The investment of our reserves provides a valuable stream of income for the Government Budget, which can be spent or invested for the benefit of current as well as future generations.
Q24. How do Singaporeans benefit from the investment returns from our reserves?
The investment returns from our reserves provide additional resources for Government spending to benefit Singaporeans. This includes Government investments in education, healthcare, transport infrastructure, R&D and other areas to strengthen our social compact, improve our living environment and to grow our economy.
The ability to tap our reserves in a sustainable manner is a significant financial advantage for Singapore. Our situation is quite unlike that in many countries that have to service their debts and other liabilities from their budgets on an annual basis, and hence either raise taxes for the purpose or engage in further borrowings so as to service current borrowings.
In Singapore, the Government is instead able to take in money from the investment returns of our reserves to supplement our Budget on a sustained basis, in keeping with the provisions in the Constitution. The few other countries where Governments are able to derive net investment income for public spending are typically those with substantial reserves of natural resources such as oil.
The investment returns of our reserves supplement the annual Budget through the Net Investment Returns Contribution (NIRC). The NIRC is estimated to be S$23.5 billion in FY2023, or around 20% of our budget.
The Government generally budgets to take in 50% of NIRC at the start of each FY. The actual NIRC taken in at the end of the FY may vary due to changes in the fiscal position and differences in the actual outturn for the maximum NIRC, compared to what was budgeted at the estimates stage.
Q25. What is Net Investment Returns Contribution (NIRC)?
Net Investment Returns Contribution (NIRC) comprises:
Up to 50% of the Net Investment Returns (NIR) (see Q27) on the net assets invested by GIC, MAS, and Temasek; and,
Up to 50% of the Net Investment Income (NII) (see Q26) derived from past reserves from the remaining assets.
The annual NIRC amount is published in each year’s Government Budget.
Prior to FY2009, there was only the NII component. The NIR component was introduced in FY2009 with the implementation of the NIR framework, which allows the Government to spend up to 50% of the expected long-term real returns (including capital gains) from the net assets invested by our investment entities.
Q26. What is Net Investment Income?
Net Investment Income (NII) refers to the actual dividends, interest and other income received from investing our reserves, as well as interest received from loans, after deducting expenses arising from raising, investing and managing the reserves.
Q27. What is the Net Investment Returns framework?
Under the Net Investment Returns (NIR) framework, the Government can spend up to 50% of the long-term expected real returns (including capital gains) on the relevant assets.
The expected long-term real rate of return refers to the investment rate of return that can be expected to be earned over the long term, after netting off inflation.
Expected (as opposed to actual) rates of return are used to provide some smoothness over the years in the amount of NIR that can be spent. (See Q28)
Spending up to 50% of expected returns strikes a balance between the needs of current and future generations of Singaporeans. It allows us to take in some investment returns for spending, while continuing to grow our reserves.
Relevant assets are defined in the Constitution as the net assets invested by GIC, MAS, and Temasek7, minus the liabilities of the Government (which include SGS and SSGS).
Q28. Why did the Government introduce the NIR framework, and what are the differences between NIR and NII?
The Government moved to the NIR framework in 2008 in order to enhance revenues and ensure a fair balance between the needs of current and future generations.
Government expenditures were expected to rise significantly over the long term. The three main areas of increased expenditures were:
Increased investments in human capital, knowledge and innovation to sharpen our capabilities and enable us to move up the value chain and maintain our relevance in a much more competitive global economy.
Investments to make Singapore a top quality home, through enhancements in the city centre and across our neighbourhoods, to make Singapore a highly liveable and inclusive home.
Higher social expenditures in an ageing society and one that was facing growing income gaps.
The NIR framework is an enhancement from the NII in the following ways.
First, the NIR framework expanded the definition of investment returns to total returns, including capital gains (both realised and unrealised). The new framework was more aligned with our asset allocation that is focused on maximising total returns over the long term. A spending rule based only on interest and dividends could have led to a bias toward investments that generate income rather than capital gains. This would be inconsistent with our objective of maintaining a diversified investment portfolio aimed at achieving long-term returns.
Second, the NIR framework allowed the Government to spend based on expected long-term returns, rather than actual investment income, comprising dividends and interest, under NII. This allows the government to smooth out the volatility of spending. For example, it ensures that the government does not overspend in a bull market, and end up finding itself short of resources in a bear market.
Third, the NIR framework allows us to spend based on real returns. This is unlike NII, where spending is based on nominal dividend and interest income. Our spending rules must ensure that we continue to maintain the international purchasing power of our reserves. Otherwise, in a scenario of sustained high inflation globally, even if we were to earn reasonable nominal investment returns, our past reserves would be gradually eroded in real terms.
Q29. How does being included in the NIR framework impact the investment strategies Temasek, GIC and MAS? How does the Government meet its liquidity needs for NIRC?
Being included in the NIR framework does not impact the investment strategies of the three entities.
