How does the NIR framework ensure that the investment returns are tapped for spending in a disciplined and prudent way?
The NIR framework ensures that the investment returns are tapped for spending in a disciplined and prudent way. Under the framework:
The Government can only spend up to 50% of the long-term expected real returns.
The NIR framework uses real rates of return, i.e. after netting off inflation, to protect the real value of our reserves.
The NIR framework allows the Government to spend only from returns on the net assets, i.e. the excess of assets over liabilities invested by our investment entities, minus the liabilities of the Government. This ensures that we set aside returns to cover the costs of servicing our liabilities.
There is a rigorous process in place for determining the long-term expected real rates of return of the investment entities.
Before the start of each financial year, the rates are proposed by the Boards of the investment entities, based on detailed study and assessments by investment professionals in the three agencies, who also draw on a range of external expert views.
The Ministry of Finance undertakes a thorough review of the methodologies used by the investment entities to be assured that their approach is sound and the estimated long-term rates of return are reasonable. MOF will then propose the expected long-term real rates of return to be applied to the net assets invested by the investment entities for the President's concurrence.
The President consults with the Council of Presidential Advisers (CPA) before deciding on whether to agree with the Government's proposal.
In the event that the Government and President do not agree to any of the expected rates of return, the respective 20-year historical average rates of return will be used to compute how much the Government can spend. The 20-year historical rate of return provides a neutral and pragmatic basis for resolving any dispute between the President and the Government, and avoids paralysing the government of the day.
After the close of the financial year, the Minister for Finance will certify to the President the amount of NIR that the Government has actually taken into the Budget, within the caps specified in the Constitution.
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