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The Alarming Implications of PM Lee’s Speech to the Economic Society of Singapore


Recently I have asked some questions about discrepancies in our national accounts. These seem to indicate that our reserves are not as buoyant as we might have been led to expect by past surpluses and the supposedly class-leading returns achieved by our sovereign wealth funds. No answers have been forthcoming. Instead there has been a deafening silence from the State media. Whether our reserves have been depleted through poor management or were never there in the first place or whether there is a relatively simple explanation is something we can only speculate about.

The PM’s speech to the Economic Society of Singapore did not set my mind at rest. Instead it exacerbated my previous concerns. Already Tharman, in his 2012 Budget speech, said that not much more could be spent on health by the government without tax rates rising significantly. He said that doubling health expenditures as a proportion of GDP would require a top income tax rate of around 60% and a GST rate of 25%. My immediate thought was that this did not square with what the government has told us about its cushion of assets built up through years of austerity. However I put this down to nothing more than the PAP government’s usual desire to hide the crown jewels from the peasants.

It was thus even more alarming to hear much the same story from the PM. The PM talked about taxes needing to rise in the medium term if we were to deal with an aging population and rising healthcare expenditures. He also said that returns from investing our past reserves only contribute about 2% of GDP (or S$6.5 billion approximately). This does not square with the total level of assets (about S$700 billion). Neither is it compatible with Temasek’s reported annualised return of 17% p.a. since 1974 or even GIC’s reported long term returns of around 7%. I have already pointed out in my letters to the Finance Minister the alarming and rapid increase in public debt. This is now some S$367 billion according to the latest Monthly Digest of Statistics. Why would the government be borrowing so much? Particularly when it only seems able to achieve a return of less than 1% of total assets which is less than it pays on its debt. I said earlier that if the reserves had indeed been depleted through bad investments and were not sufficient to repay the CPF then the government had two alternatives. It could print money but in view of the likely implication for the currency it was more likely to raise the money through a combination of higher taxes and more borrowing. This seems to be becoming an increasingly probable scenario.

You would think that the government would want to reassure the people that all is well. However all we get is a deafening silence. Like when Tharman said we did not need to know the reasons for Chip Goodyear’s resignation as CEO-in-waiting at Temasek. The stunning arrogance of a government that thinks we are its employees and is not answerable to us.

I have already ridiculed the PM’s use of those well-worn phrases “An Inclusive Singapore” and “Politics That Works” in a separate article. Here I will devote the remaining space to a critique of the rest of the PM’s speech. In particular I will focus on his assertion that the Nordic model will not work in Singapore. What is remarkable is that despite new buzzwords the PAP model remains the same one of adding more inputs to produce higher output. This has not changed for fifty years. The only way the government knows of keeping the growth rate up is by bringing in more cheap foreign labour. In the section entitled “A Successful, Growing Economy”  there is the seemingly deliberate confusion of raw growth with what should be the relevant measure which is productivity or growth in GDP per hour worked.

Where Are We Today?

This was the usual blend of misleading statistics to buttress the PM’s case that PAP policies have worked well. Given the fact the flaws in these statistics have been apparent for some time you would think that the PM would come back with slightly more sophisticated arguments. Instead he has opted to use the same old discredited statistics.

The PM starts with a comparison of GDP per capita. It is true that this puts Singapore nearly at the top if measured on a Purchasing Power Parity (PPP) basis. However if we then normalize this as GDP per hour worked (Singapore both has a high employment to total population ratio because of the large number of foreign workers and one of the highest numbers of hours worked) then the reality is more prosaic. Singapore is near the bottom of the international league table when it comes to GDP per hour worked.

Even the lowly position it has owes much to a highly suspicious enormous one-time jump in productivity in 2010 of 11.1%. This happened right after I criticised Singapore’s poor productivity performance way back in 2009.  After that we had the report of the Economic Strategies Committee which was all about the productivity problem. Subsequently Tharman devoted most of the 2010 Budget to the issue. And then this was followed almost immediately by a massive jump in productivity. The gain is enough of an outlier given Singapore’s historical record to arouse suspicion. It seems to stem from a revision of the way Singapore’s PPP exchange rate is calculated. This has had the effect of pushing up the value of Singapore’s output. Could it be connected with the fact that our CPI does not track the rise in housing costs accurately? Even if there has been a genuine underestimation of Singapore’s PPP output, the Statistics Department allocation of the change to a single year rather than spreading it out over past years looks fairly dubious.

