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How To Make A Surplus Disappear Without Anyone Noticing!

Magic Disappearing TrickIt will come as no surprise to those who regularly read my blog that I am going to start critiquing this year’s budget by drawing attention to the various subterfuges that Singapore’s PAP ruling Party uses to disguise the true state of its government’s finances.  As usual the budget is an exercise in opacity and smoke and mirrors type illusions.

Not Progressive

The PAP has also touted this year’s budget as a progressive Budget aimed at fostering a fairer and more inclusive society.  Sadly, I could not find any evidence of this progressive attitude. Progressive and efficient would mean taxing both employment and investment income equally and also capital gains. It would also mean abolishing special tax breaks and one-off tax holidays. With a broader tax base rates could be lower. Better still would be moving towards a progressive consumption tax in which savings would not be taxed.

There was a lot of noise about a slightly more progressive property tax structure but the net changes were relatively small. The Finance Minister claimed that Singapore’s property taxes are relatively efficient and preferable to other forms of tax. In economic theory this is because the supply of land is completely inelastic and thus economic growth which raises demand for land increases the wealth of landowners without them having to undertake any productive activity. However this would only be true of our property taxes if they taxed just the rise in the value of the land and not any improvements to the land in the form of buildings or other structures.

Of course the state owns 80% of the land so increases in land values directly affect its wealth. I have suggested before that this is the likely motivation behind the government’s obsession with economic growth from population growth rather than from working more productively (see “About Your Landlord”). However the value of its land holdings is not disclosed in the government’s balance sheet despite the fact that this wealth, expropriated with little or no compensation which would be unconstitutional in many countries, belongs to all Singaporeans.

Apart from that, Budget 2013 merely continued an established tradition of a limited number of ad-hoc handouts.

There is nothing progressive or long term or effective in the budget that I can see that would help the majority of Singaporeans.  Yes, no surprises here. The PAP continues to rigidly adhere to a disastrously flawed economic policy and by failing to provide the necessary transparency hopes to prevent discovery of the true state of the finances.

 No room for spending?

 The PAP continues to insist that it is running a balanced budget with no room for additional spending without going into deficit.
I would like to be able to contest that assertion irrefutably but unfortunately the data is not provided as this year’s Budget again fails the basic tests of transparency. (For a breakdown of how last year’s budget failed the basic tests of transparency I humbly refer you to a paper  I wrote then that you can find on the Reform Party website here.  I hasten to add that this is not a political blog and has no partisan political view but that paper remains the only authoritative break down of the budget for last year.)

There is an accepted format for the layout of budgets prescribed by the IMF. Last year I asked why the Budget could not be set out in the format prescribed by the IMF. In July 2012 I wrote an open letter to Christine Lagarde (see here) asking this question in more detail and that latter was published by the Huffington Post.  I said there that :

 The foreword to the IMF manual sets out an analytical framework for budgets and states that one of the aims of the framework is to provide an early warning system as to when things start to go wrong.

It is particularly relevant because Tharman was appointed Chairman of the International Financial and Monetary Committee of the IMF. One would expect that these positions would be given to the finance  ministers of nations which  demonstrated best ( IMF) practice. But maybe Lagarde gives these positions to those nations who will most be able to support her political agenda. Singapore’s lack of transparency must be especially comforting to her in that case.

Specifically lacking in  Budget 2013 are the figures for  net interest earned and investment gains or losses on financial assets and liabilities. It also does not include a value for the state’s land holdings or for receipts from land sales.

The only information available to us is the Statement of Assets and Liabilities that is more than a year out of date. This barely helps us gain some picture of the true state of the government’s financial position and the size of our net assets particularly as it comes without any explanatory footnotes or an explanation as to what accounting policy is followed.

As the stocks of financial assets and liabilities are more than twelve times the flows represented by revenues and expenditures any losses in the former can easily dwarf any surpluses in the latter.  We see no reason not to have full transparency, as secrecy can only be conducive to lack of accountability, even to mismanagement and potential corruption.

The Monthly Digest of Statistics shows a government surplus of $36 billion for 2012. This is not the general government surplus, a wider measurement of the surplus that is shown In the Yearbook of Statistics. In 2010 it was about $28 billion while the government surplus was “only” some $15 billion. This suggests that the general government surplus for 2012 is likely to be considerably bigger. Leaving aside the question of discrepancies in the accounts and possible doubts over the veracity of these surpluses, and also whether GIC’s performance has been extremely poor (which I have raised elsewhere), it is clear even under the most conservative assumptions that the Finance Minister has considerable room for additional spending.

Even on the basis of the limited and partisan information presented in the Budget, one can clearly see that the Finance Minister has been extremely tight-fisted. The PAP has taken back a chicken while giving out a drumstick. The Basic Surplus in 2012 was $3.6 billion. At a very minimum this should have been carried over for additional spending/transfers or tax cuts this year. And that is before the Net Investment Returns Contributions (NIRCs).
Smoke and Mirrors with the NIRCs?

