Causes of a Current Account and Budget Surplus, and Whether the Twin Surpluses Benefit Singapore

Answer

The two surpluses are distinct: a current account surplus is an external balance (inflows from trade, income and transfers exceed outflows), while a budget surplus is an internal fiscal balance (government revenue exceeds spending). The thesis is that for Singapore both are, on balance, beneficial — but conditionally, because each carries a downside the government must actively manage.

Causes

Current account surplus. It arises whenever export-and-income inflows exceed import-and-income outflows. Three causes stand out. Foreign-income or domestic-income changes: a rise in trading partners’ national income raises demand for exports, while a fall in domestic income cuts import expenditure — both improving the balance of trade. Rising international competitiveness: lower costs, higher efficiency or lower relative inflation make exports cheaper and imports relatively dearer, so — with price-elastic export demand — export revenue rises and import spending falls; Singapore’s comparative advantage in high-value industries (petrochemicals, electronics) underpins this. An undervalued or depreciating currency: cheaper exports and dearer imports raise net exports, provided the Marshall–Lerner condition holds.

Budget surplus. It arises when revenue exceeds spending. An unplanned surplus reflects strong economic performance — buoyant national income raises personal and corporate tax receipts, the more so under a progressive structure. A planned surplus reflects contractionary fiscal policy deliberately run to cool an overheating economy facing demand-pull inflation.

Are the surpluses beneficial?

Benefits of the current account surplus. A surplus means net exports (X − M) — a component of aggregate demand — are positive and rising, raising AD.

Below full employment this lifts output and, via the multiplier, raises national income and lowers unemployment; higher incomes raise consumption and material standard of living. This matters greatly for Singapore, whose small domestic market makes growth export-driven.

Problems with the current account surplus. Near full employment the same AD rise causes demand-pull inflation. A balance-of-payments surplus puts upward pressure on the SGD; appreciation erodes export competitiveness and deters FDI, slowing the growth of long-run capacity. And a persistent surplus implies deficits for trading partners — the beggar-thy-neighbour effect — inviting protectionist retaliation that would harm Singapore’s exports.

Benefits of the budget surplus. Accumulated surpluses build reserves that can fund counter-cyclical expansionary fiscal policy in a downturn — as in 2008–09. Invested, those reserves now generate Singapore’s single largest source of government revenue; without them, income tax or GST would have to be far higher, harming competitiveness.

Problems with the budget surplus. A surplus may signal over-taxation and under-spending — an opportunity cost in forgone standard of living, and a drag on AD and LRAS. But in Singapore’s case this critique has little force: absent the investment returns on reserves the budget would be in deficit, so spending is in fact high relative to tax revenue, and low tax rates are maintained to attract investment.

Judgement. Both surpluses benefit Singapore, but for different reasons and with different caveats. The current account surplus is beneficial because export-led growth suits a small open economy — provided supply-side policy raises LRAS in tandem so growth stays non-inflationary and the appreciation and retaliation risks are contained. The budget surplus is beneficial because it funds the rising needs of an ageing population without contractionary effect, since it rests on investment returns rather than punitive taxation — provided fiscal prudence is maintained and reserves are not drawn down unnecessarily. The verdict therefore turns on management: the surpluses are assets, but only because Singapore actively offsets their downsides.