This year’s budget was notable for the Financial Secretary’s hand-wringing over events in Mong Kok, calling them shocking and an assault on Hong Kong’s core values.
John Tsang’s solution: “As long as everyone is willing to set aside short-term political considerations in favour of the long-term overall interests of Hong Kong, we shall have a chance to return to rationality.” While it is tempting to suggest he tells that to the Chinese Communist Party it has won him newspaper headlines for having ‘heart’ and being more in touch with Hong Kong’s problems than other senior government officials.
But leaving aside Tsang’s bromide political observations, his latest effort was much the same as previous budgets in that his main problem was to hide the extent of Hong Kong’s embarrassment of riches.
Tsang’s standard modus operandi is to start by taking too much out of the economy and people’s pocket than is needed to balance the budget. He then gives some of this back in the form of so-called sweeteners to selected areas of the economy, then stashes the rest away in portentous sounding government funds and the reserves. Sweeteners in the form of tax concessions, and one-off relief measures this year amounted to HK$38.8 billion up 13% over last year, which itself saw an increase of 70% over the 2014-2015 financial year. The sweeteners have almost doubled since the 2014 budget. Despite his stated reservations about one-off sweeteners, Tsang persist with them, presumably in view of the government’s unpopularity.
Hong Kong is supposed to run a balanced budget. Indeed, it is a requirement stated in the Basic Law. But the truth of the matter is that the government is consistently running budget surpluses. In other words, it is taking more out of the economy, out of taxpayers pockets, than it needs to balance the budget.
Recurrent public expenditure in 2016-2017 is forecast at HK$365.7 billion. This is after recurrent spending of HK$74.7 billion on education, HK$66.2 billion on social welfare and HK$57.3 billion on health. Government revenue is forecast at HK$498.3 billion which includes HK$100 billion of capital revenue. The difference between revenue and expenditure leaves a surplus of HK$132.6 billion. Infrastructure spending swallows up a huge portion of this while the rest disappears in one-off sweeteners and tinkering with questionable ‘initiatives’ for the economy.
In the financial year which ends in March 31, 2016, the fiscal reserves are forecast to hit HK$859 billion, which is 35.8 per cent of GDP and equivalent to 24 months of government spending. This year, Tsang is forecasting a 2.3 per cent increase in fiscal reserves to HK$870.4 billion, equal to 35.2 per cent of GDP or 21 months of government expenditure. So he is taking more out of the economy than he needs to in order to balance the budget.
Even this figure understates the extent of Hong Kong’s riches, which can be seen by comparing the cash-based accounts with the accrual-based accounts. The government released this comparison in December last year, stating: “Compiled on the basis of actual cash revenue and expenditure within a financial year, the cash-based accounts serve mainly to demonstrate that public money has been paid within the limits and ambits approved by the legislature. The accrual-based accounts … aim to present more information on the financial performance and position of the government.”
Thus on a cash basis, the fiscal reserves for 2014-15, the latest available figures, stood at HK$828.5 billion, but on an accrual basis, which many would argue presents a more accurate picture, they were HK$1.6 trillion. This budget was another example of what has long been known. The government finances are out of control and are desperately in need of a major restructuring. The government has studiously ignored demands for a proper pension scheme, preferring instead one-off sweeteners.
It is also clear that government finances would benefit from a change in the way land is sold. The current system requires a whopping up front land premium which restricts the competition for land to the well capitalised big developers.If instead of requiring huge upfront premiums the government introduced higher ground rents, as critics such as David Webb suggest, then this would smooth out the budgetary process in providing a more stable revenue stream, as well as opening up the market to smaller developers.
But in the nine years Tsang has been Financial Secretary, there has never been any suggestion that he or anyone in government is interested in what would be a truly ground breaking measure in Hong Kong.
Tsang once again raised the bogey of the approaching ‘structural deficit’ He said in his speech “Recurrent expenditure is not sustainable,” and he anticipates a structural deficit. This was foreshadowed in the report published in March 2014 by the government’s working group on long-term fiscal planning which forecast that with rising health and welfare spending as a result of Hong Kong’s ageing population together with declining revenue growth, Hong Kong will burn through its reserves within 15 years. This calculation was achieved by employing a number of questionable assumptions such as restricting the use of funds squirreled away in government funds to their ‘designated’ purpose. The most questionable assumption was that spending on infrastructure would increase from an already whopping HK$74 billion in 2014 to HK$515 billion in 2041. Despite being discredited Tsang continues to accept the reports findings.
Looking at the accruals based accounts for the last five years it is clear that the government is running surpluses and is matching expenses and revenues on a like for like basis. The basis for the future fund – the structural deficit argument -is on shaky ground. Undeterred Tsang announced in his budget that he would transfer the HK$220 billion which has been untouched in the Land Fund since 1997 to the new future fund. It will be locked up for the next ten years. This is a pity as it would have made an ideal basis for a proper pension scheme.
The government’s steadfast reluctance to upgrade government finances and to make them more transparent by adopting accruals based accounting reform is becoming increasingly suspicious.
What is the purpose of these huge reserves Hong Kong is piling up? You can’t help wondering whether there is some arrangement with the Central government that people in Hong Kong do not have have pension and social welfare arrangements that cannot be aligned with what is likely to be available in mainland China in 2047.
There is also likely to be a tidy nest egg in the reserves which the central government has no doubt already got its eye on.