The NIR framework provides a formula to work out how much the Government can spend from the reserves, based on the expected long-term real rate of return of the investment entities on the framework. By basing the Government’s spending on expected long-term returns of the investment entities on the framework, the investment entities are not pressured to sell assets, realise capital gains, and pay more dividends. NIR framework is designed to ensure that the investment returns are tapped for spending in a disciplined and prudent way. (See Q30)
The Government has a healthy level of Government Deposits with MAS as well as a variety of sources of cash flows to meet its liquidity needs for day-to-day operations. This enables the Government to manage its liquidity needs independent of the cash flows from the three entities’ investment strategies. Unlike dividends which are separately determined, the NIR framework does not require any realisation of cash that needs to be transferred from the investment entities to the Government.
Q30. How does the NIR framework ensure that the investment returns are tapped for spending in a disciplined and prudent way?
The NIR framework ensures that the investment returns are tapped for spending in a disciplined and prudent way. Under the framework:
The Government can only spend up to 50% of the long-term expected real returns.
The NIR framework uses real rates of return, i.e. after netting off inflation, to protect the real value of our reserves.
The NIR framework allows the Government to spend only from returns on the net assets, i.e. the excess of assets over liabilities invested by our investment entities, minus the liabilities of the Government. This ensures that we set aside returns to cover the costs of servicing our liabilities.
There is a rigorous process in place for determining the long-term expected real rates of return of the investment entities.
Before the start of each financial year, the rates are proposed by the Boards of the investment entities, based on detailed study and assessments by investment professionals in the three agencies, who also draw on a range of external expert views.
The Ministry of Finance undertakes a thorough review of the methodologies used by the investment entities to be assured that their approach is sound and the estimated long-term rates of return are reasonable. MOF will then propose the expected long-term real rates of return to be applied to the net assets invested by the investment entities for the President's concurrence.
The President consults with the Council of Presidential Advisers (CPA) before deciding on whether to agree with the Government's proposal.
In the event that the Government and President do not agree to any of the expected rates of return, the respective 20-year historical average rates of return will be used to compute how much the Government can spend. The 20-year historical rate of return provides a neutral and pragmatic basis for resolving any dispute between the President and the Government, and avoids paralysing the government of the day.
After the close of the financial year, the Minister for Finance will certify to the President the amount of NIR that the Government has actually taken into the Budget, within the caps specified in the Constitution.
Today, the NIRC is one of Singapore’s largest sources of revenue for annual spending.
There have been calls to draw more NIRC, above the present spending limit of 50% of the annual investment returns.
a. 50% places even emphasis on the needs of today and tomorrow. It allows us to tap on the investment returns for our current spending, while continuing to grow the reserves.
b. Drawing more NIRC for this generation would mean leaving less for the next generation, who would likely end up paying more taxes to fund their needs.
The pace of our reserves growth should be viewed against the growing size of the economy and spending needs. National spending needs, especially for healthcare and social spending, are growing faster than GDP. Meanwhile, the NIRC is only expected to continuing growing in step with GDP.
a. Furthermore, it is not certain that the NIRC will continue to keep pace with economic growth. Investment returns are subject to significant headwinds in the global investment environment – for example, due to ageing populations in the developed countries, lacklustre productivity growth, rising government debt levels and geopolitical tensions.
b. Future generations can expect to face more challenges, for example due to climate change and rising sea levels, as well as public health emergencies which experts predict will happen with increasing frequency. With more emergencies to contend with, they are likely to need more reserves, not less.
Land is scarce in Singapore, and it is our main natural resource. It is thus protected as part of the reserves.
When the Government sells land, it does not create new wealth – it merely converts the physical asset into a financial asset. When land is converted into a financial asset, the financial asset remains part of Past Reserves and cannot be used for expenditure. Spending the proceeds from selling land is simply akin to using up more of the reserves.
Instead, the Government invests the land sales proceeds with the rest of the reserves, and spends up to 50% of the returns through the NIR framework.
This provides a more stable and sustainable stream of income over time than directly spending the land sales proceeds.
a. First, land prices move in cycles and can be volatile. This would cause Government revenues to fluctuate with the market, creating too much uncertainty for the Government to plan for the long term.
b. Second, when a government relies on land sales to fund spending, it could develop a vested interest in keeping land prices high to maximise revenues.
Land returns to the State at the end of a lease, as the State holds ultimate title to the land. It then becomes State land once again and is protected as part of the reserves.
When that happens, there is no “profit” or net increase in the reserves. This is because the value of the “reversionary interest” in land (i.e. the right to resume ownership of the land at the end of a lease) forms part of the reserves. In other words, when land is sold, the financial proceeds that the State receives make up for the State's loss of use of the land for the lease period, and not for the State giving the land away forever.
Q34. Why does the Government sell land at market value, even for public housing?
The fair market value of land is the price that a willing buyer and willing seller, at arms’ length, would transact at. This can be determined by open tender, or by professional valuation. In the case of public housing, the value of land is determined independently by the Chief Valuer, using established valuation principles.
The constitutional amendment to include GIC and MAS in the NIR framework was passed by Parliament in 2008. The constitutional amendment to include Temasek in the NIR framework was passed by Parliament in 2015.