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Mr. Tavence Kang (''Wise to review rules on reserves'', Straits Times, 24 Oct 2008) asked if the new rules for spending from returns on our reserves might cause the Government to have insufficient income for spending in years when investments are unprofitable - which will likely also be bad economic times when needs are greater.

The Constitutional amendments recently approved by Parliament will allow the Government to spend up to 50% of the 'long-term expected real returns' on our reserves. This means spending based on total returns (including capital gains), not just interest and dividends as in the existing rules. It will also be estimated based on expected returns over the long term, instead of actual returns each year. Further, under the new rules, spending can only be out of real returns (adjusted for inflation), so as not to erode the purchasing power of the reserves.

As Mr. Kang suggested, actual returns can be volatile. This is why the new spending rule is based on expected returns over a 20-year horizon. This is an estimate of the average rate at which the reserves will grow over the long term, across investment cycles, and hence provides for a stable revenue stream.

There is nevertheless a risk that actual returns over the long term will differ from forward-looking expected returns, as Mr. Kang also implied in his letter. To help ensure that we do not over-spend because estimates of expected returns turn out to be mistaken, several safeguards have been put into place. The Government will review the expected rates of return afresh each year, advised by the Boards of GIC and MAS, who will take all new information into account. Further, the Government?s estimates must be agreed to by the President, who will be independently advised by the Council of Presidential Advisers.

These checks are in addition to the safeguard that the Government can only spend up to 50% of the expected real returns. In total, the new framework provides for a fair distribution of benefits from our reserves, between current and future generations of Singaporeans.

Mr. Kang rightly pointed to the need to spend wisely, even as we obtain more revenues from the reserves. This remains a key priority. A rigorous framework is in place to ensure that Ministries' budgets are prudent and grow no faster than resources permit. The Cut Waste Panel will also look into any public complaints on wasteful spending.

CHIN SAU HO
DIRECTOR (CORPORATE COMMUNICATIONS AND SERVICES)
MINISTRY OF FINANCE