The PM goes on to say that the appropriate comparison for Singapore is with other cities. He is absolutely correct. On that basis Singapore’s economic success looks distinctly pedestrian. We fall out of the top 20 down to number 40 or so in the Brookings Global Metro Monitor of the top 200. The top positions are all held by American or Nordic cities. However again the PM does not normalize the figure for GDP per hour worked. This would surely push Singapore’s position further down the rankings.

The PM also says that our real median wages have risen in the last decade. I am not so sure. Firstly, if like Tharman in the Budget speech, he has used income per household member this has not been corrected for changes in the number of dependents per household.  Secondly there has been a big rise in the number of new citizens and PRs whose incomes you would expect to be higher than native Singaporeans and who have fewer or no dependents. However I believe the real problem lies with the way housing costs are calculated in the CPI which uses imputed rents. Tharman himself pointed out that this may not be an appropriate measure when most Singaporeans are leaseholders. I wrote about this in “Inflation a Problem? Just Change the Way You Measure It.” Since HDB properties are leasehold, capital costs strictly should be amortized and included in the calculation of total housing costs.

An Inclusive Singapore and the Nordic Model

Just as, not surprisingly, foreign heads of MNCs are happy to sing the PAP’s praises if a generous tax break or two is tossed their way, so in the question and answer session that followed this speech we had the usual sycophantic foreigners ready to jump in and say that the freedoms and benefits their countrymen enjoy are not appropriate for Singaporeans.

When the Danish ambassador says that Singaporeans have decided that the Nordic model does not work for Singapore he should qualify that by saying that Singaporeans have never had a choice. Much as it pains me to say it, the Scandinavian countries also do not support the view that high levels of taxation and an overly generous welfare state destroy incentives to work and innovate. They have historically been among the top performers in innovation and growing new start-ups and world class companies. This may have something to do with the fact that all of these countries spend more than double what Singapore spends on education as a proportion of GDP.

PM Lee’s arguments that the Nordic states enjoy many natural advantages over Singapore which allow them to have generous welfare states can easily be refuted. At the very least it can be shown that Singapore has equal and offsetting advantages.  Norway sits on huge oil reserves which Singapore lacks but then the other Nordic states lack oil as well. Much of their land area is frozen and unsuitable for human settlement.  They are on the periphery of international trade routes whereas Singapore sits in the middle of the busiest shipping lanes in the world. Far from being a malarial swamp as LKY would have gullible Westerners believe, Singapore was already the second richest city in Asia after Tokyo at the time of independence.

Norway in any case manages its oil reserves, which are of course exhaustible, by transforming them into a permanent stock of capital in the form of its sovereign wealth fund. The fund, in contrast to our SWFs, is a model of transparency and accountability. Norwegians know exactly where their fund is invested whereas, as my two open letters to the Finance Minister have shown, Singaporeans are treated like the proverbial mushroom farm.

Other than saying that the Nordic model was not right for Singapore, the PM spent the rest of this section of his speech trying to show how PAP policies have worked towards a more inclusive Singapore. However I fail to understand how spending less on education than any major developed country as a proportion of GDP is “equipping people with the skills and ability to do well for themselves”. Singapore fares poorly on any measure of private sector innovation or new start-ups. Almost all the growth comes from foreign MNCs lured here by cheap labour and low tax rates and from the GLCs.

While welfare spending may have risen marginally it still remains very low as a proportion of GDP, particularly when compared to what we spend on defence. It may just be that the PAP elite are against greater welfare despite a steadily growing positive net asset position. However a less charitable explanation is that the assets are much smaller than we thought and that the money simply is not there.

Instead the PM says that the government has concentrated on raising assets more than incomes. However rather than being a source of uplift the HDB programme has become a means of converting Singaporeans into serfs. It has also historically been a useful tool in intimidating the people into voting PAP for fear of losing upgrading. The government has used its monopoly over the supply of land to deliberately create a housing bubble which it has further inflated through immigration and subsidies. It has cost them nothing but instead boosted their profits from land sales. It is misleading of the PM to boast that households in the lowest quintile have on average over $200,000 of equity in their flats. Firstly they cannot monetise that equity easily because otherwise they would have nowhere to live. Secondly if a significant proportion tried to sell at the same time that equity cushion would disappear and quickly become negative just as has happened in the US and Europe. This could happen even faster if Singaporeans wised up to the fact that what they own is a 99 year leasehold property that will revert to the government at the conclusion of the lease.

