This is taken from Mdm Ho Ching’s FB post 07 Sep 2015. A succient explanation on our reserves – on the how, what and why about our reserves.
Ever wondered how SG remains a top rated triple-A credit country?
There are only about a dozen triple-A rated countries around the world.
Amongst these, SG is the only one in Asia, and also a rare one with no oil or natural resources, unlike Norway, Australia or Canada.
So how did SG do it?
One key reason is the strict financial discipline and prudent saving for the future in government budgetting and spending.
Few remember that when the PAP won their elections to form our first self govt in 1959, they inherited a budget which was in deficit and the year was about half over.
Together, the new government cut government salaries and allowances, including their own, shelved projects in the remaining few months, and managed to close the year in a small surplus.
Such was their determination not to be owing money, or borrowing money to spend, right from the start.
This set the tone for subsequent SG governments, always to live within their means and never spending wastefully or frivolously.
When PM Lee Kuan Yew was preparing to pass the baton some 25 years ago, he worried that future governments may not be as disciplined or financially careful.
And so the SG Constitution was amended in 1991 to require each successive government to live within its means, spending only what they have earned during their term of office.
Past reserves saved up by previous generations and governments before the most recent general elections are to be locked up. Any spending from such past reserves would be subject to the approval of the Singapore President.
Do you know we also lock up proceeds from land sales as past reserves?
Land is not only limited in island SG, barely bigger than Lake Tahoe in California. Land is also our common heritage asset and inheritance, belonging to past, present and future generations of Singaporeans.
Most if not all other governments in the world treat land sale proceeds as revenues to be spent. These include island economies like Hong Kong as well as larger countries with large land mass.
IMF also treats land sales as part of government revenue for spending.
We in SG treat land sale monies like some prudent countries treat their oil revenues – a heritage asset transformed from one physical form (oil or, in SG’s case, land) to a financial form (funds), and save them up in their sovereign wealth funds.
But should we completely lock up our past reserves and not use them at all?
This is like grandpa saving in a long term savings and investment account and protecting the original amount and any interest for his grandchildren. And now the kids are deciding whether to also save all of the current interests earned and keep that for their own grandchildren yet unborn, or to spend part of the current year’s interest earned, and use that for present spending for themselves and their parents or children each year.
Under the SG Constitution, up to half of the returns from investing past reserves may be used for current government spending. This would include interests earned from investing in bonds.
In other words, we lock up the principal amount of past reserves, including from land sales, and try to continue saving part of the investment returns for future generations, and spend a part of the earnings and returns for the present generation.
This is a way to have a fair sharing between generations, past, present and future, from the hard earned reserves.
MAS, GIC and Temasek too, as three of the key financial institutions of Singapore, were also required under the same 1991 Constitution amendment to each protect its own past reserves.
MAS, GIC and Temasek are key contributors to the Singov budget through the returns earned on our investments.
Last year, the returns from these financial institutions and other investments, such as interest from bonds, totalled S$8.6 billion.
This helped to fund the S$8 billion put aside for Pioneer Generation Package announced by Singov the previous year. This PG package will cover healthcare benefits our Pioneers for the rest of their lives.
It is very fitting that the returns from past savings and reserves are used this way to provide for our Pioneer Generation.
It also gives meaning to those of us working in these institutions, past and present as well as future.
Photo Source: Mdm Ho Ching’s FB
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