Fiscal predator

Dan Fineman
Far Eastern Economic Review
6 May 2004

Huge hidden fiscal surpluses enrich the Singapore state but impoverish the private sector

Austere fiscal policies hurt Singapore more than possibly any country on the planet. Although Singapore markets itself as a low-tax country with world-class social programmes, in reality the government taxes heavily and spends little. The resulting huge surpluses – largely hidden and off-budget – strengthen the ruling party but weaken the economy. Unless the government drastically loosens fiscal policy, businesses will lose competitiveness and long-term growth will slow.

Singapore’s political system and fiscal strategy are inextricably intertwined. Only a government dominated by a single party could consistently post such large surpluses and only an extraordinarily well-financed state could exert such extensive control over political and economic life.

Big structural surpluses most benefit the ruling party, to the detriment of the private sector. Unconstrained by tight finances, the government pays cabinet members and civil servants some of the world’s highest public-sector packages. Although generous salaries discourage corruption, they also lure the best talent to the government and ruling party. Private enterprises – and rival political parties – suffer brain drains. When campaigning, the ruling party argues that the opposition lacks capable leaders. Because high pay has attracted the island’s brightest to the government camp, the claim rings true.

A variety of analytical shields obscures the embarrassing size of government surpluses. Accounting principles differ from global standards. A bewildering array of statutory boards, government-linked companies, investment corporations and holding companies transact among themselves at undisclosed prices. Key data such as the government’s share of national savings and the profits of holding companies and investment corporations are kept secret. One analyst calls the national accounts a “masterpiece of obfuscation.”

Actual surpluses greatly exceed the already impressive stated numbers. From 1991 to 2001, the government reported surpluses averaging 3.6% of GDP, but Mukul Asher of National University of Singapore calculates an adjusted average of 9.7%, nearly triple the announced figures. Official budgets exclude land-lease revenues, investment income and profits from off-budget state bodies. Because Asher includes only publicly disclosed revenues, his adjustments understate real surpluses.

The high-surplus strategy lowers Singapore’s standard of living. Deprived of disposable income by numerous taxes, Singaporeans consistently consume a share of GDP 10-20 percentage points below Hong Kong levels, while Hong Kong maintains a higher per-capita income. Their high-revenue, low-expenditure government leaves Singaporeans a smaller slice of a more modest pie.

Overly stringent fiscal policies sap Singapore’s competitiveness. Excess surpluses depress the cost of capital and encourage firms – many state-owned – to overinvest. According to JPMorgan, listed Singapore companies provided a return on equity below the non-China developing Asian average in four of the last five years and half the United States benchmark since 1996.

Looming crisis

An excessively pro-fiscal design is contributing to a looming crisis in Singapore’s national pension plan, the Central Provident Fund, or CPF. Rather than invest balances on beneficiaries’ behalf, CPF payscontributors
a low, artificially determined interest rate. The state pockets as a hidden tax the potentially huge difference between the actual investment yield and what beneficiaries receive. In contrast to most countries’ schemes, Singapore allows working contributors to pay medical bills with plan balances. The resulting outflow depletes retirement funds but relieves the government of potential health-care liabilities.

Arguably, provisions allowing home buyers to tap CPF balances work to similar effect. State entities own an estimated 85% of the island’s land. If, as some analysts believe, CPF financing has contributed to high land prices, the government gains from home purchases, while pension balances dwindle. Largely as a result of its fiscally friendly features, CPF will prove grossly inadequate for meeting individual retirement needs.

Slower economic growth has eliminated reported surpluses this decade, but the lack of change in broader fiscal policies indicates that actual balances remain high. Until the dominant-party political system that thrives on outsized surpluses undergoes fundamental reform, Singapore will struggle with an underfunded pension plan, inefficient businesses and sickly consumption.