TALKS BETWEEN FEDERATIONS AND SINGAPORE GOVERNMENTS ON FINANCIAL ARRANGEMENTS RELATING TO PAPER CMD. 33 of 1961

[Mr Speaker in the Chair]

Tun Lim Yew Hock asked the Prime Minister whether he will make a statement on the talks, to date, between the Federation of Malaya and the Singapore Governments on the financial arrangements relating to Head 17 (Finance) of Paper Cmd. 33 of 1961.

The Prime Minister (Mr Lee Kuan Yew): Mr Speaker, Sir, I will make a statement on the progress of negotiations relating to the financial arrangements between Singapore and the Federation.

The Committee of Officials of the Singapore and Federation Governments reached no agreement on two matters:

(i) The apportionment of expenditure and the quantum of Singapore's contribution for Federal expenditure.

(ii) Responsibility for collection of national taxes in Singapore after merger.

As a result, these and other unresolved matters were referred to the plenary sessions of the Inter-Governmental Committee which to date has held nine sessions. The first session was on the 28th February, 1963, convened at the instance of the Federation Government to discuss these unresolved matters. On the 21st March, the plenary session of the Inter-Governmental Committee met again to discuss a memorandum forwarded to the Singapore side on the 18th March setting out the proposals of the Federation Government. The main features of this memorandum are as follows:

(i) Provisional actual expenditure incurred in Singapore in the year 1962 is classified according to whether it is State or Federal expenditure according to the interpretation of the Federation Government of the White Paper Cmd. 33 of 1961.

(iii) Similarly, revenues are classified as State or Federal in accordance with the interpretation of the Federation Government of White Paper Cmd. 33 of 1961.

(iii) The Federation Government proposed that Singapore should bear 21.2 per cent of certain common Pan-Malaysian expenditure such as defence, internal security, external affairs, Parliament, etc. This percentage was based on the average of the 1961 actual revenue and the 1962 provisional actual revenues collected in each of the territories to comprise Malaysia.

(iv) Since Singapore's revenue from State taxes, as defined in the Tenth Schedule o the Federation Constitution, will be inadequate to meet local State expenditure plus Singapore's contribution for common Pan-Malaysian services, as well as the cost of Federal departments in Singapore, the Federation Government proposed that certain revenues be assigned to the State to enable Singapore to meet her obligations in both these respects.

The effect of the above proposals will be that Singapore's revenue surplus, in other words, the whole of the balance between revenue collected in Singapore, on both national and State taxes over Singapore's expenditure for both State and Federal departments will go to the Federation Government.

The Singapore Government objected to this scheme on the following grounds:

(i) The figures used for computing Singapore's State expenditure were based on the provisional actual expenditure in 1962 whereas the cost of Federation defence services is based on projections as far ahead as 1970. Even expenditure outside the fields of defence and internal security of the Central Government has been raised by varying percentages representing the expected increase in future expenditure.

(ii) The percentage of Singapore's contribution for common Pan-Malaysian expenditure, assessed at 21.2 per cent was too high. The percentage, in our view, should have regard to two factors, namely representation in the Central Parliament and population, and not just capacity to pay.

(iii) The whole of Singapore's surplus based on 1962 calculations goes to the Federal Government.

Agreement had already been reached on the 1st March, 1963, on the initial disposal of national taxes collected in Singapore. The proceeds would go neither to the Singapore nor to the Federal Consolidated Fund but to an account to be opened in the Singapore branch of the Central Bank. The money collected must physically be in Singapore. No disbursement from the fund would be made until the apportionment between the two Governments has been agreed to as to Singapore's contribution to the Central Government for Federal services.

The Singapore Government then proposed a scheme which was embodied in a paper submitted to the Inter-Governmental Committee for consideration at its meeting on the 2nd April, 1963, held in Singapore. The main outline of the scheme was as follows:

(i) Singapore's contribution for Pan-Malaysian services should be based on actual expenditure and not projected expenditure. The contribution in the first instance should be based on estimates passed by the Federal Parliament in respect of these common Pan-Malaysian expenditure and should be adjusted after the Accountant-General has submitted his accounts of actual expenditure.

