How to finance Development Expenditure?

What is Development Expenditure (DE)?
According to Ministry of Finance, DE refers to expenses that represents a longer term investment and result in the formation of a capitalisable asset of the Government.

How is DE financed currently?
Based on FY2007 Budget, $7.1 billion of total DE of $13.1 billion (ie. 54%) is financed out of current revenues, mainly taxes.

How should DE be financed according to Mr Basant Kapur?
Mr Kapur said most DE should be financed by borrowing. Exception – DE on military hardware which should be financed out of taxes.

What are the basis of Mr Basant Kapur’s position?
DE, as in any investments, would generate a return over time. The return should be measured by the incremental GDP contributed by the DEs. The interest servicing and loan capital repayment should be paid out of taxes on the incremental GDP.
Using current tax revenues to pay for future returns may have negative repercussions. Mr Kapur argued that the 2% GST increase may thus not be necessary if the DE were to be financed through borrowing, from internal sources or otherwise. The GST increase has resulted in higher than expected tax revenue which may curb consumption and fuel inflation.

In summary, we should not impose cost to the present when we are investing today for future benefits based on economists’ “efficiency argument”.

Who is Mr Basant Kapur?
He is a Professor of Economics and Director, Singapore Centre for Applied and Policy Economics, NUS.

Reference – Basant Kapur, “Better to borrow than raise GST”, Straits Times, 29 Feb 2008.
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