Delivered in Parliament on 27 July 2021
To SINGA or Not to SINGA
Mdm Deputy Speaker, this latest ministerial statement—which details additional COVID-19-related financial measures—does much to shore up the most-affected sectors of the economy. There is certainly more that can be done to offer short-term transitional support the most vulnerable segments, especially displaced workers and those operating in the F&B and hospitality sectors, along with our local SMEs, as my Sengkang colleagues Louis Chua and He Ting Ru have pointed out.
I wish to focus instead on the longer-term elements of the statement, especially surrounding SINGA. I will pose three questions, about spending reallocation, a timeline for bond issuance, and a scheme for income-contingent student loans.
Why have we chosen to reallocate spending instead of accelerating it?
My first question has to do with better understanding why the Government has decided to reallocate development expenditure from an underutilized budget, instead of accelerating spending, so that projects can be completed according to the original timeline. Specifically, why not fund the delayed $0.6 billion directly from more SINGA borrowing instead?
After all, we should recognize that the delayed $0.6 billion in development expenditure has an opportunity cost, in terms of foregone benefits from these capital projects. If we truly believe that the benefits of our development expenditures have not been irrevocably altered by pandemic-related delays—and I believe that this should be the case for long-term capital projects—then we should be working hard to get these delayed projects back on track by boosting immediate spending, rather than passively accepting the delay. This would also allow the revenue streams associated with projects to accrue sooner.
Moreover, doing so would not only ease the restraints on the supply side; it would also serve to strengthen the demand side in the hard-hit construction sector—still among our hardest hit, having shrunk 11 percent in the second quarter1—which would undoubtedly benefit from a short-term expenditure boost.
This is not merely an abstract cost, existing only on paper. I have many residents whose living situations have been significantly compromised by the delay in the expected handover dates of their BTO flats. Could we not accelerate our spending, temporarily increase our inputs, so that construction of these flats do not face an inordinate delay?
To be entirely fair, in our conversations with our contacts from the construction sector, they have shared that their ability to ramp up activity has been constrained by a combination of supply and demand limitations. Construction raw material prices—like those of all commodities—have increased sharply worldwide. This spike has been further exacerbated by U.S. infrastructure building, Chinese restrictions on material export, and difficulties in procuring Malaysian-manufactured materials due to the country’s lockdown.
But activity has also been curtailed by some of our own policy decisions, which have served to dampen demand in the sector. While we have attempted to relax immigration controls somewhat, they remain comparatively restrictive, and our friends in the industry share that this remains their most binding constraint.2 While we recognize the importance of exercising caution to limit imported cases—as well as the longer-run need to transition away from this low-cost labor model, as my Aljunied colleague Gerald Giam has shared—there is, in the meantime, an immediate need to relieve labor needs on this front. Moreover, we know that well-executed quarantine procedures have proven their worth in containing spread by this channel. Will the government be willing to offer an update on their plans for restarting our inflow of foreign workers in this sector, and the accompanying measures for managing imported cases?
Furthermore, mandatory quarantine, routine testing, and safe distancing measures all add to costs, which inevitably renders some projects no longer economically viable. Could some of these new overheads be partially offset by the government, to help the sector get back on its feet? And ultimately, the surfeit of projects could potentially have lasting consequences: our sources also report that skilled workers are leaving, hollowing out a sector already struggling with low productivity.
Does the government have a timetable for upcoming SINGA issuance?
Another important question, Mdm Deputy Speaker, is to enquire about whether the Government has a detailed plan for upcoming SINGA bond issuance, or if it plans to dip into markets on a more ad hoc basis. More pointedly, are the Deep Tunnel Sewerage System and North-South Corridor the only projects that can be brought forward to be capitalized now?
I will contend that we require not just a clear—if amendable—issuance timetable, but also one that is front-loaded as much as possible. After all, it is useful to keep in mind that low interest rates will not remain with us indefinitely. Between the start of this year till the end of the first quarter, the U.S. long-term interest rate3 almost doubled, from 0.9 to 1.7 percent. This rate remained elevated through most of the second quarter, before easing significantly to around 1.3 percent today. Surveys of market forecasters suggest that the rise in rates through mid-2022 may only be slightly higher than 2 percent.4 On its face, then, it may seem like we have ample time to return to markets for our future infrastructure borrowing needs.
But markets are unlikely to remain quiescent forever. Indeed, a more careful consideration of the underlying components of long-term yields reveals that since mid-May this year, the real interest rate—that is, the true underlying cost of capital—began to rise.5 What this means, in practical terms, is that as markets normalize, surplus capital is beginning to be dissipated. Once this process takes hold, we should expect a more decisive climb in the observed long-term rate.
