with Prof Jayakumar under Prime Minister Goh Chok Tong, then later on as PM. Over time, we realised that NII may not be the best measure of what you should be able to spend. Because when we invest, we do not just look at income from dividends and interest – we also expect to make capital gains, which are often more important than dividend payouts.
For example, if you had bought Facebook shares at their IPO (initial public offering) in 2012 at a price of US$38, you would have had their value gone up 12 times – because Meta closed at US$455 on Feb 6. But you would not have received one cent of dividends. Meta is about to pay its first dividend in March. So in that circumstance, can we say that the return from the investment is zero? No. We decided that we should consider not just the interest and dividends, but also include capital gains and capital losses as well. That means spending on the basis of overall investment returns – capital gains and losses, plus in earnings, plus income, interest and dividends – instead of just investment income.
We also studied how other institutions which had built up large endowment funds managed them, particularly US Ivy League universities like Yale and Harvard. Harvard has the biggest fund. Yale has quite a big fund, but Yale has a model which is very successful and well respected. We learnt how they implemented consistent spending rules, how they smooth out the draw on funds, because from year to year the fund performance can be volatile.
We must understand this. We can project 4 per cent long-term expected returns. Next year, what would you earn? God only knows. It can be plus 10 per cent, it can be minus 10 per cent. Hopefully after 20 years, it is something like what you projected, but really, it’s volatile from year to year. You have to find some intelligent way to smooth it out, so that you can spend steadily and not be whiplashed.
I met Mr Leonard Baker, who chaired the Yale Investment Committee, to understand how Yale did it. We studied them, we modelled our rules on these ideas, taking into account our political and constitutional context, which makes it much more complicated for us to implement than for a US university. In 2008 we amended the Constitution again, to specify that the Government would spend out of net investment returns (NIR) instead of NII. But we kept the 50 per cent rule: the Government could spend 50 per cent of NIR, instead of 50 per cent of NII. We called this amount, which the Government can draw from the reserves and add to the annual Budget to spend, the NIRC (net investment return contribution). This is how we arrived at today’s system of spending half of investment returns and saving the other half, after decades of refining and improving the system, testing it out, making sure that it works as intended.
It Is important to put into context just how valuable an asset our reserves are to Singapore. As you have heard, the NIRC accounts for one-fifth (20 per cent) of government revenue. It is around 3.5 per cent of gross domestic product (GDP) – more than what we spend on any single ministry, more than we spend on defence, more than we spend on education, more than we spend on health – 3.5 per cent of GDP every year.
As far as the Ministry of Finance is concerned, it arrives. We don’t have to raise taxes, we don’t have to collect fees. The MOF just has to make sure that Temasek, GIC and MAS are run properly. And every year, you should be able to get 3.5 per cent of GDP. How does that compare with our other revenue sources? It is about equal to corporate income tax revenues, 1.4 times personal income tax revenues, and 1.3 times goods and services tax (GST) revenues.
Supposing we did not have NIRC out of the reserves. Then what would we do? You have a choice: You can double corporate income tax, you can more than double personal tax, or you can roughly double GST – so instead of 9 per cent it may be 18 per cent or 20 per cent GST. That is what the NIRC has enabled us to do. That is the burden which the NIRC has taken off Singapore taxpayers.
We are here today because our forefathers had the prudence to build up the reserves, the vision to anticipate the political pressures to spend them, and the imagination to design the two-key scheme to protect the reserves for succeeding generations. This is what stewardship means.
Despite the constitutional protection, the pressure to draw on the reserves will still be there, especially as spending needs grow. Hence the repeated questions and demands. How much do we have? Do we have too much? Are we saving too much? Can’t we save just a little bit less? This is far from the first time this subject is being discussed. The opposition will swear they are being responsible, and give many plausible reasons to draw on the reserves. Surely spending a little bit more, just a little bit more, won’t break the bank? Surely it’s okay to talk about the income or the returns and we don’t touch the principal. Surely we can treat land differently from other assets, no need to price it fully? Once we take that mindset, we are going down a deep hole.
How much is enough?
How much is enough? To me, that is the wrong question to ask. It is a misconception that when it comes to our reserves, there is such a number – say $X billion – that is enough. Then you have more than $X billion in the reserves, we have too much; we have less than $X billion in the reserves, we have too little. There is no such number.
We can have no idea what the future holds: what crises we will run into, how much we will need. When the global financial crisis came in 2008 to 2009, we tapped our past reserves for the first time. We made a Resilience Package, $20.5 billion, of which $4.9 billion was earmarked to come from past reserves. We implemented the Jobs Credit Scheme to help employers pay CPF and to protect jobs. We had a Special Risk-Sharing Initiative to encourage banks to lend, and the Government would share the risk of lending. In the end, we actually took $4 billion from past reserves. The economy revived much faster than we expected, and the Government fully returned this $4 billion by the end of its term.