Despite the fact that the 2012 NIRC, which at $7.65 billion is roughly 20% of the government surplus for that year, is supposed to be available to fund current spending, this contribution is again almost entirely offset by the Finance Minister’s top-ups to Endowments and Trust Funds. In 2012 the Finance Minister transferred $7.40 billion into Endowments and Trust Funds. Most of this money is not spent. For instance in 2012 the Minister transferred $2.95 billion into the GST Voucher Fund and proposes to transfer $3 billion this year. Yet the cost of the GST Voucher Scheme was funded out of Special Transfers, which come out of current spending. Indeed it just seems to be an accounting book entry to keep these funds reinvested in our SWFs without ever having to sell or realize any investments. Thus Singaporeans do not see much immediate benefit from the NIRCs. In 2013 the FM has again allocated $5.59 billion to top up these funds.

By moving so much money into these special purpose funds the objective of Parliamentary scrutiny and accountability over their use is defeated. The performance of these funds does not appear to be debated in Parliament even if the FM is required by law to put the accounts before Parliament and the President.  There is not even a line entry for the $2 billion National Productivity Fund in the Government Statement of Assets and Liabilities despite an Act of Parliament being required to set it up. Neither is it possible to find accounts for either the Productivity Fund or the National Research Fund even though they are required by law to submit their accounts to the Auditor-General and the Finance Minister is required to present them in Parliament as soon as practicable.

I had previously written about this topic here raising these points. Yet again, the Budget debate has come and gone without any MPs, whether PAP or Opposition, probing the lack of transparency in the government’s accounts and the true state of our reserves.

Lies, Damned Lies and Statistics

I am highly sceptical of the government’s claims that its measure of real incomes per household member accurately tracks the experience of most Singaporeans. If real wages have risen that would suggest the PAP have miraculously managed to repeal the laws of economics.  An elastic supply of labour, brought about by the PAP’s immigration and foreign worker policies, coupled with an inelastic supply of land is likely to lead to falling returns to labour, exacerbated by lack of competition and stagnant productivity growth.  Firstly, falling numbers of children and the high cost of housing is likely to have resulted in households with more working members and this would naturally boost incomes per household member perhaps quite significantly. Secondly the CPI undoubtedly understates the real rise in housing costs, which is a big component of the index.  This is because the Statistics Department uses an imputed rental for owner-occupied housing, which is not an accurate way of capturing the rise in housing costs. In line with the practice in other advanced countries the Statistics Department should use an index of mortgage costs plus depreciation and maintenance costs. However Singaporeans do not own their housing but hold it on a 99-year leasehold. Therefore any measure of housing cost would have to factor in lease amortization, which is likely to be much higher than depreciation. As HDB prices have risen over the last five years so will the amortization costs, which need to be factored in. Thirdly the large number of new citizens and PRs, who would likely be on higher real incomes than native Singaporeans and have fewer dependents, is also likely to have a positive bias on this measure.

Nor can I find any foundation for the government’s claims that over a lifetime a young low-income family with two children can expect to receive more than $600,000 in benefits. Firstly is this figure net of taxes paid? Secondly much of this benefit figure does not represent real costs for the government but are a consequence of its monopoly control over much of the economy. Land costs are inflated because the government owns most of the land and uses its monopoly power and immigration policies to keep prices much higher than they would otherwise be. So Singaporeans are forced to pay considerably more for housing than they otherwise would. It is like saying you can only shop at one store which charges prices 100% more than anywhere else but then offers you a 10% discount and calls that a subsidy. The same goes for many other costs that are inflated because of the scarcity of land but the returns to land go to the PAP government. Thirdly the figure of $600,000 fails to take account of the taxes and other contributions that their children will make over their lifetime.


 Without full transparency, the yearly Budget presentation is a meaningless exercise. If the government’s Statement of Assets and Liabilities and its surpluses buried in the Yearbook of Statistics have any connection with reality then it is hard to understand why it needs to save so much and cautions incessantly about the need for tax rises if we are to have more generous social safety nets. This is particularly the case if one considers the enormous value of the state’s land holdings which should be on the balance sheet. It is especially puzzling because the government’s plans to boost the working age population through continued mass immigration will be likely to swell the basic surplus in the future, especially as there is no burden on the current generation of workers of having to cover unfunded pension liabilities or health benefits for retirees.

Singaporeans would surely be better off curbing the growth of new citizens so as to prevent their shares in the state’s assets being diluted especially given the sacrifices they have made to build these up. However the PAP government is only interested in maximizing the size of the total assets not in maximizing the value of assets per citizen. If the bribe of citizenship makes individuals more likely to vote for them then the PAP have an additional incentive to do so. I have likened this in the past to a game between corporate management and shareholders. The management tries to dilute the shareholders by issuing more shares to their allies if the existing shareholders try to make the management pursue policies that maximize the value of their shares rather than policies that benefit management such as increasing the size of the company (because this means they get paid more).

Despite all the talk about a strong Singaporean core that must be precisely why the PAP is creating so many new citizens. There can be no other explanation otherwise the government’s policies do not add up. Meanwhile a policy of secrecy and obfuscation, as exemplified once again by Budget 2013, conceals the real size of the cake and the (poor) performance of the managers of the cake. Even money supposedly available for current spending is recycled back into the pool of assets and locked up again. We are constantly told that the only way to have greater spending or transfers is either through higher taxes or more immigration.

It is time to nail this lie once and for all. That is why I have consistently advocated the privatization of Temasek and GIC and the distribution of shares to Singaporeans with a certain number of years standing to create a shareholder democracy (see Chesapeake and Temasek: A Tale of Two CEOs and Shareholder Democracy


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