Assoc Prof Jamus Jerome Lim (Sengkang): Chairman, fiscal councils are agencies staffed by professional civil servants which evaluate policy proposals to provide budgetary implications.
To-date, there almost 40 fiscal councils worldwide concentrated among advanced economies. Some are comparatively older. The Netherlands Bureau for Economic Policy Analysis dates back to just after the end of the Second World War while the Congressional Budget Office which serves both Houses of the United States legislature was founded in 1974.
Others have more recent prominence but have, nevertheless, become rapidly influential. Canada’s Parliamentary Budget Officer was established in 2006. The United Kingdom’s Office for Budget Responsibility was formally constituted in 2010 and most fiscal councils within the EU were set up following the European Fiscal Compact in 2012.
Importantly, fiscal councils are independent and are expected to provide non-partisan assessments of the expected effects of policy on revenue and expenditure. As such, they serve as trusted public institutions that can help score, reform ideas and proposals to help ensure the economy’s commitment to sustainable public finances. The support functions that fiscal councils offer include public assessments of fiscal plans and performance and evaluation of all provision of macro-economic and budgetary forecasts.
While these functions may already be performed to some degree by MOF, MOF reports to the government of the day. In contrast, the fiscal council will provide advice and the key here is advice as they do not possess any formal power to determine the Budget to the whole of Parliament at their request. As such, the Council will be available to scrutinise policy proposals offered by PAP backbenchers as well as Opposition parties.
I should point out that a proposal to form an independent Office of Budget Responsibility was raised by Mr Low Thia Khiang of the Workers’ Party in 2017’s Committee of Supply debates, This proposal builds on that, detailing the functions of the proposed agency and its service to the full legislature, and underscore the distinct macro-economic environment of the day.
There is evidence that fiscal councils can improve fiscal performance, especially when such Councils enjoy legal and operational independence, are tasked with monitoring fiscal rules and are supported by a robust media presence. Moreover, an independent fiscal council can be especially useful at this juncture in our economic evolution, given how we are currently running the largest Budget deficit since Independence, with substantial uncertainty over the likely future evolution of our economy.
Unlike the past where our Government has run balanced Budgets over successive terms and, hence, we may have had little need for this institution, there was an unprecedented deficit over the last term of Government which necessitated a draw on past reserves. I propose that the MOF consider the formation of an independent fiscal council, the Parliamentary Budget Office of Singapore seeded with an initial $20 million and tasked with the mandate to score all major policy proposals, formally advanced by Members of Parliament for budgetary and macro implications.
The Second Minister for Finance (Ms Indranee Rajah): Thank you, Mr Chairman. Let me address the independent fiscal council and also earlier on, during the debate on the Budget Statement, there were a few confused looks around the Chamber, so I thought it will be helpful if I just explain what that was about.
Mr Pritam Singh had suggested a Parliamentary Budget Office. In his response, the Deputy Prime Minister had referred to that as having a $20 million budget being requested for it. The reason why that was referred to was because, when Members of Parliament file cuts, they have to give an indication of what the cut is about, so that the Ministry can prepare. And in this case, Assoc Prof Jamus Lim had filed his gist that he proposed that MOF consider the formation of an independent fiscal council or the Parliamentary Budget Office of Singapore, seeded with an initial $20 million.
Hence, I sought clarification from the Leader of the Opposition whether his Parliamentary Budget Office was the same as the independent fiscal council and the Leader of the Opposition kindly confirmed that they were actually the same. There is only one council that he is talking about. And we heard Assoc Prof Jamus Lim just now, who has confirmed that what he is asking is for a council that is set up at a proposed cost of $20 million. This is just so that everybody knows what everyone is speaking about.
So, let me address Assoc Prof Jamus Lim’s cut. In assessing the value of such a proposal, the fundamental starting point must always be: why? What is the need to be addressed? The Assoc Prof Jamus Lim ran us through various independent fiscal entities around the world. I will refer to them as Independent Fiscal Institutions, or IFIs.
So, it is important to first understand the context in which such institutions are established. The setting up of IFIs around the world took place mainly in the aftermath of the Global Financial Crisis in 2008 and 2009 where government deficits and debts were high.
There were some which were established beforehand, for example, in the US and the Netherlands, but, primarily, the largest bulk of them were established after the Global Financial Crisis.
So, more than half of the IFIs in the OECD today were established after the Global Financial Crisis and the main intent was to prevent future fiscal crises.
