There are three huge hurdles to making anything worthwhile out of the national conversation that the government has launched.
The first is the attitude the government brings to it. Early indications are not encouraging; there is reason to suspect that they dearly want the outcome to more or less confirm what they want to hear, but there is possibly a second motive which I will write about soon. Consequently, the process is being tightly managed. A related issue is the lack of open data and access to information. How can the public meaningfully participate if the government insists on releasing only such information that suits its agenda?
The second hurdle is the unwillingness to discuss fundamental rights issues and paradigmatic straitjackets. When criticism is labelled as “politicisation”, as discussed in my most recent post, what conversation is possible? Questions of fundamental rights — e.g. what do we mean by equality? freedom of expression? right to information? — are foundational to the futures we are supposedly to imagine. Again, early indications are that these are going to be dismissed as irrelevant to the conversation. Moreover, a reexamination of the paradigms would also be essential to a substantive assay of the possible paths. In this regard, an excellent paper by Donald Low (Reframing the national conversation) has been circulating and is a must-read.
The third hurdle is what I wish to discuss in this essay. It’s a hurdle that is found among some of the government’s critics. I’d describe it as an attachment to certain doctrinaire positions and reliance on a few easy answers that may well prove to be more myth than reality. These show up especially when the discussion turns to social investment and the social safety net, and the question of how we would pay for them surfaces.
Unlike issues like rights, attitudes and paradigms, modification of which don’t cost money (at least not directly), social investment and the social safety net do. Of course, there is, and quite rightly, the counter argument that they pay off, and indeed a fair recognition of returns must be integral to any discussion, but to pretend that at least in the initial stages these lovely things can be had without cost is illusory. Money has to come from somewhere. We can’t have a mature conversation if this simple fact is denied.
I saw an excellent opportunity to bring this up at a forum organised by the Singapore Democratic Party (SDP) on 29 September 2012. Knowing that it will be peopled mostly by government critics, I thought to myself: why don’t I needle some of them about their own blindsides?
Sure enough, during the coffee break, two men from the audience — I’m sorry, I never got your names — raised the anticipated objection to what I had said. They argued that if the government would only stop paying million-dollar salaries to ministers and if we took into account the millions raked in through land sales, there’d be enough money around to pay for a wide social safety net. During question time, someone suggested that with billions locked up in sovereign wealth funds, there’s plenty of money there too. I explained the fallacy of those arguments to them, and will do so further down.
I believe the SDP will be releasing videos of the forum. You will see me struggling to say all this in the very short time I had. But here, in text, I hope I can be a bit more coherent.
The national conversation will naturally cover a huge range of topics. Here, I want to zoom in on the question of social investment and social safety nets. Generally speaking, nobody is arguing for less. I have a sense that most people are arguing for more. Even the government recognises that in the years ahead, there will need to be greater provision, from the simple fact that numbers of elderly will rise. The need for more childcare support, in the interest of raising the birthrate, is another driving force.
Far from being an area of easy agreement between the government and its critics, this can become a highly contentious issue. Huge sums of money are involved. Where will that money come from?
The first speaker at the forum, Teo Soh Lung, highlighted the results from a Yahoo! survey which found that the top issues among Singaporeans are:
1. Housing, cost of, affordability;
2. Inflow of foreigners;
3. Widening income gap and economic stress on families;
4. Education, stress;
5. Healthcare, cost and access to;
6. Political/electoral reform.
I was a little surprised that transportation was not among them. I had it in my own little list of key issues that concern a biggish number of Singaporeans.
Three of the six — housing, education and healthcare — are very much social safety net issues. They, with transportation, also raise issues of social investment. The widening income gap is a related issue in that it impacts the perceived affordability of housing, education and healthcare.
The recent sale of a public housing flat for a million dollars focussed many people’s attention on the rising prices of homes. Indeed, this is one area where I think the government took a wrong turn 20 – 30 years ago, and by refusing to admit their mistake, continues to make things worse. Public housing should never have been treated as an investment good; doing so brings in conflicting objectives.
Moreover, the system contains a vicious cycle. Maybe two. Very briefly, it goes like this:
The government pegs selling prices of new flats, not to the cost to build them, but to their “market value”. Some buyers get subsidies, but the subsidies are fixed, whereas the “market value” floats with the market.
