With spending expected to be racked up on several fronts, including in healthcare and public transport, Finance Minister Tharman Shanmugaratnam said the Government must take steps now to strengthen future revenue, with one of the first moves being to include the projected earnings of Temasek Holdings in the Net Investment Returns (NIR) framework.
The inclusion of Temasek’s total expected returns — including realised and unrealised capital gains, and not only actual dividends paid to the Government — in its spending budget will “bolster our fiscal resources at a time when we have to fund long-term critical infrastructure and develop the human talent and capabilities to secure our future”, said Mr Tharman.
While the Government will seek to control costs, spending will “inevitably rise”.
“We project overall spending to reach about 19 per cent to 19.5 per cent of gross domestic product on average over the next five years. This is about 1 per cent of GDP higher than the revenues we have today,” added Mr Tharman. “It is, therefore, necessary that we take steps now to strengthen future revenues, to put Singapore on a firm fiscal footing for the rest of this decade.”
Economists say the change will give a significant boost to government coffers — to the tune of at least S$3 billion per year — although at least one said it might lead to Temasek altering its investment approach to a more conservative one.
Before this change, the Government was allowed to spend up to half of the expected long-term real returns on net assets managed by the investment entities of the Monetary Authority of Singapore (MAS) and GIC.
The inclusion of Temasek’s expected returns in the NIR framework was deferred in 2008 because there were no established methodologies for projecting the sum, given its investment approach of taking concentrated stakes and making direct investments. Temasek’s investment strategy was also still evolving then — it began to invest in more geographies and sectors since 2002, said Mr Tharman.
But he said yesterday that the Government is now ready to do so, despite the volatility of Temasek’s equity-only portfolio. He added that it has developed an approach to project its expected long-term returns.
The change to the NIR framework, in addition to the raising of personal income taxes he also announced yesterday, will yield additional revenue equal to about 1 per cent of GDP annually for the Budget over the next five years, said Mr Tharman. Of that, changes to personal income tax rates are expected to raise S$400 million a year.
He added that the higher government spending over the coming years is in three main areas: Expanding healthcare infrastructure and subsidies for MediShield Life premiums; improving public transport (another S$26 billion has been committed over the next five years); and the development of Changi Airport Terminal 5.
On top of these expenditures, there will be other essential spending, such as on enhanced domestic security and the rejuvenation of neighbourhoods, said Mr Tharman.
Commenting on the move, Barclays economist Leong Wai Ho estimated that the inclusion of Temasek’s expected returns would yield at least S$3 billion, in addition to the roughly S$8 billion of investment income the Government is currently netting from the MAS and GIC per year.
DBS economist Irvin Seah said the change will increase the Government’s fiscal sustainability, “especially when social spending is set to rise as the population ages”. But he felt the long-term projection of Temasek’s earnings will not be easy, given the entity’s portfolio, which could encourage it to take a more conservative investment approach in return for greater stability.
Mr Leong noted that Temasek’s average returns over the past five years have been 11 per cent, falling to 9 per cent over the past 10 years and 6 per cent over the past 20. Its portfolio value, he observed, has risen to S$223 billion as of March last year, compared with S$133 billion 10 years ago.
“It is probably not as volatile as people think, because of its diversified basket of investments, both geographically and sectorally,” he said.