In the crisis, we also used past reserves to guarantee deposits in commercial banks. We ring-fenced $150 billion for this purpose. And we said that we would put aside $150 billion from the reserves to back this guarantee. It’s not just words, it’s got real heft behind it. Thankfully, no banks failed, and we did not have to touch the money. But it was critical that we did that. And we could deliver a credible guarantee to bolster confidence in our banking system, and probably prevented a run. The deposit would have disappeared from our banking system and gone overseas. The banking system would have crashed. The exchange rate would have crashed. Those people who say it didn’t happen, it can’t happen – I say, get real. So was $4 billion enough?
The next crisis, Covid-19, when it hit us, that was on a different scale altogether. We sought the President’s approval, successively, to draw up to $69 billion from past reserves – for medical facilities, testing, vaccines, support schemes and assurance packages. We saved lives, and we saved livelihoods. In the end, we actually drew down about $40 billion. It’s not likely that we are going to be able to put $40 billion back into the reserves any time soon. Again, in Covid-19, our reserves were a tremendous advantage. It gave us confidence, and gave others confidence in us. We had the financial muscle to do everything we needed to do, without getting heavily into debt, unlike so many other countries.
The Ministry of Health could concentrate on its duties. The Ministry of Education could concentrate on its arrangements. The Ministry of National Development and Ministry of Manpower could look after the dormitories. You do what you need to do, the resources will be forthcoming. It’s a tremendous luxury. Without the reserves, would we have dared to pre-order vaccines, even before they were tested and proven, and produced? Would we have been able to pay up to 75 per cent of salaries in the crisis, in the Jobs Support Scheme, to protect workers and to prevent companies from closing? So we drew down $40 billion in the end. Is $40 billion enough?
Covid-19 will not be our last pandemic, nor our most serious one. And it is far from being the worst thing that can happen to us. If we find ourselves at war, like Ukraine, how much is enough? The war is costing Ukraine over US$100 million (S$134.7 million) a day. The country relies heavily on US and European support. The US has committed over US$100 billion in humanitarian, financial and military support. And now, another US$60 billion is being debated. The administration wants to do it. The money is desperately needed in Ukraine. Not just money but guns, weapons, ammunition, everything.
Europe has also committed almost US$100 billion so far and just committed an additional €50 billion (S$72.6 billion) in grants and loans over four years, with a lot of angst and debate, and internal disagreement. Hungary had strong views to the contrary. Without this external funding support, Ukraine’s war is over. How long more can the US and Europe sustain this support for Ukraine? Looking ahead for 50 years, can anyone promise that Singapore will enjoy another half century of peace and tranquillity? Or guarantee that someone will come to our rescue if we ever find ourselves in the same situation as Ukraine?
So back to the question – for Singapore, how big a nest egg is enough? There is no sensible answer to this question. We can never say for sure how much is enough, because we do not know what kind of crises we will face in the future, or how our investments will fare.
But that does not mean we should mindlessly save every dollar we earn, without regard for present needs. Instead, our mindset should be to treat past reserves as a precious resource that generations of Singaporeans have built up. Starting with the Pioneer Generation, but continuing with the Merdeka Generation, and with the later generations till this day. And it is a resource. How much? It doesn’t matter. Whatever the amount, we have put it aside as a nest egg, a rainy day fund. We draw on half the investment returns to supplement our Budget every year. The rest we touch only in times of exceptional need, or during crises, with special permission from the president. If during one term of government we happen to accumulate a surplus, then we add to the reserves. And hopefully, we can maintain the nest egg and keep on growing it gradually year after year, not just for this generation but for future ones as well.
The spending rule we have settled on, and enshrined in the Constitution, is 50-50. Half for now, half for the future. As I explained earlier, this is fair and just, and it also happens to be about the right sustainable proportion to keep the reserves in proportion with the GDP.
Let’s assume a long-term expected real return of roughly 4 per cent. It’s roughly that. You can see from GIC’s numbers. MAS’ is slightly lower. Temasek’s is slightly higher. But based on the 4 per cent, the 50-50 rule means we spend 2 per cent, we save 2 per cent. It means the reserves should grow by about 2 per cent per year. Because there is no other place for the reserves to grow. (Not) land, because it’s a conversion; the Budget, because it is not in the surplus; and borrowing, issuing government securities, because that is not really our money. It’s borrowed and one day it will be claimed. And foreign exchange, that’s also not really our money, because just as people can bring money to be deposited in Singapore banks, they can take the money out of Singapore banks any time. So just because the balance is sitting there, it doesn’t mean you can take it home.
