Fiscal Finagling or Journalistic Bollocking?

Last week, the article Fiscal Finagling supposedly highlighted some "structural weakness" of Singapore's growth and argued that it "augurs ill" for Singapore's long tem prospect. Lucky Tan set me up with a few questions on what myself as a student think about these issues.

Old Wine in Recycled Bottles

First of all, I would like to point out that many of the points raised in the article are not in fact new. In one guise or another, many of these criticisms have been levelled at Singapore for decades. Fifteen years ago, Alwyn Young who is now at LSE, famously made many similar arguments in a respected economic journal (QJE) - how Singapore over-invested to boost growth with little efficiency gains. That then prompted Paul Krugman to liken Singapore to the Soviet Union.

It is a time honoured tradition for academics and journalists alike to criticise Singapore's high rate of savings and investment. When the economy is routinely growing at 7 per cent, what else can you say to generate headlines? More good news is hardly the correct strategy! The important thing for readers is therefore to have a balanced perspective and not get carried away by any arguments.

The starting point for any discussion about growth should be the recognition that there is a lot we do not know. Countries are by definition different (jargon: heterogeneous) and growth theories are an inexact science. History, culture, institutions, geography, natural resources - no two countries are exactly the same in these dimensions - are only some of the determinants that explain the differences in income levels between countries. In many cross-country analyses, Singapore often stands out as a statistical outlier even as researchers fit all kinds of regressions to explain growth.

Global Time Bombs

Turning more specifically to Singapore's fiscal stance, in particular to the question whether our system of old age provision is adequate, it is useful to take a global snapshot. The UK is just waking up to a pension crisis. A combination of ageing, over-optimistic forecasts, and bad fiscal policies mean that many companies are no longer able to pay their retired employees the promised pensions. In Europe, many governments already have public debts more than 100 per cent of GDP and like the UK, have unfunded pension systems with open ended obligations. With ageing population, one just have to wonder who is going to service and repay these debts, let alone meet the future liabilities.

Cross over to fast growing China. Despite the phenomenal growth rates, China is in fact one country that is ageing faster than it is getting rich due to the one child policy. When China shifts, it does so with astronomical numbers - what is going to happen when many hundreds of millions chinese retire in 20 years' time? The biggest time bomb, at least in absolute terms, is the US. Greenspan and Bernanke repeatedly warned of a Social Security crisis that was beginning to unfold as baby boomers retired. US public debt is already US$8 trillion by some estimates not even accounting for social security liabilities. Do Americans feel secure about their social security cheques?

These are not Singapore government propaganda, these are facts. Compared to these global time bombs, our problems if indeed there are, would at best be considered small fart. If Singapore's high savings paradigm points to a "bleak" future as some critics suggest, what would they say about a high consumption, low savings, high-deficit high-debt model? Are these structurally sound as opposed to Singapore's structurally weak development model?

Enough to Retire?

If you ask me, Singapore's fiscal position is in rude health. There is however an important caveat: The fact that the system as a whole saves enough and is on a financially strong footing does not mean every citizen is. If an individual has not saved enough, or has over-withdrawn for property and made losses, or has made bad investment decisions, old age retirement provision can become a big personal problem. Does the CPF ensure that every one can retire with a huge stash of retirement fund? Probably not. Can CPF as a system meet its future obligations? A highly likely yes. There is no contradiction between the two positions.

The author Shawn Crispin however made no distinction between the financial health of the system and the financial health of the individual, and instead rather naively suggested that CPF would face a "fiscal crisis" because of withdrawals for housing and medical needs.

Hidden Taxes or Crouching Subsidies?

Lucky is not the first to claim that CPF returns are too low, it has been discussed extensively. I have even heard of the term "Financial Repression" - to describe how the government forces the citizens to save at absurdly low interest rates, which is yet another hidden tax. To be honest, I have always been rather bemused by this allegation. Here's why.

We get a 'lowly' 2.5 - 4.0 per cent (OA, SA and Medisave) but people forget this is a RISK-FREE rate. Adjusted for zero risk, are the returns still low? Also, CPF contributions are not taxable and this creates a tax shelter which boosts overall returns. As I recall, financial institutions were offering a meagre 1 per cent or even less for fixed deposits over the past few years.

Furthermore, whether interest rate is too high or too low from a personal welfare point of view obviously depends on whether one is a borrower or saver. When I applied for the HDB loan for my flat a couple of years ago, I wanted to liquidate my savings to pay for the flat and borrow as little as possible (for some reason, I am irrationally debt-averse). Short of saying it outright, the HDB counter officer pretty much implied that I was stupid not to want the maximum loan since it was so cheap at 2.6 per cent interest, pegged 0.1 per cent above OA rate. His advice was that even if I had the money, I should take the maximum loan and invest my cash elsewhere.

That was obviously sound advice. My investment has given me, let's just say, significantly higher returns than the 2.6 per cent interest I paid. Which financial institution offers only a 0.1 percentage point spread between saving and borrowing? When we complain that CPF rates are too low, are we forgetting the flip side of the coin - that many of us are in fact borrowers at the early part of our life cycles, in which case low interest rate is a good thing!

But of course, net of housing and other uses, there is still a large balance held in CPF accounts. If one is still not satisfied with the 2.5 per cent for OA, there are always alternative investment available but how many Singaporeans are financially savvy enough to manage the associated risks? Many people who invested and burnt their fingers in fact blamed the government for liberalising CPF for investment purposes. How on earth is it possible for the government to guarantee high returns to citizens without someone having to bear the risks? There is really no free lunch here.

Double-Dealing Accusations?

I am not suggesting that Singapore's saving or fiscal systems are in any way perfect. One can indeed make a honest intellectual case that Singapore's national saving rate is too high, such that any future benefit from today's savings is outweighed by the cost of today's consumption foregone. However, to provide a proper analysis or critique, one has to exercise some intellectual discipline.

To on one hand accuse Singapore of building up too much savings and on the other claim that there is "lingering concerns about the financial health of the CPF" or that it is facing a "fiscal crisis" is a bit like double-dealing, using the ace of spade twice. If it is indeed true that Singapore saves too much nationally relatively to some estimates of its future needs, then there should not be any concerns about the financial health of its key retirement fund.

The author, perhaps rather too conveniently, also made no reference to Singapore's sovereign rating. It would be very odd indeed for the ratings to be AAA if there were any doubts about the government's ability to meet future obligations of its key retirement fund. These are just some thoughts on the article, and I leave you to decide whether there is more fiscal finagling or journalistic bollocking.