The constant prophecies of doom has justified the building of a massive government stash. This constant overdraw on Hongkongers pockets is mollified only by one-off giveaways. But our structural surplus and reserves arises from a structural lack of creativity.
One shouldn’t be too hard on Paul Chan, the Financial Secretary who read out the budget on his 37th day in office. Indeed, he gets full points for recognizing so quickly that Hong Kong has one of the narrowest tax bases in the developed world. We shouldn’t have expected him to address that failing right out of the starting gate, but it is good to know he’s aware of it.
Still, Mr Chan thinks “Public spending must be fit for purpose,” but does not seem to apply that same principle to public revenues. Spending topped 20% of GDP in the fiscal year just ending, while revenues were 22.5% As was the case with budgets produced by each of his three predecessors, this will all change in the year after next. It’s always going to change in the year after next. Just wait and see.
At the heart of the matter, a budget that seeks to put public resources to use for the benefit of the people probably shouldn’t plan to take an additional $16.3 billion out of the economy – with no clear purpose in mind – and park it in the already over-bloated fiscal reserves. After 2016-17’s $76.7 billion surcharge brought the government’s hoarding to 37.6% of GDP, one might have expected the FS to take less – not more – out of the economy. But, that’s not what Hong Kong Financial Secretaries do.
Bear in mind that not one penny of the fiscal reserves are needed to defend the Hong Kong dollar’s link to the US dollar. That is handled through interest rate movements (the currency board system) and, when necessary, the Exchange Fund. That one had assets of $3.63 trillion at end-2016, and a $546.7 billion accumulated surplus.
Among the things Financial Secretaries actually do is to forecast, and they all do it quite badly. Last year’s anticipated $11.1 billion surplus, for example, was off by $82 billion. The first budget to forecast the 2016-17 outcome, which was presented in 2012, envisaged fiscal reserves of less than $670.5 billion by the end of next month. That’s off target by 40%. Over the past five years revenues over-shot by one-third and spending by more than 30%. Surprisingly, the economic forecast was spot on: nominal GDP grew 5.65% in 2012-16, against a forecast of 5.5%. Which should, in theory, make budgeting all that much easier.
There may be cause for hope, however. Establishing a tax policy unit focused on strategic approaches to public finance might bring some sanity to the budgeting process. One area in need of rationalization is the practice of one-off “gifts” in the form of salaries and profits tax rebates, rates waivers and CSSA/OAA/OALA/DA/LWFA/WITS* bonuses.
The Silver Bond scheme introduced last year provides the HKSARG with more money it doesn’t need, which makes one wonder why increasing the old age allowance seems so difficult. Spending has been soaring beyond the rate of economic growth for many years, which is a clear violation of the Basic Law. And,
Mr Chan thinks the Basic Law is just a collection of good ideas. They’re suggestions, perhaps, that need not be taken literally.
What might the FS have done differently? Certainly, reducing tax rates on the first $2 million of taxable profits would be a strong incentive to small business, and at a cost that would barely be noticed. Issuing, free of charge, Silver Bonds to the elderly is another option, but it does require thinking outside of the box. That is not something Financial Secretaries do.
* Comprehensive Social Security Allowance/Old Age Allowance/Old Age Living Allowance/Disability Allowance/Low-income Working Family Allowance/Work Incentive Transport Subsidy
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David O’Rear is a freelance economic and political consultant based in London. Previously he was Chief Economist at the Hong Kong General Chamber of Commerce since 2002.