Speech by Mr Raymond Lim,Acting 2nd Minister for Finance at the Committee of Supply Debate 2005 at The Parliament, 2 March 2005 (continued)

19. It is understandably difficult for the public to suggest major changes for the public service, as they are not familiar with the detailed workings and processes in public sector agencies. Nevertheless, we have had some extremely insightful contributions. One suggestion was that MINDEF's GP cars should use lower grade petrol - to use 95 octane instead of 98 octane petrol because they are driving on normal roads. This saved the Government $10,000 a year. Another suggestion has led to the Traffic Police sending requests for the particulars of offenders via registered mail only if the recipients fail to respond to the first request sent via ordinary mail. That has saved the Government $113,000 annually.

General Government Procurement - Offsets

20. Dr Wang Kai Yuen suggested that we consider the use of offsets in government defence procurement to help create jobs for locals, and that Government should set up a multi-agency committee to further study this. We do not practise offsets for general government procurement. Not only are offsets incongruent with our general economic policy of free market competition, but they also are in violation of our WTO obligations on general government procurement and our commitments under various bilateral free trade agreements. Although the WTO-GPA does offer one, and only one exception, pertaining to ''procurements indispensable for defence purpose'', there is no compelling reason for MINDEF to depart from the 'clean price' policy in their major acquisition programmes.

21. The link between offsets and job creation for the Singapore economy that Dr Wang makes is also a tenuous one. Whether it is "Economics 101" or "Economics 501", the basic lesson of economics is that there is no free lunch. If we want our defence procurements to also serve our job creation objectives, somebody has to pay for it. And the question we must ask ourselves then is whether incurring higher costs for defence procurement is an effective way of helping our local workers.

22. In the past, MINDEF had used offsets to some extent, but the benefits in terms of technology transfer to local companies, job creation for local workers, and additional value-add for the Singapore economy were found to be limited. We are therefore not convinced that the uncertain benefits of offsets are worth the higher costs of defence procurements that the Government will have to bear.

Measure Performance

23. Maximum discretion over the use of given budgets must mean strict accountability for the use of funds. Mr Leong Horn Kee has suggested that all Government agencies state and publish appropriate Key Performance Indicators (KPIs). This we already do in our Expenditure Estimates book, but I agree with Mr Leong that the number and scope of key workload and performance indicators need to be appropriate and realistic.

24. Performance indicators need to be observable and verifiable to provide meaningful analyses. They also need to be adjusted as needs and priorities change. The problem is that the indicators that are easy to measure are not very important to the Ministry's desired outcomes while those that are relevant to the Ministry's desired outcomes are difficult to measure. But we have to keep trying to find good ones. We will take into account the suggestions that Mr Leong has raised and if Mr Leong has any further suggestions, MOF will be happy to hear them.

Basis for Accounting - Accrual vs Cash

25. Mr Leong has also suggested that the Government move to be more like companies, and adopt the accrual basis for national accounts. In adopting the basis of accounting, we must be clear about the purpose for which the accounts are being drawn up. The main reason why companies prepare their accounts on accrual basis is to allow a better match of their costs and revenues for profit reporting. Over and above the accrual accounts, many companies track their cash flows religiously as a key operational and management tool.

26. Our statutory boards maintain their accounts on an accrual basis to better define their operating surplus or deficit. However, the Government's budget, which is submitted to Parliament for approval, is made on a cash basis because this gives Parliament the most direct control on the resources to be made available to ministries. The imperative of accrual accounting to define profit does not apply to Government, whereas the imperative of cash accounting to directly control resources for expenditure is overriding.

27. But ministries apply elements of accrual accounting to enhance their financial and resource management. For example, when ministries need to know their total costs for delivering a service so as to decide the fee to charge for it, they will supplement their cash costs with accrual elements like the depreciation costs and the imputed rental of a government facility. Ministries are also required to keep fixed asset registers to track the physical assets and to calculate the depreciation of these assets.

28. Governments in most countries are still relying on cash basis of accounting for financial reporting and budgeting. The key advantage of the cash basis is that it is simple, objective, and prudent. It instills discipline in the allocation of budgets. It will not allow the government, for example, to make a $300m expenditure on a facility look like a $10m commitment, which is the annual value of the depreciation of the facility over 30 years.

29. MOF officers have been following closely the development of public sector financial reporting in other countries and we are aware that the public sectors in countries such as New Zealand, Australia and United Kingdom, have implemented the accrual basis of accounting. Their experience has been mixed on whether the additional complexity and effort of accrual accounting has indeed led to better expenditure control and discipline, or that cash control is, in the end, the most direct way to influence government programmes. We will keep monitoring this, and "never say never".

Others

30. Let me now address the other issues members have raised.

Casino

31. Mr Steve Chia has asked what we intend to do with the tax gains the government expects from the casino. Let me remind Mr Chia that we have not yet decided to have a casino. We are still studying the feasibility of an integrated resort in Singapore, including the option of having a casino as part of such a resort. The strategic objective is tourism growth rather than revenue - it is to expand our range of tourism offerings. The whole economy benefits if we have more tourists, and they stay longer and spend more. But there are negative effects on society which have to be considered carefully before a final decision is taken on the casino.

32. So, it is too early to speculate on the tax revenue that a casino might bring. And, quite frankly, I do not understand why Mr Chia thinks that bringing a casino into Singapore will give civil servants and Ministers a bigger pay check. Many arguments have been made about whether we should have a casino or not, but no one has made this extraordinary leap that Mr Chia has made.

Tobacco vs Liquor Duties

33. Mr Ong Ah Heng has asked whether we are unwittingly penalising older Singaporeans by raising tobacco duties. We are not. As Mr Ong has alluded to liquor duties, I would like to assure him that when we decide to raise duties, be it on tobacco or any other items, we always do so soberly. In this case, we were motivated by serious public health concerns which cut across age segments and in particular the young.

34. Seven Singaporeans die from smoking-related causes each day. The problem has been compounded by the prevalence of low-priced cigarettes which has made smoking more affordable. Each pack of low-priced cigarettes costs $1 to $3 less than conventional brands. More are turning to low-priced cigarettes rather than quitting. 42% of smokers in Singapore today smoke low-priced cigarettes compared to only 33% just one year ago.

35. Studies have shown that higher tobacco duties do encourage more to quit and fewer to start. We have been progressively raising tobacco duties over the years and this has helped reduce smoking among the population at large. But as I have said earlier, we are concerned about the young, and young women in particular. In 1992, 2.8% of women aged 18 to 24 smoked. By 2001, this has tripled to 8.2%. We decided to further raise tobacco duties this year to curb smoking, especially among younger Singaporeans. I hope that they will think twice before picking up the habit. I also hope that existing smokers will seriously consider quitting.

Conclusion

36. Mr Speaker Sir, our fiscal landscape has changed. The era of large budget surpluses is over. International competition is driving our taxes down, while demographic changes are driving demands in public expenditure up. The norm going forward will be fiscal tightness. The need for sound fiscal management is thus all the more critical. Sound fiscal policies, a lean and trim government, and a low tax burden contribute directly to the economic well-being of Singapore. They sustain investor confidence and free up resources for the private sector. By remaining lean, efficient and effective, the government creates the enabling conditions for a more dynamic and entrepreneurial economy, while providing adequate services to meet the needs of Singaporeans.