So based on the 50-50 spending rule, 2 per cent goes back into the reserves, the reserves will grow, all things going well, 2 per cent per year. And our economy, all things going well, will also grow, about 2 per cent per year. Because my workforce is flat, my productivity, if I work very hard, I get 1.5 per cent productivity growth a year. So to make 2 per cent, 2.5 per cent, is already working very hard and doing quite well. In other words, on present settings with our present policies, the reserves will be growing about 2 per cent per year. The GDP will be growing about 2 per cent per year.
The balance is the same every year. It’s not getting bigger and bigger, more and more reserves while the GDP languishes. And so the contribution to our Budget, NIRC, will be the same every year, about 3.5 per cent (of GDP). And if you look at our Budget – the past five years’ Budgets, all of the figures are published – you will see that it has been about 3.5 per cent a year. It hasn’t gone 3.5 per cent, 4 per cent, 5 per cent, suggesting that I have more and more money in the kitty. It’s about there. And so if I keep on doing this, I will keep on being able to do this, and spending 3.5 per cent from the reserves every year, saving me a doubling of the GST. I think that’s a good thing. And that is the way to protect our nest egg. This is the right thing to do.
Spending within our means
Singaporeans are facing higher costs of living. Our spending needs have gone up, and we need more programmes to cater to and look after an ageing population. And the Government does have many programmes to help Singaporeans cope with the cost of living. In fact, we have covered not just the present generation and the younger generation, but also the older generation too, because we have the Pioneer package, and the Merdeka package. We have not forgotten the people who brought us here.
But each generation must spend within our means, and each generation has been able to spend within our means. It does mean that from time to time, we have to revise our taxes, raise some of them. Like the GST, which we have just raised to 9 per cent. And we have powerful reasons for doing so, which have been extensively debated.
Our spending needs have gone up – especially for healthcare and the ageing population. And we know that we will need the money sooner rather than later. Why do we do this? It’s not just for the fun of it. Nobody relishes a tax increase. Not even the Ministry of Finance. Why should the Government volunteer unnecessarily to do something which it knows is going to be unpopular? But if it has to be done, we will do it and that is what it means to take responsibility for governing a country.
We got here because of the careful tending of our forefathers. Despite the difficulties and challenges which they faced, they still put savings aside, so that we can enjoy this resource today. And we are better off for it, and grateful to them for it. Now, we too should fulfil our obligation to our children and grandchildren, to protect their interest in this nest egg. This nest egg is the money of the people of Singapore. It belongs to this generation. It belongs to future generations too, and we have a responsibility to both. And if we fulfil that responsibility, in time our children and grandchildren too can benefit from a steady stream of returns from the reserves, and also have an umbrella that can protect them, come a rainy day.
We must not erode the patrimony, this family treasure, which we have inherited from our forefathers, nor should we burden future generations with debt nor mortgage their future. We are beneficiaries of our forefathers’ sacrifice and vision. But we are also trustees, protecting this inheritance for future generations. It is not just for us, and we have a responsibility to our children and grandchildren. This is the ethos and compact which generations of Singaporeans have forged. And it is one that in fact has been upheld across the aisle in Parliament.
During the global financial crisis, we brought forward the FY2009 Budget to deal with the crisis. We had a crisis Budget. This was a Budget where we had the Jobs Credit Scheme. And we were going to draw $4.9 billion from the past reserves. In the Budget debate, Mr Low Thia Khiang questioned why the Government wanted to draw down on past reserves instead of using savings from the Government’s current Budget.
“What is unusual of our Resilience Package is that the Government will be using our past reserves to fund two main components of the package – the Jobs Credit Scheme, and Special Risk-Sharing Initiative”, he said.
“Past reserves are a strategic asset meant for use in times of need, especially when the Government faces financial constraints due to unprecedented circumstances which require the Government to respond in the interest of the nation. Hence I am surprised that the Government has chosen to set up a precedent in asking the President for approval for a drawdown of our past reserves when it has enough savings from the current term of Government to fund the entire Resilience Package, and the resulting Budget deficit which the Finance Minister has estimated.”
It was a very reasonable question. Actually, it was a very polite objection and Mr Low was right that he raised it and we debated it.
And our answer was, we are doing this so that we have dry powder, and there are current reserves which we may well need later. We put that aside. If we need to, we will use it. As it turned out, fortunately we didn’t need to.
Two years later, in 2011, when the Government paid the $4 billion back to the past reserves, Mr Low spoke again. He did the honourable thing and commended the Government. He said in the Budget debate again in 2011: “In conclusion, sir, the Budget this year has done one thing right. It has prudently put back into the past reserves the $4 billion that the Government took in 2009.”
This is how a responsible opposition conducts itself. There was a common commitment to safeguard our past reserves because of a shared recognition that they are a strategic asset only to be used for unprecedented circumstances.