Conclusion

The PM’s speech was shocking on several levels. It showed the PAP are bereft of ideas on how to transform the economy other than continue the same old tired policies of extensive growth. Just as was the case with the Soviet Union, a fear of creative destruction and losing their grip on power will prevent the PAP from taking the steps necessary to foster innovation and new technologies.

Even more alarming were the hints that perhaps the government’s reserves are not as big as we have been led to believe. If this is the case will Singaporeans fall into line like the animals in Animal Farm when their dam collapsed and meekly accept they would just have to work harder to rebuild it? It is to be hoped that instead it will finally bring about the democratisation that Singapore so desperately needs if we are to have inclusive prosperity.

12 Comments »

  1. Hi Kenneth! Big fan! Really liked the article. I do agree that our social spending has to increase. That’s the only way we are going to rein in income inequality and falling working-class wages. But at the same time, I wouldn’t want to see our taxes go up, and high taxation is a key part of the Nordic system, besides our tax base is probably too small to pay for it. And while I would like to see Singapore Inc. shell out more for welfare, I’m unsure how it will work as Temasek and GIC just own shares in publicly-traded companies and getting them to lower their profits might not be acceptable to the remainder of their shareholders. Interested to get your take on it.

    Like

  2. Article 148I of the Singapore Constitution: http://www.agc.gov.sg
    Transfer of Government’s past reserves
    148I. —(1)   Notwithstanding any provision in this Part, a proposed transfer or transfer (whether by or under any written law or otherwise) by the Government of any of its reserves to —
    (a) a Government company specified in Part II of the Fifth Schedule (referred to in this clause and clause (2) as the transferee company); or
    (b) a statutory board specified in Part I of the Fifth Schedule (referred to in this clause and clause (2) as the transferee board),
    shall not be taken into account in determining whether the reserves accumulated by the Government before its current term of office are likely to be or have been drawn on if —
    (i) in the case of a proposed transfer or transfer of reserves by the Government to a transferee company — the board of directors of the transferee company by resolution resolves that those reserves of the Government shall be added to the reserves accumulated by the transferee company before the current term of office of the Government; or
    (ii) in the case of a proposed transfer or transfer of reserves by the Government to a transferee board — the transferee board by resolution resolves, or any written law provides, that those reserves of the Government shall be added to the reserves accumulated by the transferee board before the current term of office of the Government.
    PART II
    1. Government of Singapore Investment Corporation Pte. Ltd.
    2. MND Holdings Pte. Ltd.
    3. Temasek Holdings Pte. Ltd.

    Somebody should check Hansard on the date this law was changed , some unconfirmed rumours had it that it was the day after the nicol highway disaster.

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    • I’m looking into it. As no reply has been received from the President we must assume that no Presidential approval was sought. No parliamentary approval was sought either. So there must be some loophole. Loopholes need to be plugged.

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  3. Just re-read this article again, thanks Kenneth!

    Was brought up by my mom’s ‘Singapore is so rich, our reserves pocket is so deep’ that for years, news of great losses did not raise any doubt that ‘Singapore got more chips to play around’.
    However, one do get worried after the mega-losses by our leeders in international investments, and having read your article, now I fear the worst.

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  4. Well, if you believe in hardcore liars, then falsehood is all you get. And after all the years of hoodwinking the public, it still pays and very handsomely too to continue doing so since there is zero accountability. Wrong? But maybe only to the father.

    What is more alarming is that many people do not know, there is a special clause that allow the minilee to draw on the so called locked up reserves ‘for opportunties in investment.’

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  5. Woah the possibility that our reserves may have been depleted by poor investing has not crossed my mind… thanks for pointing it out!

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  6. Great insights! KJ, you have raised very solid probing questions. Let’s see if our multi-million dollar elite ministers can shed some light on these questions. Singaporeans have the right to know what has happened to our money!

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  7. Thanks Kenneth! Your article is so eye opening! Where are all the so-called Analysts and Commentators? They are all so quiet?

    Do they open their mouth only to sing praises to the PAP and have no guts to make wise but critical comments to enlighten readers?

    A million LIKES to you Kenneth!

    Like

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