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Why did the Government introduce the Net Investment Returns (NIR) framework, and what are the differences between Net Investment Returns (NIR) and Net Investment Income (NII)?



The Government moved to the NIR framework in 2008 in order to enhance revenues and ensure a fair balance between the needs of current and future generations.

Government expenditures were expected to rise significantly over the long term. The three main areas of increased expenditures were:

  • Increased investments in human capital, knowledge and innovation to sharpen our capabilities and enable us to move up the value chain and maintain our relevance in a much more competitive global economy.

  • Investments to make Singapore a top quality home, through enhancements in the city centre and across our neighbourhoods, to make Singapore a highly liveable and inclusive home.

  • Higher social expenditures in an ageing society and one that was facing growing income gaps.

The NIR framework is an enhancement from the NII in the following ways.

First, the NIR framework expanded the definition of investment returns to total returns, including capital gains (both realised and unrealised). The new framework was more aligned with our asset allocation that is focused on maximising total returns over the long term.

A spending rule based only on interest and dividends could have led to a bias toward investments that generate income rather than capital gains. This would be inconsistent with our objective of maintaining a diversified investment portfolio aimed at achieving long-term returns.

Second, the NIR framework allowed the Government to spend based on expected long-term returns, rather than actual investment income, comprising dividends and interest, under NII. This allows the government to smooth out the volatility of spending. For example, it ensures that the government does not overspend in a bull market, and end up finding itself short of resources in a bear market.

Third, the NIR framework allows us to spend based on real returns. This is unlike NII, where spending is based on nominal dividend and interest income. Our spending rules must ensure that we continue to maintain the international purchasing power of our reserves. Otherwise, in a scenario of sustained high inflation globally, even if we were to earn reasonable nominal investment returns, our past reserves would be gradually eroded in real terms.

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