As I had previously documented in my two prior Parliamentary interventions on this issue, one of the main advantages underlying SINGA—the ability to lock in current low financing costs for long-term projects that we fully expect to realize—will disappear, or at the least, face a much higher hurdle rate to justify the debt incurred. Put another way, once interest rates begin an inexorable climb, many projects will no longer be economically justifiable. If so, we may inadvertently end up significantly undershooting the approved SINGA loan limit of $90 billion.
Could SINGA be directed toward human capital formation via income-contingent student loans?
Mdm Deputy Speaker, I had also previously flagged a number of potential projects on the human capital side that could be considered for SINGA. If I may indulge this opportunity to elaborate on one more suggestion: could we consider dedicating part of SINGA financing to fund an initial pool of income-contingent repayment student loans? I should also add, before I proceed further, that I am an educator at an institute of higher learning.
To reiterate: the idea is to use SINGA to seed a fund for income-contingent loans. The government commits to fund all the costs of tertiary or continuing education programs up front, perhaps subject to a very very modest copayment as collateral. After the graduate secures a job and contingent on them earning enough, the recipient would pay off the acquired debt. To maximize repayment probabilities, we could limit, at the outset, the scheme only to courses with a clear economic need, such as information and computer science, biopharmaceutical science, and digital and social media marketing, among others.
Just as important, such loans stand apart from SkillsFuture, because it would cover the full costs of an extended training program. It will also not be constrained by the need to identify employer matches, as the Work-Study Degree program is, and it is meant to be accessible to young, college-age students, rather than mainly targeted at reskilling displaced workers.
Such schemes already exist elsewhere in the world. In the United Kingdom, the government-run Student Loans Company operates several plans, where incomes must cross a fixed weekly or monthly threshold before loan repayment deductions are made.6 In the United States, various permutations of the program have been proposed and implemented since 1971, enjoying bipartisan support, and has been championed most recently by the Institute for College Access and Success.7 Australia, Hungary, New Zealand, the Netherlands, and South Korea have all introduced variations of the scheme.8
Importantly, such a program in the local context will also free parents of tertiary students from the perceived need to finance their children’s university education—especially when parents’ CPFs are already stretched in terms of meeting retirement needs, and all the more by income shocks endured due to the pandemic. The risks of repayment would be transferred to the main beneficiaries of this human capital investment—the graduates themselves—while being underwritten by the Government. Since human capital investments, as a whole, pay off in the long run, such an investment is eminently suitable for funding via long-term bond issuance via SINGA. And most importantly, surely nobody can credibly argue that education should not be considered infrastructure in the 21st century economy.
Notwithstanding these three questions, Mr Speaker, I support the ministerial statement.
1 As measured on a sequential quarter-on-quarter basis. In 2020, the sector contracted by almost 36 percent. Source: https://www.singstat.gov.sg/-/media/files/news/advgdp2q2021.pdf.
2 Emigration restrictions have further reduced migrant flows.
3 This is approximated by the yield on the 10-year Treasury note.
4 This is the case whether based on a July 2021 WSJ survey, or the Congressional Budget Office’s June release, or the 2nd quarter Survey of Professional Forecasters by the Philadelphia Fed (albeit the last only extends till early 2022). See: http://econbrowser.com/archives/2021/07/forecasted-ten-year-interest-rate-trajectory-declines.
5 Careful observers of financial markets will recognize that inflation expectations have increased in an almost unabated fashion since March 2020. However, the increase in real rates were kept in check by a combination of a term premium that rose even more rapidly, and (more recently) an easing in nominal rates. The decomposition of the nominal long-term rate is accomplished by attributing inflation to inflationary expectation (proxied by the 10-year TIPS inflation breakeven), the term premium (as estimated by Adrian, Crump & Moech 2013), and the real interest rate (the residual). See Adrian, T., R.K. Crump & E. Moench (2013), “Pricing the Term Structure with Linear Regressions,” Journal of Financial Economics 110: 110–38.
6 Student Loans Company (2020), “Student Loans in England: Financial Year 2019–20,” SLC Statistics Paper SLC SP01/2020, Glasgow: The Student Loans Company.
7 Shireman, R. (2017), “Learn Now, Pay Later: A History of Income-Contingent Student Loans in the United States,” Annals of the American Academy of Political and Social Science 671: 184–201.
8 Britton, J., L. van der Erve & T. Higgins (2019), “Income Contingent Student Loan Design: Lessons from Around the World,” Economics of Education Review 71: 65–82.