The country's rapid development was closely linked to the government's efficient financial management. Conservative fiscal and monetary policies generated high savings, which, along with high levels of foreign investment, allowed growth without the accumulation of external debt. In 1988 Singapore had foreign reserves worth about S$33 billion, which, per capita, put it ahead of Switzerland, Saudi Arabia, and Taiwan. That same year, the domestic savings rate rose to one of the highest in the world (42 percent), as gross national savings, comprising public and private savings, totaled S$20.9 billion, 19 percent higher than in 1987. By the mid-1980s, however, domestic demand had been so stunted that it became increasingly difficult to find productive areas for investment. In the recession year of 1986, for the first time, gross national savings exceeded gross capital formation. This was in spite of a 15 percent cut in the employers' contribution to the Central Provident Fund. As a result, already depressed domestic demand was depressed even further, falling by 1 percent in 1986 after a decline of 3 percent the previous year.

Singapore's foreign reserves were, in fact, the country's domestic savings held overseas. Since the source of the domestic savings was in large measure the compulsory savings held by the Central Provident Fund, Singapore had a huge domestic liability. The fund claims, standing in 1988 at S$32 billion, almost equalled Singapore's foreign reserves. But since they were fully funded and denominated in Singapore dollars, the country was relieved of the problems of showing either a budget deficit or an external debt.

Indeed, for many years, the government had pointed out that its foreign reserves, managed by the Government of Singapore Investment Corporation, were larger than that of wealthier, more populous countries. The reserves issue became politicized after 1987 when Lee Kuan Yew proposed a change in the country's government to an executive presidency in which the president (presumably Lee himself) would have veto power over Parliament's use of the reserves. In 1986 the government-sponsored Report of the Economic Committee admitted that "over saving" was a problem. Not until 1988, however, were some tentative steps taken to invest the surpluses directly in productive resources. This process included a one-time transfer to government revenue of S$1.5 billion from the accumulated reserves of four statutory boards.

The country's public sector financial system was structurally complex and difficult to follow owing to different accounting practices. Funds essentially were derived from three sources: tax revenue (directly on income, property, and inheritance indirectly as excise duties, motor vehicle taxes stamp duties, and other taxes), nontax revenue (regulatory charges, sales of goods and services, and interest and dividends) and public sector borrowing (see fig. 6). The statutory boards had separate budgets, although they played a major role in infrastructure creation. Government companies also were not included in public finance re46a reporting.

After 1975 the government consistently had substantial current as well as overall surpluses. From 1983 to 1985, total government expenditure averaged 59.8 percent of current revenue. In fact, the overall surplus exceeded even the net contributions to the Central Provident Fund. The seven major statutory boards also had consistent current surpluses. Economic theoretician and member of Parliament Augustine Tan suggested that Singapore's public spending and public savings were much too large. According to Tan, the government tended to err on the side of financial surplus, despite frequent forecasts of deficit, because the government consistently underestimated tax revenues and overestimated expenditures. These surpluses then put upward pressure on the exchange rate and eroded manufacturers' competitiveness.

Data as of December 1989