Why Singapore Avoids Borrowing & Keeps Taxes Low

Singapore’s government debt, standing at approximately S$1.13 trillion in 2023, might suggest a nation heavily reliant on borrowing. Yet, this figure belies a unique fiscal reality: Singapore has no net debt, as its financial assets far exceed its liabilities. This strategic positioning reflects a deliberate choice to avoid borrowing as a casual tool for funding expenditure, prioritizing instead a disciplined approach that leverages investment returns to sustain public services. The nation’s fiscal model, built on decades of prudent planning, offers a compelling case study in balancing current needs with long-term stability, ensuring that taxes remain low without compromising economic resilience.

Borrowing to fund government expenditure might seem like an attractive option, especially for addressing immediate needs such as infrastructure development or social welfare programs. However, for a small, open economy like Singapore, this approach carries significant risks. The nation’s high gross debt-to-GDP ratio, around 170.8% in 2023, is primarily composed of securities issued to develop domestic capital markets and fund long-term investments, not to cover operational deficits. Unlike many countries where borrowing finances recurrent spending, Singapore’s debt is backed by substantial assets, ensuring no net debt burden. Increasing borrowing to fund ongoing expenses would introduce interest payment obligations, which could consume a growing share of the budget, potentially reaching 2-3% of GDP annually, as seen in other advanced economies.

Singapore’s fiscal strategy hinges on the substantial returns generated by its sovereign wealth funds, GIC and Temasek Holdings, alongside the Monetary Authority of Singapore (MAS). These entities manage the nation’s reserves, investing globally in diversified portfolios that include equities, bonds, real estate, and private equity. The Net Investment Returns Contribution (NIRC), derived from up to 50% of the long-term expected real returns from these investments, has become a cornerstone of Singapore’s budget. In Financial Year 2024, the NIRC contributed an estimated S$23.5 billion, equivalent to roughly 20% of the national budget, surpassing annual spending on education.

Without the significant contributions from the NIRC, Singapore would face a stark choice: raise taxes or cut public spending. The nation’s tax regime is notably competitive, with a corporate tax rate of 17% and a top personal income tax rate of 22%, significantly lower than in many advanced economies like the United States (37% top personal rate) or Germany (45%). This low-tax environment attracts foreign investment and talent, driving economic growth. However, maintaining current levels of public expenditure—projected at S$123.79 billion in Financial Year 2025—without the NIRC would require substantial tax increases, potentially doubling personal or corporate tax rates to close the revenue gap.

Some argue that Singapore could afford to borrow more, given its strong credit rating (AAA) and substantial reserves. Proponents of this view suggest that borrowing could fund transformative projects, such as climate resilience initiatives or advanced infrastructure, without immediately straining the budget. Low global interest rates in recent years have further fueled this argument, as borrowing costs have remained relatively affordable. For a nation with Singapore’s fiscal discipline, the risk of default seems remote, making borrowing appear as a viable tool to accelerate development.

Singapore’s fiscal philosophy is deeply rooted in the concept of intergenerational equity, ensuring that each generation contributes to and benefits from the nation’s wealth. The government’s decision to use only a portion of investment returns through the NIRC reflects this commitment, preserving the principal reserves for future needs. This approach contrasts with borrowing, which often shifts financial burdens onto future generations through higher taxes or reduced public services. By maintaining a no-net-debt position and growing its reserves, Singapore ensures that future citizens inherit a financially secure nation capable of addressing emerging challenges.

Singapore’s fiscal strategy offers a powerful lesson in balancing immediate needs with long-term responsibility. By eschewing excessive borrowing and leveraging investment returns, the nation maintains low taxes, funds robust public services, and preserves wealth for future generations. This approach not only ensures economic stability but also reinforces Singapore’s position as a global leader in fiscal prudence. As other nations grapple with rising debt and fiscal deficits, Singapore’s model demonstrates the value of disciplined financial management in navigating an uncertain world.