Sunday, 3 June 2018

HSR, External Shocks and the Medium-term Fiscal Policy Challenges



Singapore is now waiting for the official notification of the cancellation of Kuala Lumpur-Singapore High Speed Rail (HSR) from Malaysia.  This big item project, as part of Singapore’s medium-term fiscal policy, has now become an external shock. Do we have a Plan B? Are we going to find another bigger project or speed up our existing projects?    

The People’s Action Party government likes big projects. They believes big projects can generate economic growth and jobs, like the two casino projects.
Besides HSR, they plan to build Terminal 5, seaport, developments in Jurong area, more metro lines, and continue the existing projects like housing and health care facilities.

Singaporeans seldom ask why or the cost/benefit analysis.  According to Malaysian reasoning, HSR is too costly to build and to maintain.   

Guan Eng on HSR: 'You can get something... for half the price.'
https://www.thestar.com.my/news/nation/2018/06/02/guan-eng-on-hsr-you-can-get-something-for-half-the-price/#MR07VAdqFcRqHTVU.99    
We believe Lee Hsien Loong’s explanation (as he claims) just like Malaysians, especially rural Malaysians, believe Najib’s explanation on the necessity of big projects until 9 May 2018.   

Tharman’s calling

{Policymakers must look past the strategies of the second half of the 20th century if they are to deal with the challenges of the 21st, Deputy Prime Minister Tharman Shanmugaratnam said on Wednesday (May 30).
He warned of an "ebbing of hope and optimism" and the loss of faith in market-based meritocracy in advanced economies.
“Loss of faith in market-based meritocracy” can happen in Singapore too. In fact, it is happening. We have seen conflict of interest in our GLCs, Temasek, GIC while the PAP still insists it is based on meritocracy.  
By calling Advanced economies to think of progressive strategies, I wonder why Tharman did not mention his own country - Singapore. We, too, face the same challenges or even worse than them in term of Gini index and inequality.

Purposes of fiscal policy

Annual budget and medium-term fiscal framework have three purposes:
  • Stabilization of economy, reducing internal and external shocks
  • Efficient use of resources, including human resources
  • Equal distribution of growth, reducing poverty and inequality

International Monetary Fund, World Bank and other international bodies are helping the world to maintain economic stability, especially when countries facing internal (e.g. high debt, deficit) and external shocks (fluctuation of commodity and oil price).

They also provide assistance on the use of resources and distribution of income. One key recommendation to achieve the target is Citizen Engagement. Without the support of the citizens, successful implementation of fiscal policy will be in doubt. The first 50 years of Singapore after independence is one such example. However, since Lee Hsien Loong became the prime minister, “Loss of faith in market-based meritocracy” appears.

The recent Malaysian example shows voters have no confidence in Najib’s fiscal policies. His economic policies have failed to achieve equal distribution of wealth to Malaysians, especially rural Malaysians. People care more about cost of living rather than Najib’s corruption. This is another example of “Loss of faith in market-based meritocracy” .
Why WP rejects Budget 2018?

Singapore Budget 2018 was rejected by the Workers’ Party. It is related to GST.

[The Workers’ Party MPs voted “no” to the motion that Parliament “approves the financial policy of the Government for the financial year 1st April 2018 to 31st March 2019” for the sole reason that WP is unable to support the announcement of a GST hike from 7% to 9% in 2021-2025 at this point in time.
We support the Government’s budget strategy and measures for the coming Financial Year, as presented to Parliament. However, the future GST hike is an announcement and not a budget measure. We are unable to support the announcement for three reasons:
1. the lack of clarity on long-term projected Government income and spending;
2. the lack of consideration of alternative revenue streams and whether there is scope for the reserves to better support and invest in Singaporeans;
3. the lack in details on the effect of the future GST hike on low-income and middle-income Singaporeans and the Government’s permanent GST offset packages.
In our parliament system, a vote of NO to annual budget is a vote of no confidence to the government.

WP’s reasoning is related to our medium-term budget framework and fiscal policy.    
It is related to future income and expenditures, as well as Plan B.  It seems the PAP government has failed to provide a detailed fiscal risk statement to the parliament.

Few Singaporeans notice the NO vote. Even fewer are asking why. Anyway, the Budget 2018 has passed. Life is back to normal. Is this so simple? Should we expect and demand a transparent PAP government?  

What are the fiscal risks
 
The Malaysian example shows the contingent liabilities that do not appear in the budget or fiscal framework. Najib Adminstration only considers federal debt as government liabilities (RM 686.8 billion).

Malaysia's 1 Trillion Ringgit Government Debt Explained

https://www.bloomberg.com/news/articles/2018-05-24/malaysia-s-1-trillion-ringgit-government-debt-explained   

Fiscal risks can be explicit contingent liabilities, like 1MDB. When the company is not able to serve the interest or principal payment, the government as a guarantor has to pay.  (RM199.1 billion)

There are also implicit contingent liabilities, like major banks, too big to fail state owned enterprises, where investors and citizens believe the government will step in to help. Just imagine our Temasek, GIC, or GLCs, Singaporeans and foreigners believe the government will bail out these companies if they get into troubles.  

Bigger and bigger SOEs and fiscal risks

When Singapore economy grows, so do the GLCs, GIC and Temasek. Today’s Singapore SOEs are the major listed companies in the stock exchange. They also expand their reach all over the world. By definition, SOEs are part of the public sector and so should subject to parliament’s questioning.   

In rejecting Budget 2018, WP said there is “the lack of clarity on long-term projected Government income and spending.” Indeed, few in Singapore know about the accounts of these SOEs.  Even listed in Stock Exchange, companies like Keppel can still involve in corruption cases in Brazil.   
All these are potential fiscal risks for Singapore. What happens in Malaysia can happen in Singapore too. Najib claimed Malaysian debt is only 50% of the GDP while the new government increased it to 80%. However, Singapore’s debt to GDP ratio is nearly to 120%. Many of these borrowings are from CPF members so there is no worry for the government? Think again! CPF contribution is your money not the wealth distribution from the government.
Think again why is Najib withdrawing his 1MDB court cases in Malaysia?

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