NIR, Budget untruths, & the President

In GIC, Temasek on 29/03/2016 at 1:22 pm

This (on Ong Teng Cheong possibly wanting to screw S’poreans like, as perceived,the workers were screwed when he was NTUC chief) got the a reader, Wil, asking

A Qn: The NIR used for the budget is projected returns. If the projected returns did not materialize, then how? It seemed like insurance agent selling us a policy on projected returns which never materialize.

Am I comprehending the NIR correctly? Because this seemed to me that there might be hefty tax increase down the road if the projected returns did not materialize. This will also affect all the social spending currently on Singaporeans

I asked Chris K to answer and he gave the following reply

Reply to Wil as request by atans1.

Your reading of the Constitutional NIR rule is correct – the NIR Contribution is calculated on the expected long term real rate of return (LTROR) on the government’s net assets (assets in excess of its liabilities). Pls note it is REAL returns we are talking about – that is the actual dividends and market valuation of the net assets minus the inflation rate. Therefore not all returns are spent. Then the rule limits the spent to 50% – therefore more than half of the actual or nominal returns are re-invested. Again pls note this is nothing unusual, Norway’s GPF and university endowments permit up to 100% of the returns to be spent.


[Side box comment]

Own President Check Ownself

Chris later added this further explanation which helps explains why the PAP administration wants to fix things so that when it’s in power, the president is its preferred candidate for the post.. Imagine if Tan Jee Say was the president.

I should mention that there is a certain ownself check ownself in how they determine the NIR contribution. The asset managers in GIC, MAS and Temasek make an assessment of the expected real LTROR which the government submits to the President for his approval. It begs the question how the President is able to come to a decision to approve the expected real LTROR without referring the matter back to the government if he disputes the assessment. So the issue goes back to the asset managers who indirectly works for the government. Conflict of interest is obvious. Should no agreement with the President is attained, the NIR rule permit the use of the reported real LTROR instead of the expected real LTROR.


Certainly on a year to year basis, GIC, MAS and Temasek may suffer losses or as you say the returns do not materialise. But again pls note we are talking of long term returns of 20 years or more – an occasional bad year like 2015 is not going to cause a significant dip in the LTROR and we must also be mindful that inflation has fallen thus increasing the real LTROR or offsetting any fall in real LTROR. Besides a dip in the reported real LTROR simply means the expected LTROR will be revised downwards for subsequent budgets. So there is a buffer built into the NIR framework which means the available amount of spent will fall.

As for tax increases, I do not see any reasons based on the NIR alone (although I see very good reasons for further tax increases on the top 1% to 5%). Any fall in the real LTROR may decrease the NIR Contribution but this decrease is offset by the fact that more than 50% of the LTROR is reinvested, increasing the reserves and offsetting the fall in the NIR Contribution.

Most importantly that the Budget as presented to the public is not IMF compliant – that is to say the true fiscal position is obscured from the public (but not to the IMF since Singapore is subject to the assessments required under Article IV of the IMF constitution). The actual fiscal position are far more in surplus than the government revealed. in 2015, the government presented a budget deficit equal to 1.2% of GDP but the true fiscal position is a surplus of a surplus of 1.7% of GDP. In 2014, the government reports a surplus of 0.1% of GDP while true position is a surplus of 3.9% of GDP. There has been huge differences between the two sets of numbers simply because the government do not reveal “net acquisition of non financial assets” or simply revenues from net sale of land.

This is the reason why the NIR contribution kept increasing despite generally poor global investment returns.

Atans1: apols for mouthful but this is as layman as I can manage. Will write a piece on the budget being non IMF compliant after I read the MPs falling over themselves to debate fiscal sustainability and the likes without knowing what they are talking about


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