As minister Mah has again talked rubbish, this time that cheaper HDB flats will raid our reserves, I tot I should paint a mental picture of how our reserves, CPF and SWFs are linked, and in the process show that he is talking rubbish when he talks of our reserves being raided, if HDB flats’ selling prices are lowered.
Visualise a big glass tank. Above it are three pipes, below it is one pipe. When the taps are open, water flows in from the pipes on top and water flows out from the pipe below.
The water flowing from the pipes at the top represent the income that goes into the Consolidated Fund (tank). From one pipe would flow income from all the taxes (income tax, VAT, property etc), service charges and fines levied. From another another pipe would flow the permitted returns from our reserves. From the final pipe would flow the money from government borrowings*. The money from the special CPF bonds would be part of the flow from this pipe. The water flowing out from the pipe below represents government spending.
There is no water in the tank when the outflow (expenditure) exceeds the inflow.
But there will be water in the tank if the inflow exceeds the outflow.
Now imagine a ballon hovering just above the water. It has a hose syphoning out water from the tank. The ballon is the reserves taking surplus $ from the Consolidated Account. The ballon has another hose sucking air into the ballon: this represents the proceeds of “sale of state land”. This shows that minister Mah is wrong in his assertion that cheaper HDB flats raid the reserves. All that happens is that less goes into the reserves. Is this a bad thing. I doubt it as we got lots of money in our reserves, Temasek’s 2009 losses notwithstanding. (Our SWFs managing only a part of our reserves have 179.5% more in assets than S’pore’s 2009 estimated GDP. I calculated this in November 2010.)
The ballon keeps growing while another hose pumps some of the water into the reserves pipe which flows into the tank.
And where is GIC and Temasek? They and the central bank manage what is in the ballon.
*Accounting for loans:
When any government or company or person borrows, the money borrowed becomes the income of the borrower. So when the government borrows money from the CPF by using the special bonds, the money borrowed becomes part of government income.
The interest payments on the special CPF bonds and other borrowings are part of government expenditure.