I found nothing much to talk about after Hong Kong’s recent budget, as there was nothing new in it.
Financial Secretary John Tsang Chun-wah was obviously playing safe and trying to please all groups thanks to a staggering surplus.
When the government has more money than it needs, preparing a budget is not difficult. In such an advantageous position, Tsang has no need to rack his brain for any austerity measure that no one likes. Instead, he just needs to hand out more sweeteners, and everybody is happy.
Tsang has been in the post for almost eight years, not rare in Hong Kong but nevertheless an unusual case.
Some of his long-serving predecessors, including Arthur Clarke (in office from 1952 to 1961), John Cowperthwaite (1961-1971) and Philip Haddon-Cave (1971-1981) have won credit for their contributions to laying a solid foundation for Hong Kong’s financial standing.
What has Tsang achieved all these years?
In my opinion, Tsang has been sticking to his principle of “living within your means” by keeping the government spending within levels allowed by the revenue.
It seems that it has been his perfect excuse to gloss over the failure to foresee challenges and prepare Hong Kong for the future amid the changing economic landscape.
Like what I said a year ago, Tsang adheres to Britons’ ways of managing the government’s books but he is short of fresh ideas and inspirations for his successors.
Hongkongers are pragmatic and they won’t expect the budget to be groundbreaking with drastic policy shifts. That said, Tsang has never been able to have a vision for Hong Kong.
Quite the reverse, he has a poor record in foreseeing what’s in store, as shown in the striking difference between his estimate of government revenue and the actual surplus all the years (nearly HK$55 billion more than his original estimate for the financial year 2014-2015).
This has laid bare the fact that he is simply unable to gauge the situation and forecast changes, let alone envisaging the government’s financial standing in a decade.
In this year’s budget speech, Tsang offered a fresh reminder of the conclusion drawn by the task force on long-term fiscal planning that despite expected surpluses in the consolidated account in the future, structural deficits will surface within ten years. So, he believes he must “contain expenditure, preserve the revenue base and save up in a timely manner”.
Tsang has proposed to explore ways to broaden the tax base, in due course. Introduction of a Goods and Services Tax (GST) will come on the radar again.
Although being a principal official, consciously or not, Tsang still regards himself as a civil servant. The administrative officer mindset has dominated throughout the drafting of the budget, making the document look more like a day-to-day account of the government’s earnings and expenses rather than a decent budget with vision and mission.
The way Tsang performs his job makes him look like a company treasurer while the scope of duties of a financial secretary is much broader and far more comprehensive, ranging from macroeconomic and fiscal policies to financial administration regulation.
Since the Hong Kong dollar is pegged to the greenback, Hong Kong has limited room to maneuver in terms of monetary policy. The financial secretary should therefore spend more efforts on crafting the fiscal policy.
Hong Kong is perhaps the only one among the world’s advanced economies that boasts of fat annul surpluses and a huge pool of aggregate fiscal reserve. Singapore, Hong Kong’s major rival, has forecast a combined deficit of HK$38 billion in its latest budget. Perhaps one reason for the different books of the two cities is that Hong Kong has no expenditure for national defense or diplomacy.
But Tsang still fears a looming deficit, prompting an answer in the form of a Future Fund. An amount of HK$220 billion from the Land Fund will first be injected and the new fund will serve as long-term savings and be placed in long-term investments for higher returns, according to his budget.
As fiscal reserves are estimated to be HK$856.3 billion by the end of March 2016 – equaling 36.8 percent of GDP or 23 months of government expenditure – and further to HK$948.8 billion by end-March 2020 and given Tsang’s huge errors in past estimates, we have reasons to believe that by 2020 government reserves may well exceed one trillion.
So, is structural deficit really an imminent threat in any sense?
Also, I am particularly irritated by Tsang’s plan to reintroduce GST, and wonder if he knows that such a tax affects all consumers regardless of their financial background.
Apparently the government is lured by its virtues, like efficient imposition through vendors and less administrative costs. But such a tax is usually deployed as an alternative option when the rates of direct taxes (like salaries tax) are already at high levels.
Hong Kong’s situation is just the opposite as for decades its low and simple tax regime is already favoring the fat cats.
Instead of asking the super-rich to pay more, the GST plan will put more burden on the middle class and grassroots, who have already been tightening their belts.
Hong Kong is already beset with acute wealth inequality with its Gini coefficient reaching 0.537, the worst in the developed world. It was ranked No. 21 globally in 2011, in the same league as many least developed nations on the planet.
Anyone with a clear mind and conscience knows the government’s fiscal and tax planning must do something to address the worsening problem and to hike tax on top earners. (Li Ka-shing has already stated that he won’t mind if the government increases tax on tycoons and giant firms to help the poor).
With the huge surplus, Tsang should have made better use of the extra money either for higher returns or to roll out relief measures to benefit the middle class and the underprivileged.
The financial secretary, it must be said, has done little to help narrow Hong Kong’s wealth chasm and make the community a little more harmonious.
This article appeared in the Hong Kong Economic Journal on March 10.
Translation by Frank Chen
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