Our GDP to Public Debt Relationship with Our CPF

This is a short explanation on why the Singapore government has embarked on a growth at all cost economic strategy that has increased our GINI coefficient and diminished our social safety net.  It also gives an insight into why they are so firm on the Population White Paper.

One of the issues that should concern Singaporeans is the nature of our public debt.  The public debt, also known as government debt, national debt and sovereign debt, is the cumulative debt owed by our government.  This is distinct from the annual government deficit or surplus, which is the difference between government receipts and spending in a single year.  A deficit is the increase of debt over a particular year, and a surplus is a decrease.

Public debt is a method of financing the government operations.  Our government can also monetise its debts by creating money.  This removes the need to pay interest on the debt, but it actually reduces interest costs rather than outright cancelling the debt.  There are limits to this, otherwise it might lead to hyperinflation.  Governments borrow by issuing securities, bonds and bills.  Our public debt consists largely of Singapore Government Securities (SGS) and Special Singapore Government Securities (SSGS), which is issued to assist the payments on the Central Provident Fund.  Singapore does not borrow from international financial institutions, therefore, we have no external public debt.

Here are some points about our public debt.  Singapore has amongst the highest public debt to GDP ratio.  This is because Singapore does not borrow externally to fund its fiscal policy.  According to MOF, “The Singapore Government operates on a balanced budget policy and does not need to finance her expenditures via the issuance of Government bonds.  It has enjoyed healthy budget surpluses over terms of Government in the past decades.”

Singapore only borrows domestically, the Singapore Government does not have any external debt.  Why do we have such a large public debt?  SGS are issued to develop the domestic debt market.  There are three principal objectives of SGS issuance.  Firstly, it is to build a liquidity in order to provide a risk-free benchmark against which other private debt securities are priced off.  Secondly, to grow an active secondary market for cash transactions and derivatives.  And finally, to enable efficient risk management; and encourage both domestic and international issuers and investors, to participate in the Singapore bond market.  It has succeeded to an extent.  As at December 2011, SGS stock is valued at S$79 billion, while the stock of Treasury-Bills is valued at S$59 billion.  Being government bonds, the yield is extremely low.

SSGS, on the other hand, are non-tradable bonds specifically issued to address the investment needs of the CPF.  CPF monies are invested in these special securities, fully guaranteed by the Government.  These securities earn the CPF Board a coupon rate pegged to CPF interest rates that members receive.  As at December 2011, SSGS stock is valued at S$216 billion.  In the 3^rd quarter of 2014, the amount of outstanding SGS bills and bonds, which account for 52% of total government bonds, was S$101 billion.  It was up 1.0% quarter on quarter, but declined 20.9% year-on-year.  New issuance of SGS bonds fell 26.9% quarter on quarter, and 66.5% year-on-year in the 3^rd quarter of 2014.  These numbers do not include the SSGS.  Singapore’s public debt was 106.7% of GDP in 2014, 104.7% of GDP the year before.

What Singaporeans must be cognisant of is the fact that public debt is an indirect debt upon us as taxpayers.  A broader definition of our public debt includes all government liabilities, including future payments, and payments for goods and services contracted but not yet paid.  This includes the money that is supposed to be paid into our CPF as a guaranteed interest.

In general, it can be said that Singapore practices Keynesian economics, where there is a tolerance for high levels of public debt to pay for public investment, which can then be paid back from tax revenues.  Our high public debt is not in itself a concern as long as we can generate GDP growth.  And that is why the Singapore government has embarked on this economic policy.  They need that growth to sustain the high public debt.

To understand the nature of our of public debt and analysing its risk, we need to estimate the projected value of our public assets being constructed, in future tax terms or direct revenues.  This is especially difficult for Singapore because a lot of our assets are held through Temasek Holdings, and they are not transparent.  As such, it is a challenge to determine whether much of our public debt is being used to finance consumption.

Because of the CPF, the government has implicit debt, which is the promise by a government of future payments from the state at a fixed rate on all deposits into the CPF.  A major problem with these implicit public insurance liabilities is that it is hard to cost accurately.  The amounts of future payments depends on so many factors.

Firstly, claims are unpredictable.  Population projections predict that when the current generation retires, the working population is insufficient to fund future payments.  Our total fertility rate as per the Population White Paper is 1.19.  We need a TFI of about 2.1 to adequately replace the population.  One way that the Singapore government is going around it is by drastically increasing the population.  And secondly, there is no maturity limit for payments of this nature.  As long as there are CPF accounts, and as long as the owners of these accounts live, the interest has to be paid.

Now, if the population by which revenues are raised to sustain these payments has a much lower TFI, the population will shrink without another form of growth.  And that means, the government will have increasing difficulty keeping up with payments and allowing withdrawals.  And that could also be a reason why the withdrawal age and the minimum sum is going up: they might not have the money to pay up on withdrawals.

In summary, these are relatively quick fixes to problems that have developed over the last few decades.  On hindsight, Lee Kuan Yew’s stop at two policy worked far too well, and we are now having to pay an expensive price to reverse this.  It either means we all have to work at having larger families, or we have to accept the reality of increased immigration.