Hongkong:The blue sky symbolism that Donald Tsang gave to the cover of his Budget documents should not just mean sunny days ahead. It ought to mean transparency, clear air and sunlight as the best disinfectant. He could have made a start by defining and being consistent in his use of terminology, long designed to baffle even veteran budget watchers.

In the Budget speech and supporting tables and documents, there is an intermingling of references to recurrent budget, operating budget, general revenue budget, consolidated surplus/deficit, government revenue, consolidated public sector expenditure, etc. There are real differences between them, which are mostly explained in the budget Appendix.

The problem lies in the way they are often used at random and consistent series are hard to find Making it worse, loan advances and payments are counted as revenue and expenditure, and fund accounts have to examined separately to see whether money allocated is intended to be spent, and actually spent. Further complicating matters is the off-balance-sheet treatment of the Housing Authority, not to mention KCR and MTR It is a major exercise, involving the accounts of those entities, to figure out whether government spending is actual or just a shuffling of money between accounts.

To take just one example. Mr Tsang referred in his speech to public sector capital spending still gaining momentum in 2000. That may well be the case but one needs to know a lot more than the government tells us. The budget estimates show small decline - a $2 bn rise in spending from the Capital Works Reserve Fund but (according to notes to the spending estimates) there will a $4 bn fall in construction by the Housing Authority and $2 bn decline in outlays by the Capital Investment Fund which is providing a $6 bn equity injection for the Disney project compared with $8 bn in the last budget for the KCR's West Rail.

On the revenue side, it is not clear how the Exchange Fund gains are being calculated. Returns on reserves at $44 bn are twice the original estimate due mainly to profits on sale of share to the Tracker Fund. But there is no explanation of how this arrived at. Is this is all of the realised profit, or just part, or is some of it not realised at all? To make matters worse, the documents use nominal and real numbers interchangeably and without specifiying what deflator is being used.

For example, for 2000-2001 "real" spending projections it appears to use a near zero deflator. But where does that leave "real" spending in the current year, when deflation as applied to the government might be anywhere between zero and the minus 5.3% claimed for the overall GDP deflator. Tsang cannot be entirely blamed for this confusing state of affairs much of which long pre-dates him. But he is in no position to complain that the public (or legislators) lack understanding of public finances while he treats them to this confused concoction.

Meanwhile sceptics will also continue to question claims for "real" GDP growth of 2.9% last year when most of this was due to a 5.3% decline in the deflator, converting a dollar decline of more than 2% to a "real" gain. This number may have been arrived at in good faith, but it still looks bizarre given the much smaller falls in all price components except property rentals. Did your business or household costs, your export or import prices, construction costs, wage costs fall by anything near 5% last year? The government's assuredly did not.

Using the domestic demand deflator (2%) would leave overall GDP growth in negative territory - clearly not in keeping with Mr Tsang's feel good talk. As for the GDP forecast for 2000, it looks over-optimistic about external conditions - 10% re-export growth and 8% rise in service earnings. But the 2.5% forecast for consumer demand is on the pessimistic side. Perhaps the forecasters have taken on board the negative impact on consumption of the arrival of the MPF. But curiously Mr Tsang had nothing to say about the impact of what is a significant burden on business, and for many individuals amounts to a 5% cut in disposable income.

These quibbles apart, there is no reason to criticise or praise the Budget itself. After all, no decisions were made other than to put off decisions on introducing a consumption tax, on broadening the direct tax base which now covers only 40% of the population, or introducing a land departure tax. Tsang could not bring himself to raise long frozen fees and charges, even on mahjong parlours, preferring to await the suggestions of the legislators - on to whom he can then presumably place responsibility.

The adage: When in doubt, waffle certainly suited the occasion. That is not necessarily a bad thing. If it ain't broke, don't try to fix it. If Tsang can almost balance the budget by doing nothing, that's fine with most people. At least he recognises that he has been very lucky this year with a $21 billion (10% of all general revenue) boost from share sales.. He could barely have dreamed of such a windfall six months ago. It is largely the result of the global liquidity and tech stock binge for which he has to thank Mr Greenspan's generosity with the rum punch.

So he is right to be reminding Hongkong that the general revenue budget remains in deficit, and will probably stay that way for the next three years unless effective tax rates are raised. Without them, even an eventual return to balance is contingent on the economy returning to a 4% trend growth, and the government cutting back civil service numbers by the 5% planned by 2003. It would be easy to achieve such a big cut if there were an inexhaustible supply of jobs in semi-public bodies at three times civil servant salaries which required neither open competition nor obvious qualifications.

Perhaps Mr Tsang can carry on creating quangos (quasi non governmental organisations) which actually make money. He has certainly got off to a good start with the GEM. Thanks to a governing body eager to waive rules inconvenient to the rich and famous and a toothless (for the 28th successive year) Securities Commission an exchange intended to raise money for cash-starved start-ups has become a mechanism for the already super-rich to reward a few insiders by selling dot.com illusions to the many. As it is, he may have to keep relying on asset sales.

The next big one is the MTR, whose partial privatisation is supposed to yield $30 bn over the next two years. But if Tsang were honest about the MTR's finances he would realise this is robbing Peter to pay Paul. The MTR is a well run railway but operations earn a pittance. Its profits are mainly from property development and hence are determined to a large extent by the size of land premia it pays to the government.

Doubtless some investment banker has prevailed on Tsang the brilliant idea of inflating the MTR'sproperty profit potential so as to sell it off at a double digit multiple of the contrived earnings. That's what investment bankers do for a living. The scheme might be OK if one did not suspect that half the overpriced stock would end up back with Hongkong taxpayers via their MPF contributions. As with the Tracker Fund, Hongkongers will be invited to pay for what they already own. Perhaps, Mr Tsang, Hongkong people would rather pay regular taxes, even including a sales tax, than be hit by arbitrary or disguised imposts -- contrived land shortages, stockmarket manipulation, Disney or MTR railroading. So he has done Hongkong no favours by delaying decisions about the issue about which he has made so much fuss - a broader and more certain revenue base. ends  

 

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