In those cases, fiscal rules had proved insufficient to ensure prudent management of the public finances before the crisis. IFIs were set up to safeguard fiscal discipline, eradicate unreliable budgeting and rebuild public trust in policy-makers’ capacity to manage public budgets prudently and transparently.
However, the context in Singapore is very different. The ills which led to the need for IFIs in other systems are not present in our system and we continue to keep a very strict eye on our fiscal prudence. Markets have confidence in our system. We are among the small number of countries today that continue to enjoy a AAA credit rating.
The Government has been disciplined in keeping to our fiscal rules and safeguards. We have run balanced Budgets in each term of Government, barring major crises. The draw on past reserves for COVID-19 relief, which was a crisis situation, was done in accordance with our Reserves Protection Framework.
We have put in place a strong system to scrutinise spending and debate budgetary matters, without incurring the costs of setting up additional fiscal monitoring institutions.
The Constitution requires us to run a balanced Budget over each term of Government and any departure would require the approval of the President.
The Government is required under the Constitution to seek Parliament’s approval for its expenditure and revenue during each year’s Budget.
The annual Budget Debate and Committee of Supply (COS) provide the opportunity for Members of Parliament to debate on and scrutinise Government policies and programmes.
Under the Constitution, the Government cannot draw on the reserves accumulated by past terms of Government without the approval of the elected President.
There is a standing Parliamentary Select Committee, the Estimates Committee, which examines the Government’s Budget.
The Government’s accounts are audited by the Auditor-General’s Office. The AGO’s findings are reported to the Public Accounts Committee (PAC), also another Parliamentary Committee, which can call on the relevant agencies to explain lapses or take corrective actions.
More importantly, the Government has been upfront about the hard choices that we make on budgetary matters. For example, we have not shied away from highlighting the need to raise taxes to meet longer term increase in healthcare and social spending needs.
Robust, intellectually honest analysis is important to foster more informed parliamentary debate. But ultimately, there is no substitute for having the political courage to make difficult budgetary choices.
Members of an independent fiscal council are not elected representatives in Parliament. Their role is to advise, but the responsibility for making difficult decisions ultimately lies with the elected Government. Alice Rivlin, the founding chair of the US Congressional Budget Office, said this very well. She said that IFIs, I quote, “can play an important role in ensuring realistic and well-informed debate based on honest numbers, focusing attention on the consequences of action (or inaction), and identifying more or less sustainable solutions to budget dilemmas. They cannot instil political courage to make unpopular decisions. Political leaders have to do that for themselves”.
Setting up an independent fiscal council will not substitute for such courage. It will also not miraculously remove the structural drivers for higher healthcare and social expenditure, nor will it delay any painful changes.
Based on the experience of other countries, did the setting up of IFIs solve their fiscal management issues? No, because, ultimately, we cannot outsource honest and upfront debate.
We should focus our time and our energy on having robust, honest and constructive debates, deciding on the trade-offs and not delegate that responsibility to a third party.
Forecasting is an inherently uncertain exercise, and independent institutions are not exempt from this uncertainty. So, the Office for Budget Responsibility, or OBR, in the UK has actually been criticised for overly optimistic forecasts and has had to downgrade its forecasts several times since it was set up.
We recognise that there will always be uncertainty in forecasting and fiscal planning, but we cannot wish away more fundamental drivers of expenditure, particularly the increase in public health expenditure, as our population ages. […]
Assoc Prof Jamus Jerome Lim: Thank you, Chairman. I would like to thank the Minister for what I believe is a very thoughtful defence of why this Government has historically had an admirable track record in its fiscal affairs. And I would put on the record that I agree that this, in fact, is the case.
That said, I wonder first if the Minister is also suggesting that our macro-economic and fiscal environment today is as unchanged as it has been historically, and even in the midst of the largest reserve drawdown in our history? And would not a second opinion on how our fiscal prospects are going forward into the future be valued, especially, as I emphasised in my cut, that this would be in the form of advisory nature rather than as law?
The second point that I thought would be useful to point out is that in the proposal, I had indicated that the independent fiscal council would actually serve all of this House. And so, if by implication, does that mean that we should regard all proposals by all Members of this House as equally, fiscally credible that whatever estimates provided should be regarded as equally trustworthy as long as they are put on the table. So, in part, you can think of it as not purely a constraint on the Government, which does have a very good track record, as I have explained, but also on proposals that are offered by Members of this House. They may not have enjoyed as long and illustrious a track record.
Ms Indranee Rajah: Mr Chairman, I thank the Member for his clarification. I am sorry, I did not understand the second clarification. Could the Member repeat it or explain it in clearer terms?