The opposition has argued that we should change the rules and draw more from reserves, and that of course they have no intention to raid the reserves, far from wanting to bankrupt Singapore. They say we can easily afford what they are proposing. I conclude their tune has changed. The changes they are proposing are not simply policy changes, but require amending the Constitution to draw and to spend more from past reserves, which are protected by the President.
Some people say it is harder for this generation to abide by the same tight fiscal rules as before. They say that now growth is slower, and the cost of living has gone up, which are true. But our forefathers who put aside the surpluses which grew into the reserves were much less well-off than us. To put it bluntly, much poorer than us. Our standard of living is double or triple what our forefathers lived with. And yet they saved up surpluses for the future, whereas now we hear arguments that we should draw more from the reserves, on the basis that we need the money more urgently today. There is a Chinese saying: 创业难，守业更难， 败家轻而易举. Hard to start, even harder to keep it going, but all too easy to ruin and to lose everything.
Mr Lee Kuan Yew and his team had anticipated this outcome, this political pressure. They knew that there would always be many worthy, heart-tugging causes demanding government resources. Every MP has pet causes which he champions. We all want more things to be done. But we also know and Mr Lee knew that money would always be not enough. He knew that it would always be politically tough to raise taxes. That is why he and his colleagues designed and implemented the two-key scheme.
Securing the future of the country
Some of Mr Lee’s senior colleagues told him that in locking up the reserves, he was trying the impossible. Their philosophy was: If a generation wants to spend the money, somehow they will get their hands on it and they will do it. Mr Lee disagreed, and decided he had to try his best. It is up to us and for us now to prove that we can protect the nest egg, and that Singaporeans are capable of being prudent and responsible well beyond the founding generation. We are responsible, as forefathers one day, of generations yet to be born.
The Government is elected not just to take care of the citizens today, but also to secure the future of the country. The PAP Government has always done both. But in taking care of today’s citizens, we are very conscious to safeguard the interests of young people not yet voting, future citizens not yet born, and the long-term interests of Singapore. In 2001, when we instituted the 50 per cent rule applied to NII and amended the Constitution, Mr Lee intervened in the debate because some MPs were proposing good causes to spend the money on, particularly old people. And he reminded everyone in Parliament, he said: “At the end of the day, whom do we owe our deepest obligation to as a government? To the future. Not just to the present; certainly not to the past.”
We must protect the past reserves. It is our precious resource, our strategic advantage. It is a great source of comfort and reassurance that if we run into a jam, or find ourselves in a tight spot – which is bound to happen every so many years and not so many years – we will have one extra card to play. We will not be destitute. Other countries admire and even envy what we have, but they find it very hard to emulate what we have done.
It was only in Singapore, only in those circumstances, only with that history and that generation, and that phase of nation-building that we could do it. If it is gone, we would not be able to do it again either. Therefore, as for ourselves, we too must make a conscious effort to keep our system working. Singaporeans need to have the right instincts – save when we can, resist the pressure to touch it, and use only when we really must. Each of us must see ourselves as stewards and trustees, taking care of the interests of present and future generations. That is the way to keep to this discipline, to keep this rule, and to keep this system – with two keys – working well.
Ultimately, in a democracy like Singapore, on big issues like this, it is the people who will decide. The PAP is convinced this is the right approach for Singapore. As long as the PAP Government is in power, this is what we will do.
If any other political party thinks that this is not the right approach, if they truly believe that we should dip into our reserves more, then bring it to the ballot box. Put it upfront. Say you want to touch, you want to spend, you want to shift the rules. Don’t pretend that you’re just as prudent, only more kind-hearted. Campaign in the next general election on this issue. Ask voters for a mandate to form the government, change the Constitution, dismantle the second key. Put this squarely to the people, and let them decide.
The PAP will convince Singaporeans that our way is the right way for Singapore. I believe Singaporeans believe us. The Institute of Policy Studies survey was not just a survey of trust in the PAP Government in general. It says in the case of the PAP Government, the statement was modified to refer to the level of trust in it to manage the reserves. In other words, Singaporeans have high confidence in the PAP Government’s management of the reserves. Therefore, we are confident that we will win the argument, and we’ll be able to get Singaporeans to do the right thing.
Taking a long-term view of the reserves, and striking the right balance between present and future needs – these are vital responsibilities of any Singapore government. I have spent 40 years of my life stewarding, safeguarding and improving this system, continuing the work of those who had come before me. Now, I am preparing to hand over to my successor in good order a Singapore which is more prosperous and more secure.
I ask everyone to help them maintain the prudent policies that have served us well to keep Singapore on the right track, so that we can all continue to benefit from the nation’s success for many years to come.
This is an edited transcript of the speech by Prime Minister Lee Hsien Loong in Parliament on 7 February 2024 during the debate on public finances.
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