In the wake of a massive fiscal surplus, debate has intensified in Hong Kong recently as to whether the government should offer cash handouts to citizens or commit itself to some long-term and fundamental social investments.
Over the years, whenever there were calls for the administration to make long-term financial commitments to major public policy initiatives, the government would always argue that it could lead to budget deficits in the long run, thereby violating Article 107 of the Basic Law.
Article 107 stipulates that “the Hong Kong Special Administrative Region shall follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.”
As we can see, literally speaking, even though the article itself does discourage the government from operating on a deficit budget, it doesn’t outlaw or prohibit budget deficits at all.
Budget deficits are actually nothing new to Hong Kong. During the era between 1946 and 1988, the former British colonial administration put together a total of 41 budgets.
Among them, 21 were actually in the red, with the overdrafts predominantly spent on long-term social “hardware” such as public housing and the Mass Transit Railway, as well as social “software” like nine-year free education and social welfare.
All these social “hardware” and “software” have turned out to be the cornerstones for Hong Kong’s economic miracle.
With the benefit of hindsight, we can tell that all the budget deficits the city has seen over the decades have proven just as transient as a fleeting cloud, but the legacies they have left behind, such as our public housing and free education system, have stood the test of time and proven instrumental in facilitating the city’s economic take-off.
In fact, when the Basic Law was being drafted, members of the drafting committee in Beijing weren’t actually that opposed to the idea of the HKSAR government having occasional budget deficits.
Instead, many of them took the view that requiring the future SAR administration to operate on a balanced budget under all circumstances was simply unrealistic, given the volatility of the global economic cycles.
However, there was also a consensus among drafting members that it was important to strike a balance between fiscal flexibility and the importance of maintaining balanced budgets, hence the final wording of Article 107.
In fact what Hong Kong desperately needs right now is some crucial social “software” such as enhanced public health and elderly care services, both of which require long-term financial commitment by the government.
And in the presence of such a whopping fiscal surplus, the government doesn’t even have to face any budget deficit to make this commitment. Therefore, pulling Article 107 as an excuse to avoid long-term financial commitments is both flimsy and unconvincing.
This article appeared in the Hong Kong Economic Journal on Feb 28
Translation by Alan Lee
[Chinese version 中文版]
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