(ii) Capital expenditure on defence and internal security should be financed partly from revenue and partly from loans.

(iii) The percentage of Singapore's contribution should be based on three factors, namely, its representation in Parliament, population and economic growth through Time. This percentage will increase in accordance with the growth of industry in Singapore determined by the annual census of production carried out in Singapore since 1960. The percentage should initially be below the proportion of Singapore's population to total Pan-Malaysian population and eventually rise beyond it, to the extent that it falls short of it in the initial year.

The Federation Government objected to Singapore's proposals on the following grounds:

(i) the contribution for Pan-Malaysian defence and internal security expenditure was far too low.

(ii) there would be troublesome accounting difficulties which may lead to acrimonious annual disputes over the quantum of contribution.

(iii) the Federation Government would be put into an invidious position of having its financial accounts scrutinised by a State Government.

(iv) the surplus of the Singapore Government was not shared and made available to the other territories.

Tun Razak, the Deputy Prime Minister of the Federation, then discussed the matter informally with myself and the Minister for Finance and stressed that the expenditure approach must be abandoned by the Singapore Government if any progress was to be made in these discussions. The contribution must be assessed in terms of percentage of national taxes arising in Singapore and this percentage could be subject to periodic review to ensure fairness to both sides.

The Federation Government then submitted an amended scheme. This approach is identical with that to the first scheme, but it contains two concessions. First, defence and internal security contribution by Singapore was reduced from $93.6 million to $75 million a year. Next, Singapore retains half her surplus, based on 1961 calculations, instead of surrendering the whole.

The proposals of the Federation Government were then discussed at plenary sessions of the Inter-Governmental Committee on 10th and 11th April, 1963. The Singapore Government, at this meeting, accepted that Singapore's contribution need not be rigidly related to actual Federal expenditure incurred and we attempted to work out the apportionment pf national taxes between Singapore's contribution for the cost of common Malaysian services and the cost of Federal departments in Singapore and Singapore's State expenditure. The gap between the estimates of the two Governments of the cost of Federal departments in Singapore was narrowed down to $8.7 million. This is due to differing interpretations of the White Paper on the responsibility of three Departments - Income Tax, Customs and Broadcasting.

The amount of $75 million for defence and internal security expenditure was accepted subject to a consideration of the following factors:

(i) British contribution to defence expenditure.

(ii) Details of the defence and internal security expansion programme have not been examined by the Singapore Government.

(iii) Capital cost of defence and internal security expenditure which may amount to $18 million out of $75 million would be met by capital transfers from Singapore's Development Fund to Federation Development Fund.

(iv) The percentage agreed upon should be reviewed periodically for the first five or six years until defence and internal security expenditures have stabilised themselves.

As regards non-defence expenditure, such as External Affairs, Parliament, the Civil List, etc., this constitutes a small part of the total and could be settled without difficulty. We have agreed in deference to the Federation Government's approach that expenditure on these Federal services, except defence and security, would not be subject to scrutiny of actual expenditure. We were, however, unable to do so for defence and internal security expenditure, because future expenditure was unpredictable and periodic reviews, which the Federation Government had agreed, would ensure fairness to both sides.

The Federation Government had indicated that it is not prepared to meet any prospective deficits in Singapore's Budget. Accordingly, Singapore's view is that there is no case for surpluses to be paid into the Federal Treasury. If the question of sharing surpluses computed on the basis of 1961 figures were not pursued by the Federation Government, the difference between Singapore calculations and the Federation calculations becomes very narrow indeed. The gap amounts to no more than $13.7 million, or about four per cent of what we estimate national taxes in Singapore will yield in 1964.

We had also offered to amend our laws to allow the Federal Minister of Finance sufficient scrutiny over Singapore's tax collection machinery to ensure that the collection of taxes, including Income Tax and Customs, was carried out efficiently and effectively.

