When I was a kid I went strolling Sungei Road 'Thief Market' once, kind of like window shopping in those long forgotten days. At a crowded cross-junction someone set up a table for a three-cup shuffling game. I was standing behind the juggler and being somewhat small at the time, my eye level was in a better position to catch subtle finger movements. I thought OK I was going to hang back, but once I catch an error, I was going to dump my pocket money on a bet. Then it happened. I saw his pinky flipped the dice under the middle cup. I excitedly squeezed my way to the front, but rowdy adults never gave way and I was too slow to place the bet. The juggler lifted the cups and hey, the dice was not under the middle cup! So glad my pocket money and I never parted.
The Government Financial Statement (GFS) is prepared on a cash basis. Their assets are in their cash a/c with MAS and investments. Liabilities are represented by the various funds accounts. Assets = Liabilities. But not all the assets can be used to meet the obligations in the funds accounts. From the total assets is deducted what doesn't belong to the government -- proceeds from debts (the various govt securities issued), fiduciary funds, fiscal surplus and proceeds of land sales. From the net assets thus derived is deducted the commitments in various fund accounts.
Based on the GFS as at 31 mar 2021 I computed an estimated deficit of S$307b. No media, academia nor social media keyboard warriors, has broached the issue except Chem-Post blog which reported that on 7 Aug 2022 . See Does The Govt Have Sufficient Cash To Meet Its Purposes. Even if the estimate is only 50% correct, the deficit is still a whopping S$153b. It's inconceivable that this be correct. Click the link and decide for yourself.
What causes the deficits and how does the govt fund itself with a deficit all these years?
Let's examine how the first pandemic aid package was funded. DPM Heng explained S$54b will be from past reserves, S$18.9b from current reserves, and S$22b from loans. Remember Heng mentioned the loans will be 'fiscally neutral' which got social media awash with the question what it means and who is lending the money to the govt.? The S$22B came from MAS money printing, that's why it was 'fiscally neutral'. No one, not Straits Times, CNA, Independent SG, Reuters, etc except Chem-Post reported this 8 Jul 2020 in "Govt Does Not Want You To Know MAS Is Printing Money For The Covid-19 Aid Package"
As to the S$72.9b (S$54bB + S$18.9b) drawn from reserves, you would be forgiven if you thought that since reserves are transferred to GIC, then the Sovereign Wealth Fund would have liquidated some assets to return cash to the govt. But there was NO return of capital from GIC. So where did the govt took the S$72.9B from?
In order to explain this, I need to pull up this chart from a previous blog.
This chart shows how money flows into govt a/c at MAS, and how it flows out when spent as per budget, ie by ministries or the various special programmes under discretionary funds. Money also flows out when fiduciary account depositors withdraw their funds, and when govt invests.
For investments, the funds are either transferred to GIC for long term investment, or govt invests and manages in its own portfolio.
Cash is fungible. That means S$1 is the same as the next S$. It doesn't matter from which stream of cash flow it comes from. And that means the cash are all co-mingled. When the govt pays out, it simply pays out of the cash balance in the MAS a/c. So it doesn't matter from which stream of cash flow, and neither is it possible to trace.
Since GIC didn't return any funds to govt, it is an absolute certainty the S$72.9b came from cash balance in MAS and the disposal of some of the assets in the investment portfolio managed by the govt.
In the ordinary course of business, all other payments whether it is expenditure in the running of the government, the payments of the various discretionary fund, and even for Securities Fund, the govt pays out of the MAS account.
In order to meet immediate and short term payment requirements the government must maintain liquid assets to cover their timeline horizon. This liquid asset is in the form of cash at MAS, and very marketable securities such as other government securities. In times of need, these securities are liquidated and balances in the MAS a/c increased. Cash in access of immediate and short term needs may be transferred to GIC for longer term investments. The liquid assets are the Short Money and the longer term assets held at GIC are the Long Money.
In view of the fact there has been no capital return from GIC to govt, Short Money runs out when:
1. When reserves are tapped, just like the pandemic aid packages.
2. There may be some discretionary projects, especially the Development Fund, which are very long term. Funds earmarked for these may likely be transferred to GIC for long term investment. When disbursements are eventually made for these projects and funds are not returned by GIC, the govt digs into their short money.
3. Proceeds of long term government bonds are transferred to GIC to invest. Redemption of these debts are also paid out by the government using Short Money. However, this situation is not posing a problem because debt is rising consistently. That means redemption is easily paid off from proceeds of new securities issuance. It's being rolled over.
4. There is another problem of short term securities (T-bills, Savings bonds, some SGS) which are issued at discounts. Govt receives proceeds at discounted value, and pays out at higher face value. The govt as a net cash payer, reduces the Short Money.
5. Similarly with long term bonds, the coupon (interest) payments are made using Short Money
What the government has is a financial management error of mixing short money with long money. By using short money to pay for obligations for which funds have been set aside in the long money with GIC, the govt ends up with the S$307b deficit when there has been no return of capital from the SWF.
However, this does not mean funds have gone missing or mis-spent. The S$307b are in the books of GIC.
It is hoped this technical deficit is not the source of the govt's worry of running out of operating funds that form the basis for policy decision of delaying CPF payout and increasing GST.
Co-mingling of funds and moving the cash around seems rather like the juggler at the cup shuffling game. One needs to step back to see how little pinkies move the dice around.
