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Changing Austerity For Prosperity

budget 2016

Budget Day, which has been postponed to March 24 this year without a reason being given (perhaps to coincide with the anniversary of LKY’s death) will soon be upon us. The likely theme of the Budget is going to be restructuring and helping SMEs adapt to the serious slowdown in exports and other sources of external demand. However there is unlikely to be much for ordinary Singaporeans in the Budget other than help for retraining and possibly more wage subsidies for employers. The PM set the tone a few weeks back when he said that it was important to focus on the long term and not worry about short-term fluctuations ( see what I wrote here).

None of this is going to cure our fundamental problem which is the global slowdown led by China which has grossly over-invested in the last few years fuelled by cheap credit. Singapore’s exports in January fell by 15% compared to their level a year ago (see my blog “Plunging Exports Will Result in Many Years of Slow Growth Without a Change in Policy“). Meanwhile tourist spending fell by 6.8% in 2015 and is expected to fall again in 2016. The Government and many private sector analysts are forecasting a revival in exports in the second half of 2016 to avoid having to cut their growth targets but that looks unlikely to happen. In fact the situation is probably going to get worse.

In this environment the Government should be cutting taxes and increasing spending to offset the fall in external demand with greater domestic demand. The PAP Government runs one of the biggest surpluses as a percentage of GDP of any country in the world. Looking at the Government Finances Section of the Monthly Digest of Statistics for January 2016  (the MDS) the cash surplus has been consistently around $20-25 billion since 2011. However this is likely to be only part of the Government’s total surplus.

The cash surplus is the sum of the cash flow from operating activities (the operational surplus) and the cash flow from purchases and sales of non-financial assets. Purchases of non-financial assets should include all investment in capital stock such as MRT track and stations and Changi Airport,  which is classified as development expenditure,  while sale of non-financial assets must be mostly land. However as usual we can only speculate on what these categories include since the Government does not tell us and without a Freedom of Information Act or MPs who are interested in asking the right questions we will not know.

However the cash surplus does not include the income earned by Temasek and GIC from investing past surpluses. We can estimate the dividends received by the Government by  looking at the cash flows from financing activities which include dividends received plus new Government debt (mainly funds invested by CPF in Special Government Securities).  If we subtract the net incurrence of liabilities (which is new Government debt net of repayments) from that we get a possible figure for dividends paid to the Government. This has been consistently around $1-3 billion per annum since 2011.  But we know from the Budget that the Net Investment Returns Contribution is around $8.5 billion p.a. and this under the Constitution cannot be greater than 50% of the total returns.

So it seems safe to assume that to get a true figure for the Government’s surplus  (what is called the General Government Surplus) including all the statutory boards and the Schedule Five companies (GIC, Temasek, MAS and Changi Airport Group are the main ones) is over $40 billion per annum. This is not even the total surplus since it is unlikely to include revaluation gains (or losses) on the Government holdings.

Whatever the true figure for the Government surplus, my point is clear. The Government has ample room to spend more to increase demand and offset the shortfall caused by the drop in exports and other sources of external demand. I have consistently forecast the downturn and demanded that the Government adopt a stimulus package since early 2014.  Since then the economy has continued to deteriorate.

I have called for additional spending of at least $6 billion to take the form of a basic Old Age Pension of $500 per month for everyone over 65 as well as Child Benefit of around $300 per child  per  month for all children under the age of 16. While these measures are permanent and not temporary there is no question that the Government can afford them.  The accumulated surpluses since 1999 are well over $300 billion.

It is disgraceful in such a rich country that we have to read about stories like this one about the family of 7 who have to get by on $1,300 per month without any assistance from ComCare (see the State Times, “Family of 7 live on $1,300 a month“). During our walkabouts in West Coast, Radin Mas and Ang Mo Kio we met so many cases of poverty including sick mothers having to care for adult disabled children without any help and sick people with chronic health conditions like diabetes who go without medication regularly because of lack of funds. One of our supporters who had kidney failure  recently passed away after he could not afford to pay for dialysis treatments. I have also written about the plight of the homeless elderly like Madam L evicted by HDB who had no idea about even the meagre assistance they were entitled to.   Calling them the “sandwiched class” is an unpleasant euphemism for third-world levels of poverty. Providing a basic old age pension and child benefit would go some way towards alleviating poverty among a substantial section of our citizens.

madam l handcart



However my arguments for additional spending in this form are not based on bleeding-heart liberal sentiments but on solid macroeconomic foundations. Without additional spending, preferably directed at those who will spend rather than save, we are likely to fall into recession. Yet the Government is extremely unlikely to change its shortsighted policies of austerity. It will continue to say that we need to save for a rainy day and put money aside for future generations. The PAP will say that spending more on our citizens will put us on the slippery slope to bankruptcy. Yet we already have more than enough savings to provide for future generations who will undoubtedly be far richer than the current one. But if the economy goes into recession there will be a big cost in lost output.

Warren Buffett recently said when he presented the latest report of his holding company, Berkshire Hathaway that “many Americans believe that their children will not live as well as they themselves do. That view is dead wrong. The babies being born in America today are the luckiest crop in history“. Similarly in Singapore the next generation is likely to be far richer than the current one as a result of advances in science and technology.



The coming Budget is unlikely to see any changes to Government policy despite the urgency of the situation.Continued austerity makes no economic sense and is self-defeating.  The Government’s mindless stinginess, which of course does not apply to themselves and the leading families, suggests that the reasons go deeper than ideology and there may be a problem with the accounts. We need to reverse this and turn austerity into prosperity.



  1. Kenneth

    It’s a sound plan but it won’t work when you link it with the previous post on supermarkets and expensive food prices.

    Singaporeans have several economic constraints:

    1) Lack of cash flow due to many indirect taxes
    2) Lack of product and service variety which severely limits consumption
    3) The state’s large economic footprint which absorbs too much of the GNP thus crowding out the private sector
    4) The completely unwarranted push by the government for SMEs to go abroad. They’re totally ill prepared as they don’t have any experience with innovation and no compelling products to offer

    Even if the government were to spend money from the reserves, there wouldn’t be much consumption


    • I disagree. If the Government put more money in the pockets of Singaporeans, either by cutting taxes or by direct transfers, they would spend a large proportion of it and boost consumption. For the lower income groups this would be close to 100%.


      • Kenneth

        Thanks for your response. I guess my apriori assumption is that will the consumption be domestic or will people buy outside?
        I. E. Amazon or Q10 which won’the benefit the the SMEs who also need a shot in the arm as well


          • Kenneth

            Thanks. I’ll keep an open mind. I agree with you on the main points but I’m still unconvinced on the detatil.Well life will correct my assumptions 🙂



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