This market value is determined with reference to the transaction prices of resale flats. The government however forgets that resale prices are not independent of their own actions. Resale prices are sensitive to the stock of flats in the market, and the overall stock is determined by the government’s building program past and present. Secondly, resale prices are sensitive to the waiting time for and availability of new flats. When new flats are harder to get, demand for resale flats go up and prices rise accordingly. It is circular then for the Housing and Development Board to reference those magnified prices as the “market price” for determining the prices of new flats.
Resale prices are also linked to the prices of private condominiums. The market prices of condominiums themselves are linked to land auction prices in some cases and in others, to development charges imposed by the government for changes to zoning and density regulations. Land auction prices are linked to land releases, again a matter entirely at the discretion of the government (with an upward price bias because of minimum reserve prices for auctions). As for the setting of development charges, the process is very opaque, and one suspects that revenue maximisation (not social interest) is the key determinant.
One can see an in-built bias towards a price spiral. Not wanting to have unsold flats, the Housing and Development Board has a tendency to under supply, thus pushing prices up. In the private market, again wanting to maximise revenue, land auctions and development charges have the same effect.
The problem is compounded when, now that prices have gone up so much, the government is terrified of hurting those who have paid handsomely for their flats. They cannot afford a crash in property values. They think they are doing Singaporeans a favour by keeping the market “stable”. They are not, as I will argue below. But also, they are fooling themselves if they think they are keeping it stable, for, as I described in the foregoing, the circular machinery has an inherent upward bias. If they don’t break that cycle, prices will continue to go up.
But if they boldly break it, quite likely, prices will crash.
Yet, crash is not necessarily a bad thing. For the status quo has victims: younger Singaporeans who need to buy their first flat. The “stability” the government thinks it is protecting, has as many losers as it has winners.
On a wider perspective, high property prices effectively suck money out of the economy into the pockets of the rentier class, which includes the government itself. Less money is available for other forms of investment, e.g. education and child-raising, which can bring far better returns, both economic and in social and personal terms.
However, at least in this area, breaking the vicious cycle(s) should not need to involve much by way of government expenditure. It primarily involves a breaking of mindset. But any significant reduction in prices, or dashing hopes of asset value increase will mean a biggish number of citizens crying in pain — and this is the point I think people need to bear in mind when they raise housing affordability in the national conversation.
Key features of the government budget
Before we delve into the question of social safety net, it is important to take a quick look at the government budget. This helps us see the problem in perspective.
The total expenditure projected for Fiscal Year 2012 is S$50.3 billion, as seen from the Ministry of Finance website (source). Here is the breakdown by ministry:
But the really interesting thing is this: As a proportion of Singapore’s Gross Domestic Product, which in 2011 was S$326.8 billion at current prices, government expenditure is only 15.4 percent. This is much lower than the levels in developed countries, as you can see from this chart from the OECD:
Click image for a larger version. (source)
At the higher end are countries like France and Sweden with government spending (all levels of government together) at about 50 percent of GDP. Most developed countries are in the 30 – 45 percent range. Even Japan and South Korea, not often considered welfare states, are at 35 and 30 percent respectively.
This suggests that there is some validity to concerns that Singapore is underproviding in terms of the social safety net. Underprovision by the state stresses private household budgets, and causes a an undercurrent of worry among average citizens over future costs. It should be no surprise if many issues raised in the national conversation relate to expanding the social safety net.
Another failing suggested by the low share of government spending is underinvestment in infrastructure. This may sound odd to many Singaporeans exposed for years to state media bragging about how, with great foresight, government planners have given us top-notch infrastructure. But if we look beyond the propaganda, they may well be real concerns. Public transport overcrowding and poor coverage of some areas is one. The slow speeds of our broadband compared to, say, Korea, is another. Hospitals so full that they turn away emergency patients is yet another again.
Judging the ‘right’ level of social safety net is difficult
Determining the ‘right’ level of social safety net is an art, not a science, and one highly dependent on contexts from the cultural to the developmental. There is no essential reason why the state should provide. Arguably, people could pay fully for whatever services they consume and the services could be supplied on a commercial terms, from healthcare to housing to schooling.
However, most people can see that universal provision by the state (to a certain minimum standard) has a moral dimension. It serves as an upward leveller and a creator of opportunity for those born into poor circumstances. It also provides some peace of mind in the event of catastrophic illnesses or accidents.
There are also certain things that if the state did not provide, the private sector would be most unlikely to step in either. One example would be the building of mass urban railways. The upfront costs are huge, and the complexities of acquiring land, tunnelling under other people’s property, and connectivity with other transport systems are daunting.
