A close look at WP’s proposal to treat land sale proceeds as revenue for spending

The WP had proposed that land sale proceeds be treated as revenue for budget spending.

They still do not recognise that land is a scarce asset in Singapore and protected as Past Reserves.

In fact, the land is so scarce, Singapore had to reclaim land to build housing estates (Read here). One-quarter of Singapore is reclaimed land.

Not fiscally sustainable

It is not fiscally sustainable for a Government to sell assets to meet expenditure needs.

The land is an asset. When we sell land, we are not creating new wealth. We are merely converting the land from a physical to a financial asset. Once land is sold, and the money is spent, we will have fewer assets that can generate future income.

This is not difficult to understand. If you sell a piece of diamond in your possession for a sum of money, you are not creating new wealth. You have merely converted that piece of diamond into money. If you spend that money, you will end up with reduced assets.

There are consequences

There are consequences when land sale proceeds are used directly to fund government expenditure. Such a policy creates an incentive for a Government to plan land sales based on fiscal needs instead of actual developmental needs and to favour high bids for more revenue. Higher land bids will, of course, lead to higher land and housing costs for Singaporeans.

Why hurt Singaporeans?

Once a Government gets used to relying on land sales to fund spending, it will have a vested interest to keep land prices high to maximise revenues. This will ultimately hurt the economy and will hurt Singaporeans. Why would we want to do that?

DPM Lawrence Wong

We see this happening in Hong Kong where revenue from land sales forms part of the Hong Kong Government’s budget. Hong Kong has the most expensive property market in the world. It is not only the most expensive city to buy property in, but also one of the most expensive places to rent.

Another pitfall of relying on land sales for revenue is that it subjects the Budget to the booms and busts of the property market.

During a downturn, bids for land are likely to be lower. The Government may find itself short of revenue at a time when it needs it most.

How to spend without depleting your assets?

To be clear, the Singapore PAP Government is already spending from land sale proceeds. They do so with a different approach.

First, the land sale proceeds are invested together with the rest of the reserves. 50% of the expected long-term real return through the NIR framework are then used as revenue for the Budget.

In this way, our land sale proceeds provide a stable and continual stream of income for our budget over time.

DPM Lawrence Wong

This approach to using land sale proceeds avoids all the pitfalls that comes with WP’s proposal.

It is a prudent approach by the PAP Government to treat land as a finite asset. The Government sells the land that Singapore need for urban development and invest the proceeds to generate a steady income over time. This is a sound approach and it has served Singapore well.