Impact of GIC and Temasek Holdings' Lower Returns on Government's Budget and Long Term Programmes

Parliamentary Questions by Liang Eng Hwa & Foo Mee Har:

To ask the Minister for Finance whether the outlook of lower long-term financial returns as reflected in the annual reports of GIC and Temasek Holdings indicates that the Net Investment Returns Contribution from the financial reserves will be lower going forward and whether that will have an impact upon the Government’s ability to balance the overall budget and to fund committed long-term programmes. 

To ask the Minister for Finance (a) whether the Government needs to review its dependence on Net Investment Returns Contributions from Temasek and GIC to fund its budget given the tough investment environment and modest growth prospects; and (b) whether any long-term spending programmes will be affected if long-term returns from both portfolios end up materially lower than in previous periods.

Reply by Deputy Prime Minister Tharman Shanmugaratnam:

Madam Speaker, as questions 25 and 26 are related, may I take them together, please?

The Net Investment Returns (NIR) framework is based on the expected long-term real rates of return on the reserves invested by GIC, Temasek Holdings, and MAS. The expected long-term rates are used because the NIR framework seeks to smooth out budgetary spending across market cycles - in other words, to ensure we do not overspend in bull markets, or face a shortage of funds during a market downturn. 

If there were to be a long term deterioration in the investment environment, in other words a secular rather than cyclical deterioration,  we would expect a downward adjustment to the expected long-term rates, and hence a lower NIRC to the annual budget. The investment entities and the Government are each studying the possible scenarios for the long term environment. We cannot rule out a scenario of lower expected long-term rates. It is an added reason why the Government has to continue to review both our revenues and expenditures to ensure sustainability. 

First, even as we recognise the rising needs of an ageing population, we must remain prudent in our spending and emphasize value-for-money in every programme.  We must continually transform the delivery of government services to be more productive and innovative in achieving better outcomes. 

Second, we must continue to build up our revenues for the long term. I should highlight that although the NIRC is a sizeable revenue item, our operating revenues (comprising tax revenues as well as fees and charges) continue to serve as the primary source of our total revenues, at slightly over 80%. Going forward, we must continue to build a revenue structure that allows us to meet important spending needs, while ensuring that we maintain our economic competitiveness as well as keep our overall system of taxes and benefits progressive and fair. 

Third, and most fundamentally, sustainable government finances depend on whether we have a healthy and growing economy.  The recommendations of the Committee on the Future Economy (CFE), and the Industry Transformation Programme that we have embarked on, are key to growing the economy and creating good jobs for our people. This is the key way to grow our revenues sustainably.