Impact of Returns From GIC and Temasek Holdings on Singapore's Fiscal Policy

Date: 9 July 2012

To ask the Deputy Prime Minister and Minister for Finance:

(a) whether the returns from GIC and Temasek Holdings had influenced Singapore's fiscal policy in the past and, if so, how; and (b) whether the returns from GIC and Temasek Holdings under the current investment climate will influence the planning of future fiscal policy.

Reply by DPM and Finance Minister Tharman Shanmugaratnam:

1. In the earlier years when our economy was growing rapidly, we were able to meet our expenditure needs from our operating revenues, with little reliance on investment income from our reserves. Strong economic growth also meant that we were able to run budget surpluses even with major spending programmes in education, defence, our infrastructure and other areas. The surpluses helped build up our reserves.

2  To ensure that the reserves could be sustained, and that both current and future generations could benefit from a perpetual stream of income from our reserves, we amended the Constitution to protect the principal sum. We also moved to restrict spending of the income to no more than 50% of the Net Investment Income from our reserves, so that the principal sum could continue to grow.

3. Five years ago, we began planning for future increases in our long term spending needs. We saw that spending would have to increase to take care of a growing number of older Singaporeans, and also to invest in new capabilities and the infrastructure for top-quality living. We therefore amended the Constitution in 2008 to introduce the Net Investment Returns (NIR) framework.

4. The NIR framework allows the Government to spend each year up to 50% of the long-term expected real returns on our reserves. This is a less conservative rule than the previous one, as it refers not just to income in the form of interest and dividends but the total expected returns which include capital gains. Taking the expected returns over a long horizon of 20 years also smoothens out the cycles and volatility in actual returns in global markets. This means that a short term downturn in the markets would not have very significant an impact on the investment returns available for spending for that year.

5. The Net Investment Returns Contribution (NIRC) has helped to diversify our revenue sources, so that we have a more stable and robust fiscal system. The NIRC has supplemented our Budget by about $7 billion each year. This is not a small source of revenues – about 2% of our GDP or about 15% of our expenditures^[1]. It has helped us to meet current spending needs while keeping taxes low by most standards.

6. This advantage we have is the opposite of what many of the developed countries are faced with. They will have to spend more than 3% of GDP each year just to service their debts.

7. Even with this unique advantage, our principles of fiscal prudence must remain unchanged. We must spend judiciously in every area – with outcomes in mind. And we must keep anticipating and planning for future needs and uncertainties. By taking this approach to fiscal policy, we ensure that what we do is sustainable, and we do not store up problems for future generations.

^[1] This refers to Total Expenditure (excluding Special Transfers).