Fiscal finagling in Singapore

Shawn W Crispin
Asia Times Online
13 Apr 07

Singapore’s economy is booming, with gross domestic product (GDP) on course to expand 7.2% this year after racing ahead 7.9% last year. But the strong economic-growth figures mask a structural weakness in the island state’s economic-policy mix, one that threatens its long-term international competitiveness, and one that the ruling People’s Action Party (PAP) clearly has no intention of amending.

This week, the PAP-led government rewarded itself with a 60% pay increase, boosting ministers’ annual base salaries to about S$1.25 million (US$823,000), the highest pay scale for government officials anywhere in the world. Big budget surpluses provide the financial power behind the PAP’s political monopoly, which steers the national economy and maintains a strict system of social controls.

To generate that largesse, the PAP maintains a highly austere fiscal policy, taxing more and spending less than perhaps any other government in Asia. The government contends on its official website that fiscal policy is directed primarily at promoting long-term economic growth rather than cyclical adjustment or redistributing income through “fair” tax policies and “prudent” expenditure programs. It contends an “ethos of fiscal rectitude” extends throughout the public sector to help ensure price stability and confidence in the local currency.

Beyond the official jargon, Singapore’s fiscal policy consistently generates outsized surpluses, which come largely at the expense of the island state’s private consumers and businesses through a complex web of income and various other hidden taxes. As a percentage of GDP, Singapore’s domestic consumption historically ranges between 10% and 20% less than that of Hong Kong, where average per capita salaries are comparable. Anemic consumption coincided with Singapore running a current-account surplus of 28% of GDP last year – far and away the highest such ratio of any advanced economy in the world.

According to independent financial analysts who spoke with Asia Times Online, Singapore’s outsized surpluses are habitually hidden away off-budget, often through the use of accounting gimmicks that diverge from internationally accepted norms. They note that government-linked companies and investment corporations buy and sell among themselves at undisclosed transfer prices, obscuring their profit and loss profiles. Nor, they note, does the government publish statistics related to its share of overall national savings.

Throughout the 1990s, the government reported surpluses averaging around 3.6% of total GDP. That, the government says, has contributed to a high national savings rate and one of the highest investment rates in the world without incurring foreign debt. Independent analysts and academics have calculated over the same time period an average closer to 10%, or three times the amount stated on the national accounts. And even those figures likely understate the true high level of the surpluses, as they fail to include undisclosed information on government land lease revenues, investment income and profits from off-budget state entities, and other hidden cash cows.

The government’s fiscal reaction to the 1997-98 Asian financial crisis gave a glimpse of just how prohibitive both its on- and off-budget tax structure has become. Then in panic mode, the PAP-led government granted an on-budget 5% rebate on income tax, a 15% rebate on property tax, a tax exemption for land under development, and an abolition of so-called stamp duties on all financial instruments except those related to stocks.

Off-budget, it temporarily allowed for an additional 40% property-tax rebate, a suspension of car-parking surcharges and stamp duty on contract notes, a deferment of stamp duty by buyers of uncompleted property, a 10% corporate-tax rebate, removal of tax on household bills, an increase in electricity-tariff rebates, and sweeping reductions in foreign-worker levies, customs duty on automobiles, and motor-fuel excise duties. Those reductions and rebates saved Singaporean taxpayers S$3.18 billion in 1998, according to Bank of International Settlements statistics.

Most if not all those taxes are now firmly back in place. Decades of tight fiscal policy has crowded out private investment and depressed the national standard of living – unless, of course, you happen to be a salaried PAP minister. The government has frequently filled in the investment gap, most recently with its big new foray into billion-dollar casinos. But historically the government has earned lower returns on equity on its domestic-oriented investments than its economic peers in the West and many of its less developed Asian neighbors.

At the same time, Singapore’s lower- and middle-class taxpayers, who directly and indirectly shoulder the tax burden, now face a stagnant or declining standard of living – a hard economic fact that even official government statistics have recently acknowledged. The PAP-led government, for its part, maintains it must pay high salaries to attract top-notch talent and curb official corruption. But the final verdict on that correlation will not be known until the PAP is eventually removed from power at the ballot box and the national accounts are independently scrutinized.

To be sure, Singapore maintains a squeaky-clean reputation, rating near the top in internationally maintained anti-corruption rankings. But nobody knows for sure how exactly the state generates and manages its revenues because exact profit and loss breakdowns for state-run entities are not publicly disclosed. [1]

The PAP-led government consistently argues that its management of state funds habitually generates higher-than-average market returns on the S$129 billion or so worth of assets managed by Temasek Holdings. But because of the investment arm’s opaque finances, which on its website details its investments by sector rather than by name, it’s difficult for independent financial analysts to confirm or dispute those official claims. But a growing list of managerial missteps raises hard new questions about those claims, particularly since Prime Minister Lee Hsien Loong’s wife, Ho Ching, took over Temasek’s top spot in 2004.

For instance, Temasek’s total US$3.96 billion investment in Thailand’s Shin Corp could eventually be written down to zero if that country’s new military government decides to rescind the mobile-telephone and satellite-communication state operating concessions held respectively by Shin subsidiaries Advanced Info Services and Shin Satellite. Thailand’s military government has already snatched back Shin-controlled subsidiary iTV’s operating concession in a de facto nationalization of a substantial Temasek investment.

More worrying, perhaps, are the lingering concerns about the financial health of the Central Provident Fund, Singapore’s national pension plan. CPF beneficiaries receive a low, state-determined interest rate on their required contributions, allowing the PAP-led government to collect yet another hidden tax on the actual investment yields earned on the CPF’s undisclosed investments. Some financial analysts believe the pension plan could eventually face a fiscal crisis, partly because the government allows the CPF’s already heavily taxed contributors to tap the fund early for expenditures such as home purchases and medical expenses.

With the recent resurgence in economic growth, some financial analysts believe last year’s total on- and off-budget surplus could have been the largest ever collected by the PAP-led government. That would go a long way in explaining the PAP’s recent controversial decision to reward itself with substantially higher pay. But it also indicates just how out of touch the self-centered PAP’s economic priorities have become, which over the medium term augurs ill for a small island country so highly reliant on the state for its economic, financial and moral direction.

1. Respected Morgan Stanley economist Andy Xie last year abruptly resigned his position at the firm after an internal e-mail he sent that referred to Singapore as an “economic failure” whose “success came mostly from being the money-laundering center for corrupt Indonesian businessmen and government officials” was published by Bloomberg. The controversial correspondence also said “to sustain its economy, Singapore is building casinos to attract corruption money from China”. The litigious Singaporean government notably never filed charges against Morgan Stanley for making, or Bloomberg for publishing, the allegations.

Shawn W Crispin is Asia Times Online’s Southeast Asia editor.

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