You have to be a hermit not to know that an “election budget” was presented by Finance Minister Tharman Shanmugaratnam on Friday, 18 Feb 2011. The Straits Times duly splashed on its front page all the give-aways announced by the government in its effort to sweeten the ground before polling day.
The Reform Party and the Singapore Democratic Party have given their critiques of the budget. You can read them here, here and here. As at the time of writing, the Workers’ Party did not have a response on its website.
Since this would almost surely be the last budget before an election, I thought it might be a good opportunity to take a look at all the budgets since Fiscal Year 2006 — the year when the last election was held. Perhaps a bird’s-eye view of the budgets through this government’s term of office might reveal some overarching patterns as to their spending philosophy?
You’ll have to begin by clicking the image below, and then if necessary, clicking again to expand it, otherwise it’s too small to see the numbers clearly.
The pink box shows you the revenue, for which there are three levels:
Operating Revenue is what the government gets from taxes, fees and other routine charges. If one adds the interest and dividends they earn from the State’s investments, you’ll have what I call Recurring Income. And then, if one adds receipts from land sales and other asset disposals, one gets Total Receipts.
Expenditure (blue box) is divided into three broad groups. There are Running Costs — i.e. the cost of running government departments, the military, police, schools, etc. Then there are Transfer payments — money that the government gives to various parties, sometimes banked into provident fund accounts rather than in cash. Thirdly, there’s Development Expenditure — the cost of building infrastructure and the like.
Whether or not a budget is in surplus or deficit depends on which definition of revenue and which expenditure groups you take into account. Development Expenditure, for example, is really a form of investment; it’s not an operating cost. But generally, you will see the government maintaining a surplus (Total expenditure is less than Recurring Income) every year in good times and bad. There is a constant deflationary effect — though whether this is good or bad is arguable.
Tharman mentioned in his budget speech that
Members will recall that the Government had sought and obtained the President’s approval to draw $4.9 billion from Past Reserves, to fund the Jobs Credit Scheme and the Special Risk-Sharing Initiative under the Resilience Package. We were in the midst of a global crisis of unprecedented scale. Our access to Past Reserves gave us the resources and confidence to deal decisively with the downturn and to be prepared to take further measures if the situation worsened. In the event the amount drawn for these two schemes was $4.0 billion, less than expected.
We have recovered well from the crisis, putting our fiscal position on stronger footing. With the much lower deficit we achieved last year, as well as our good Budget position this year, we should be able to achieve an overall budget surplus during the current term of Government. We have thus decided to put back into Past Reserves the $4.0 billion that we had drawn earlier for the Resilience Package. I have informed the President of our decision.
For the life of me, I cannot see these transactions in the Budget numbers. Perhaps they’ve been netted off some other figures, or maybe they are in the Balance Sheet, which I didn’t bother to look at. But it doesn’t really matter much, except that without being specifically itemised, the reader might wonder why we needed 4.9 billion in the first place. I suspect it had something to do with the fact that Operating Revenue in 2009 and 2010 was lower than Total Expenditure. But then, the shortfall was S$8.96 billion; the numbers do not tally (scratch head).
What I’d like to do here is to make three broad observations. Readers however, will probably be able to make more observations using the data I have provided.
Government budget a small percent of GDP
The Singapore government’s budget takes a relatively small bite of our Gross Domestic Product, always under 20 percent. In most developed countries, government spending is something between 30 – 50 percent of GDP. There’s a simple graphic on this webpage, though one has to be careful with the figures shown. The figure provided for the USA there — 21 percent — relates only to spending by the federal government. This is not comparable to Singapore. A better figure would be the total spending of all levels of governments — federal, state and local — and hence, this other chart at right from the Economist Magazine is more meaningful:
(Source: Economist Magazine, 21 Jan 2010, Leviathan stirs again)
On the one hand, you could be pleased with the way the Singapore government keeps its spending under control. It’s good to have lean government.
On the other hand, surely it’s hard to believe that we have got it right and everybody else has got it wrong. (That said, there is an entire school of pro-government intellectuals who loudly and incessantly trumpet Singapore exceptionalism, and sometimes it gets really hard to think a skeptical thought amidst the racket they make.)
One could make this argument: Here we have adopted (with a vengeance, almost) the economic model of the West which naturally brings with it the salary structures of the West and its capitalist income gap. Whereas in the West (Europe especially), governments also take a large tax bite and actively redistribute to compensate for the social costs of capitalism (therefore large government budgets relative to GDP), the Singapore government does not do anything of a similar scale. This accounts for its small size relative to our GDP.
So, is a low percentage a good thing or a bad thing?
Where’s the recession?
The second observation comes out of the combined line Personal Income Tax + Withholding Tax, and it’s quite stunning. The Withholding Tax was included inside Personal Income Tax up till 2009 and only shown separately from 2010 on. The collection of these taxes rose every year over the period 2006 – 2010 and is expected to rise further in 2011. You’d never guess that we had a recession in 2008 – 2009.
By way of contrast, consider this: Corporate Income Tax dipped nearly 10 percent in 2009 compared to 2008. The State’s Net Investment and Interest Income (mostly the returns from our sovereign wealth funds) almost halved between 2008 and 2009. But not Personal Income Tax + Withholding Tax.
These taxes mostly come from the middle class and the rich. This suggests that they didn’t suffer any recession at all. Their incomes must have continued to rise, thus paying more tax each year. We seem to have created an economic model that completely insulates the upper classes from economic cycles. Are they so able to manipulate their own salaries and earnings that they do not suffer from downturns?
Goods and Services Tax
GST collected doubled over the term of this government. It grew even more than betting taxes despite the latter being powered by the opening of two large casinos, though the GST itself was boosted by a rate hike from 5 percent to 7 percent on 1 July 2007.
As we know, the GST is a very flat tax; it is highly regressive. It impacts the poor much more than the rich because the poor tend to spend all that they earn, while the rich tend to spend only a small part of what they earn. The poor therefore pay GST on a much larger proportion of their income than the rich.
There is a very strong moral case for fiscal transfers to offset the impact of this kind of tax; yet the government has been hopelessly inconsistent about it. Transfers as a percentage of GST collected were very low in 2007 and 2008. They were high in 2006 and will be fairly high again in 2011 — and you can guess why: election years. The percentage was also high in 2009, which was when the recession hit hard and the public outcry could not be denied.
The government will likely say that is how it should be. Save during good times, spend more during hard times. But it is very strange when the hoarding is made via a flat tax, on the backs of the poorer sections of society during “good times”. Shouldn’t the war chest be built via higher personal and corporate taxes during the better years? Shouldn’t we consistently spend a bigger portion of the GST to mitigate its regressive effects?
(You will notice that I excluded those transfers that went into institutions, organisations, endowment funds and trusts. No doubt some of them serve the needy, e.g. Medifund; others however, are for research, universities, etc. They are not obviously counteractive to the regressiveness of the GST, thus excluded.)
What do I discern from the six-year data? In a nutshell, it seems to me that:
1. The government budget is admirably lean, but it also means it devotes few resources to compensating for the regressive tendency of its tax policies.
2. What compensation there is, is extremely short-term and inconsistent. Whereas regressive taxes are permanently structured, transfers that mitigate their effects are ad hoc and tend to happen only during election years or during severe economic crises.
3. There is a consistent deflationary tendency from the annual budgets.
4. There are signs that economic power is so entrenched among the upper-middle class and rich that even during a recession, they are able to ensure their incomes do not suffer; this can only mean that pain is disproportionately borne by other sections of society.