There were two elements which have a bearing on Singapore's financial contribution to the Federation. The first consists in the accounting approach, and the purpose is to forecast, as accurately as possible with the figures at hand, what would be the cost of Pan-Malaysian services and of Federal services in Singapore from 1964 onwards. On the basis of this forecast, we can agree on the apportionment of national taxes collected in Singapore for Singapore's contribution to the Central Government.

The second element consists of sharing Singapore's prosperity after Malaysia. The financial talks have run into difficulties because the Federation Government wants to introduce this element into the apportionment ratio, taking the 1961 surplus as the yardstick of prosperity. Whilst we agree that prosperity in Malaysia should be shared all round, we have been unable to agree to this particular formula. It is the additional prosperity consequent on Singapore's entry into Malaysia that should be shared, not its past prosperity based on 1961 figures when it was not part of the Federation. Should for instance, Singapore prosper under Malaysia with the advent of a Common Market, then we must share this prosperity with the rest of the Federation.

A meeting was held informally on Wednesday, 29th May, in Kuala Lumpur. It was agreed in principle that a Common Market should be established throughout Malaysia. This agreement will pave the way for a settlement of the financial arrangements between the Federation of Malaya and Singapore. Singapore's progressive entry into the Common Market must necessarily mean the gradual erosion of its free port status as Malaysia industrialises.

A further informal meeting was held on Tuesday, 4th June, in Kuala Lumpur. On the basis that satisfactory arrangements will be made for the establishment of a Common Market including the setting up of a Tariff Board under a chairman to be nominated jointly by the two Governments by Malaysia Day, we have agreed to consider that the Singapore Government should pay a certain percentage of our national taxes to the Central Government.

The Singapore Government is also being asked to pay by way of grant a sum of $50 million during the first five years of Malaysia for development expenditure of the under-developed States of Malaysia, namely, the Borneo territories.

The Ministry of Finance is at the moment carefully going through these proposals, in particular the percentage figures, and a reply will be given to the Federation Government this week.

I have set out only the main outline of the course of discussions. When final agreement is reached, all details will be published for debate and adoption in this House.

In conclusion, may I say that the rationale for the arrangements in regard to Singapore lies in the fact that there will not, in fact, be a complete merger on the basis of one of the present eleven States of the Federation. Had there been complete merger as advocated by some Parties in Singapore, like the Barisan Sosialis, then the whole of Singapore's revenues from Income Tax, Customs, vehicle taxes and others will logically be surrendered to the Central Government. This means that we give up more than three-quarters of our total revenue instead of only about one-quarter under the White Paper terms.

Under the terms of the White Paper, the usual arrangements which are suitable in the case of the other States in the Federation do not apply to Singapore. The special position of Singapore is also shown by the fact that it has been allotted only 15 seats in the House of Representatives, which is below the number it is entitled to if there was complete merger. Within the limits of this position, we have tried and will continue to try to work out a fair formula to share our prosperity consequent on the formation of a Common Market for Malaysia. Needless to say, if the Common Market terms are inequitable in their application as between industries in the Federation of Malaya and Singapore, then the whole basis of contribution to the Central Government must be altered.

Mr Speaker, Sir, on the Order Paper I notice there is a motion standing in the names of the Member for Cairnhill and the Member for Tanglin. There are approximately ten minutes to go before we have, under Standing Orders, to move on to the discussion of the Development Estimates. With the concurrence of the House, I would suggest that since this is a matter of some importance and since it has been raised not only by way of a question but also by way of a motion, perhaps we could, at the end of the debate on the Development Estimates, take the motion standing in the names of the Member for Cairnhill and the Member for Tanglin. In the course of that debate I would be able to give any such further information as Members would deem proper or necessary for a proper discussion on this matter.

Mr Speaker: On the suggestion made by the Prime Minister, the relevant Standing Order would be Standing Order 10, paragraph (2) . The Leader of the House could move a motion to the effect that item No. 20 on the Order Paper be taken immediately after item I on the Order Paper. That is, of course, after the disposal of questions and the Development Estimates. Perhaps Members would like to ask questions on the statement first.