Assoc Prof Jamus Jerome Lim: I would be happy to. So, my suggestion in the cut was that the independent fiscal council, the Parliamentary Budget Office, whatever we wish to call it, would serve the full Parliament. So, all Members of this House would be able to pose requests for scoring of policy proposals that are advanced.
So, my question was if the Minister or the Ministry believes that in the absence of such a fiscal council, are all suggestions about policy, even if it is self scored by us, and not by an independent fiscal council would be treated with the same regard?
Ms Indranee Rajah: Mr Chairman, I thank the hon Member for his clarification. Let me take them in turn. So, the first one he asked whether I thought that the macroeconomic fiscal environment is unchanged and whether or not a second opinion would be valued.
On the first one, of course, it has changed. The world has seen the biggest crisis in a century, which was when the last global pandemic was around. So yes, it has changed, but the important thing is this – what is the difference between Singapore and the other countries who have needed the IFIs or their own fiscal councils? They got themselves heavily into debt. They borrowed. They would not raise taxes when they needed to. Some did not display the political courage that was needed in order to maintain a balanced budget.
Singapore on the other hand – thanks to the foresight of our pioneering PAP leaders – set aside our reserves, refused to squander the reserves, put in place a constitutional framework which required us to run a balanced Budget and to make sure that any time that we had to dip into the reserves, it was for good reason and put in place a framework where you could use the income on the reserves, but set in place a certain limit.
All of these things are what set Singapore apart, and that is one of the reasons why we do not need a financial council like this.
And earlier on in his answer, the hon Member referred to the Office for Budget Responsibility (OBR) in the UK and referenced a cut made by Mr Low Thia Khiang some years ago. The hon Member was not in the House at that time, but I would like to read out an excerpt of what I had responded to Mr Low at that time, which is still relevant today.
When the OBR in the UK was set up, it was done so by the Chancellor of the Exchequer, the Rt Hon George Osborne, and this is what he said when he set up the OBR, because it was set up by the Tory government. He said, “Over the last 13 years, the public and the markets have completely lost confidence in government economic forecasts. The last government’s forecast for growth in the economy over the past 10 years have, on average, been out by £13 billion. Their forecasts of the budget deficit three years ahead have on average been out by £40 billion. Unsurprisingly, these forecasting errors have almost always been in the wrong direction.
The conclusion is clear. We need long-lasting change in the way we put together budgets in this country. The final decision on the forecast has always been made by the Chancellor, not independent officials. And that is precisely the problem. Again and again, the temptation to fiddle the figures, to nudge up a growth forecast here or reduce a borrowing number there to make the numbers add up has proved too great…We need to fix the budget to fit the figures and not fix the figures to fit the budget. To do this, I am today establishing a new independent Office for Budget Responsibility. For the first time, we will have a truly independent assessment of the state of the nation’s finances.”
That was the scenario that prompted the setting up of the OBR. That scenario is not present in Singapore, and for that, we have very good civil servants and agencies to thank, who keep us straight, who keep us narrow, who keep us honest.
And he asked whether a second opinion is valued. Well, I have explained firstly why it is not necessary. But I also want to go on to point out that in the UK, after setting up the OBR, it has not necessarily been the case that they have been on target. So, the second opinion, well, in 2012, the OBR admitted it had a poor forecasting record. The OBR had predicted economic growth six times stronger than the latest official figures suggested.
And in August 2020, the Institute for Fiscal Studies or the IFS described the OBR’s “upside scenario” economic forecasts for UK GDP as “extraordinarily optimistic”. So, second opinion does not always settle the issue.
With regard to the second clarification, the learned Member said that the council he is proposing will serve the full Parliament. The suggestion really is that, okay, this is going to be for everybody. And he asked whether in the absence of such a fiscal council, all suggestions will be treated with the same regard.
Well, the Parliament comprises the Members of Parliament who form the Government, the Members of Parliament who are part of the Ruling Party’s backbenchers and the Opposition Members of Parliament. Insofar as proposals are put forward by the Government, these are assessed by the Civil Service. The Government has an idea of the costing of its proposals and how it should be dealt with.
So, in essence, what the learned Member is actually asking is for this council to serve the Opposition Members because the PAP Members are not asking for this, and the Government does not need it. So, effectively, it is a request for a $20 million fiscal council to assist the Opposition Members with their proposals. Effectively, that is what it is.
Ministry of Finance
26 February 2021
Office of the Leader of the Opposition 