Lee Hsien Loong (Singapore Prime Minister) – Reserves as a Secret Weapon Part 2/3 (Aug 2023)

Chapters

Abstract

Singapore’s Prudent Reserve Management: Balancing Today’s Needs with Tomorrow’s Legacy

Singapore’s reserve management, a key aspect of its economic strategy, presents a unique blend of prudence and foresight. Anchored by the 50-50 rule, which allocates equal portions of investment returns to current spending and future reinvestment, the city-state ensures a sustainable and fair distribution of resources across generations. The significant contribution from the reserves, guided by a formula ensuring equitable distribution between current use and future investment, provides a balanced response to these challenges. This approach, coupled with the challenges of communicating its significance to the populace and maintaining the “Singapore premium” in a competitive global landscape, underpins the nation’s fiscal strategy. As Singapore navigates through an aging population, rising healthcare costs, and economic uncertainties, its reserve management stands as a testament to its commitment to financial sustainability and intergenerational equity.

Main Body:

1. Budgetary Implications and Sustainable Contributions:

Singapore’s reserves significantly surpass expenditures in crucial sectors like defense, education, and healthcare. The nation faces growing demands, particularly in healthcare, projected to reach 3.5% of GDP. The Net Investment Returns Contribution (NIRC), a significant contribution to Singapore’s budget equivalent to an additional ministry’s funding, allows for sustainable and fair contributions, with half of the investment returns spent and the other half reinvested. This situation necessitates judicious fiscal management to avoid drastic measures like substantial tax increases or GST hikes.

2. Evolution of Reserve Management:

Initially, the management of Singapore’s reserves lacked a clear distinction between income and investment returns. This evolved with the advocacy of President Ong Teng Cheong for a balanced approach, inspired by endowment management practices of US Ivy League colleges. This evolution marked a significant milestone in Singapore’s fiscal policy, laying the groundwork for the current 50-50 rule.

3. Determining Expected Returns and the 50-50 Rule:

The process of defining returns from reserves is complex, reliant on the Prime Minister’s judgments, backed by expertise and consultations with financial experts. The 50-50 rule, dividing returns equally for current spending and future reinvestment, offers both psychological resonance and practicality. It ensures consistent annual budget contributions while fostering the long-term growth of reserves.

4. Singapore’s Unique Approach and International Interest:

The management of Singapore’s reserves, particularly through entities like Temasek and GIC, has garnered international interest. The distinctive structure of Temasek as a state-owned enterprise and the Second Key system for protecting reserves highlight Singapore’s innovative approach in this domain.

5. Challenges in Communicating Value and Maintaining Reputation:

Communicating the value of reserves to Singaporeans, who may not directly perceive their day-to-day benefits, remains a challenge. However, the significance of Singapore’s strong international reputation, symbolized by its red passport, cannot be understated. This reputation, alongside the advantages from the reserves, helps Singapore stand out in a crowded global arena.

6. Economic Success and the Singapore Premium:

Singapore’s economic success, resulting in higher wages and living standards, is a testament to the “Singapore premium.” This premium is attributed to the nation’s skilled workforce and high levels of organization. However, with current economic challenges, the ability to maintain this premium and set aside significant funds for future needs is increasingly complex.

7. The Garden of Eden State and Reserves as Rainy Day Fund:

Prime Minister Lee likens Singapore to a “Garden of Eden,” emphasizing the importance of not taking the current prosperity for granted. The reserves, having grown from $14 million to $500 billion GDP, act as a safety net, providing security during unforeseen events like the global financial crisis and the COVID-19 pandemic.

History of Singapore’s Reserves:

In the early days, Singapore’s reserves were relatively small, with $14 million being considered a significant amount. Today, with a $500 billion GDP, the question arises: how much is enough?

Unpredictability of Future Financial Needs:

It is impossible to predict future financial needs accurately, as events like the global financial crisis and COVID-19 pandemic have shown. The amount needed can vary greatly depending on the severity of the crisis.

Rainy Day Fund Mentality:

Prime Minister Lee Hsien Loong views the reserves as a “rainy day fund” that should be preserved and built upon when possible. The goal is to provide a financial cushion for future generations and ensure Singapore’s long-term security.

8. Responsibility to Future Generations and GST Increase:

The responsibility to build reserves for future generations is a legacy inherited from Singapore’s forefathers. The government’s commitment to this responsibility is evident in the decision to increase GST, ensuring sustainable spending for growing needs.

Gratitude and Responsibility:

Prime Minister Lee emphasizes the importance of gratitude towards previous generations who built up the reserves and the responsibility to continue this legacy for future generations.

GST Increase and Spending Needs:

The government has implemented a GST increase to address growing spending needs, particularly in areas like healthcare and social welfare. The spending needs are expected to continue growing, necessitating further adjustments in the future.

9. Comparison with High-Debt Countries and Preserving Reserves:

Singapore’s fiscal strategy contrasts sharply with countries burdened by debts exceeding their GDP. This comparison underscores the importance of preserving reserves for future use and avoiding the pitfalls of excessive spending.

Comparison with Highly Indebted Countries:

Prime Minister Lee highlights the importance of avoiding the high debt levels seen in some countries, which can severely limit a government’s ability to respond to crises.

4G Leaders’ Understanding:

The current leaders of Singapore understand the challenges and are committed to taking necessary measures to ensure the country’s financial sustainability.

Public Understanding and Preservation:

The challenge lies in getting Singaporeans to understand the value of the reserves and the need to preserve them for future generations. The reserves should not be squandered but used judiciously when necessary.



Singapore’s reserve management strategy is more than a fiscal policy; it’s a commitment to the future. The government’s dedication to sustainable spending and preserving reserves for unforeseen challenges is crucial in maintaining the nation’s economic stability and quality of life. As Singapore continues to navigate through economic and demographic shifts, the importance of these reserves, both as a safety net and a legacy for future generations, remains paramount. Understanding and supporting these efforts is essential for every Singaporean, as they are integral to the nation’s continued prosperity and success.

Notes by: WisdomWave