Mr David Marshall (Anson): Mr Speaker, Sir, I would like to ask a supplementary question before we come to that issue.

Mr Speaker: Yes.

Mr David Marshall: I am much obliged. Mr Speaker, I would inquire from the Prime Minister whether he does not think it more appropriate that we should have a White Paper? Would he consider publishing a White Paper together with the memoranda referred to by him, and particularly, Sir, in view of the very grave connotations to that statement of his, that a common market has been agreed upon, which rather suggests not a common market, Sir, but a Customs Union; and whether he would also publish the Rueff Report for which we have been anxiously awaiting, so that we should be in a position with some responsibility and seriousness to consider a matter gravely affecting our future. It should not be taken so hurriedly, Sir. This is a matter for study and I would urge the Prime Minister to indicate whether he would consider the urgent publication of a White Paper with the memoranda and the details he has given, and other details that might help us, together with the Rueff Report.

The Prime Minister: At some stage or other, either when negotiations are successfully concluded or are unable to he resolved, then all the memoranda that had been put in stating in detail the respective stands of the two Governments will have to be published together with the Rueff Report. It is my considered opinion that publication at this stage would not help the course of negotiations as it would tend to harden attitudes on both sides. I have made this statement because a Member of the Alliance Party has requested me to do so. I would not otherwise have thought it appropriate at this juncture when we are still closely scrutinising the detailed proposals which we received last week, but since a member of the Singapore Branch of the Federation Alliance, the Member for Cairnhill, has made some rather disparaging remarks about my not being prepared to answer these questions, he has, in fact, unwittingly brought these issues into the light of day. I would have preferred to allow his principals in Kuala Lumpur more freedom for discussion and negotiations. I have deliberately slurred over certain parts of the immediate proposals that we are considering in order to give a certain degree of flexibility of approach. I hope "flexibility" would be an appropriate word for both sides, because of this new element that they have introduced into the discussions - the question of Singapore's prosperity being shared with the rest of Malaysia. I say the House can have my assurance that we will not move, and in fact we have no right to move, from the terms of the White Paper which had been voted upon by the people, unless there is definitely a quid pro quo. If we are asked to give something more than what we had agreed to give and what they had agreed to accept, then obviously we must in return have some benefit arising out of Malaysia, and I was glad on the 29th of last month we reached agreement on a common market in principle. The detailed recommendations of the Common Market are contained in the Rueff Report. It will have to be gone through by the officials. But I can assure the Member for Anson that nothing would give me more pleasure eventually when negotiations have been successfully concluded than to publish them in toto, and I think he, and even more so the merchants who have built a valuable and lucrative trade over the years on the basis of our free port, will have a great interest in seeing that all this does not disappear in the chase of a will-o'-the-wisp for a common market. I think he can take the assurance of my Minister for Finance, who has met these merchants, that there is no such sudden disappearance of our free port at all under contemplation. I have given an indication of the common market proposals when I said that by the 31st of August there must be set up a joint Tariff Board with a Chairman appointed jointly by the two Governments. In other words, before any item can be included in new tariffs, it must first be in. respect of a commodity manufactured in Malaysia, and, second, our concurrence with this appointment of a joint Chairman must first be obtained.

Tun Lim Yew Hock (Cairnhill): Mr Speaker, Sir, the Prime Minister felt that it was inappropriate to disclose the terms of the discussions in Kuala Lumpur, but because I asked a question he felt that he had to disclose what he considered inappropriate. Would he consider it appropriate that he should go to the Press and start telling the Press all the things he felt he wanted to tell the public of Singapore and not this House first? Would he consider it appropriate that he should go to the Press, whereas the question asked in this House could be considered as inappropriate?

The Prime Minister: No, I am not saying the questions are inappropriate, Mr Speaker, Sir. All I said was that I would not have chosen this particular juncture, but since the matter has been raised by a member of the Singapore Branch of the Federation Branch, I felt perhaps they had thought it in the public interest that the matter should be canvassed.

2.57 p.m.