Budget Speech

Ensuring Adequate Fiscal Reserves

39.      Our quick recovery from the financial tsunami is, to some extent, attributable to the Government's prompt deployment of huge fiscal resources to stabilise the economy. The intensity of several rounds of stimulus measures introduced since 2008 and involving a total of $87.6 billion is unprecedented. This clearly demonstrates that maintaining adequate fiscal reserves is a prerequisite for the Government to fulfil the functions of ensuring social and economic stability.

40.      Government revenue is highly susceptible to economic fluctuations. Flexibility in expenditure is very low. Over the years we have adopted the strategy of containing expenditure prudently and using our fiscal reserves as a buffer for deficits in individual years. As such, we are able to achieve a fiscal balance and keep expenditure within the limits of revenues over a period of time. The reserves required for the buffer can be substantial. Take the six years starting from 1998-99 as an example. The five fiscal deficits that occurred in these years reduced our fiscal reserves by about $200 billion – the equivalent of 40 per cent of our fiscal reserves as at end-March 1998.

41.      Apart from providing a buffer, the fiscal reserves also generate revenue of tens of billions of dollars each year. In 2009-10, for example, investment income accounted for 11 per cent of total government revenue. Should the reserves continue to fall, the revenue from this source will drop accordingly. This will reduce the resources available for investing in projects to build our economy and improve people's livelihood.

42.      Where necessary, I will draw on the fiscal reserves to implement measures for economic and social stability. However, I must act with prudence and replenish our reserves as and when appropriate. After the financial tsunami, we should appreciate more deeply the importance of adequate fiscal reserves. In the long run, an ageing population and a shrinking working population will further narrow our tax base. More than ever, we need to prepare for the future by increasing our reserves to meet these challenges.

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