The problem is that asking for a wider social safety net (e.g. medical and eldercare subsidies, lower university fees, childcare support) and more social investment (e.g. more universities, metro lines, buses) is easy, paying for it is much harder. Logic suggests that if we wish for something approaching the European level, government spending needs to climb to perhaps 30 percent of GDP or more. That’s a doubling of where we are now.
Sources of government revenue
Where’s the money to come from? Here’s a pie chart from the Ministry of Finance website showing the expected sources of about S$53 billion in government revenue 2012:
How are we going to double (if need be) the revenue base from 15 percent to 30 percent of GDP? Would we double all tax rates across the board? If so, can we stomach the top rate of Personal Income Tax at 40% instead of the current 20%? Corporate Income Tax at 34% instead of the current 17%?
What about the Goods and Services Tax? Should it go up to 14% from the present 7%?
But if we start exempting some taxes from increase, then other taxes will have to bear a higher increase.
A meaningful conversation requires us to take stock of certain realities — that was the point I wished to make at the forum.
At the same time, we need to avoid certain kneejerk reactions. One is that higher taxes are a bad thing. Is it? If we didn’t have an adequate social safety net or adequate investment in social infrastucture, we’d be paying for the same services out of our own pockets. They don’t come free. Some, like metro transport or emergency healthcare, may not materialise at all. We could see higher taxes for a wider and deeper social safety net as a form of insurance, with the benefit of removing anxiety from our lives. Universally pooled insurance may also be a more efficient provider than buying private insurance.
As mentioned earlier, three participants at the forum felt I had overlooked other ways of funding a wider, deeper social safety net that would avoid having to look at taxes. I must deal with them here, because if I don’t, some among my readers will raise them all the same.
But first, bear in mind the quantum that we may be referring to when we say that government spending, currently at 15 percent of GDP may need to get to about 30 percent of GDP. It means going from the current annual expenditure of $50 billion to $100 billion. That is, we’ll need to find $50 billion more.
Cut ministers’ salaries
We can save money by cutting ministers’ salaries — goes the argument. Yes, we can, but the amount involved is small change compared to the need. My rough estimate is that salaries for ministers and the senior echelons of the military and civil service add up to no more than $50 – $70 million. This is 0.1% of the government’s budget of $50 billion. It won’t buy you many hospital beds, operating theatres, doctors or nurses.
This is not to say that those salaries, even after the recent reductions, aren’t vulgar. I still think they are, but that is a separate issue from funding social spending.
Plough back proceeds from land sales
Here, we’re talking bigger money. The first problem is that I don’t know how much money is involved. I can’t find information on this. But there is a more fundamental problem with this argument, and it is that it would be foolish to fund recurrent expenditure from asset sales. There’s only so much land to sell, and we can’t be re-selling the same piece of land year after year to fund annual healthcare or education expenditure.
What about all the money in the sovereign wealth funds?
The above question is often asked with a hint of anger. This especially as Christopher Balding and, more recently, Kenneth Jeyaretnam, have raised questions about the accounting. A more dispassionate discussion however, requires us to distinguish between asset values and annual returns on investment. Glittering though the hundreds of millions in asset value may be, spending away the principal is far from wise. We should spend no more than what we earn from investing the principal sums.
Temasek Holdings claims a portfolio of S$198 billion in its latest annual report, and an annual return on investment in the order of 17 percent over a longish period.
The 2011/2012 annual report of the Government of Singapore Investment Corporation (GIC) doesn’t seem to say what its portfolio value is. The closest is a statement on page 24 that murmurs that it has “well over US$100 billion internationally in a wide range of asset classes and instruments.” GIC reports an annual rate of return of 3.9 percent.
Given the veil pulled over the numbers, it is hard to know how much annual earnings from the portfolios are available to the government’s budget. However, the 2012 government budget indicates an expectation that there should be $7.3 billion in “net investment returns contribution”. This amount is not part of the pie chart above. However, it is more than matched by the amount dedicated to “special transfers” as you can see from this bird’s-eye view of the budget balance:
But the point we should take note of is that stretching the investment returns contribution from $7 – $8 billion a year to something like $50 billion (which is what it will take to double government spending from 15 to 30 percent of GDP) is probably not realistic.
In short, it is hard to avoid a discussion of tax rates if we want to discuss the social safety net and greater social investment. That was the reality check I hoped to share with the audience last Saturday.