HK Budget 2001/02 SCMP March 12
With his last Budget, Donald Tsang cannot be accused of pre-empting
his successor. The non-event Budget does however contain a number of
interesting issues for discussion. but why did Mr Tsang not make some
decisions about them now rather than talking around the subjects?. On
closer examination it also not the socially responsible but fiscally
cautious Budget the government wishes us to believe.
In no particular order here are some of the issues he threw up but
failed to answer.
· Cross border relations. His speech was full of rhetoric about increasing
maniland links and taking advantage of China's WTO accession, the opening
up of the West etc. Some commitments were made to improve transport
cooperation and generally ease the movement of goods across the border.
But what about people? The decision to allow more mainland professionals
in the IT and finance sectors is doubtless welcome to those industries.
But there was no a word about wider questions of the size and choice
of inflow from the mainland. As for integration with Shenzhen, Tsang's
stated support for a land departure tax clearly indicates that he is
against making the border more porous than it is already. I think he
is right to do so, if only to cushion the asset price deflation that
easy 24-hour border crossing and affirm Hongkong's status as an international
city not just the chief city of the Pearl River delta. But why not say
so out aloud?
· The Budget deficit. By his own admission, Tsang cannot make up his
mind whether the deficit is cyclical or structural. This indecision
has allowed him to put off decisions on new taxes, and let the advisory
bodies looking at new tax possibilities waffle on for a while longer.
But by the numbers Tsang has presented, the problem is quite clearly
structural. The figure to watch is not the overall revenue/expenditure
estimates which remain opaque thanks to transfers back and forth between
various capital funds, and treatment of loans as expenditure. The key
is Operating Revenue and Expenditure. This has been in deficit since
1998/99 and will remain so, albeit by a declining amount, throughout
the Medium Range Forecast period up to 2004/05. Until 1998, much of
Hongkong's capital spending was financed out of operating revenue surpluses.
Even in the worst recession years there was always some surplus. But
the deficit for the current year is now put at HK$19 bn at HK$16 bn
for the coming year declining to HK$3bn by 2005.
In other words, sale of assets has become essential to finance recurrent
spending. In addition to sales of development land, a non-earning asset,
it is now relying of sales of earning assets such as the MTRC and, in
future, road tunnels and other infrastructure assets to fund recurrent
as well as capital spending. This is dangerous. To make matters worse,
some of the recurrent earnings projections could well be optimistic.
Tsang mentioned that this year earnings on fiscal reserves would fall
some HK$8.7bn short of projections. But what does he expect from the
reserves? Take the return on the Land Fund, now part of the fiscal reserves
and managed by the HK Monetary Authority but still separately reported.
It has assets of HK$234bn. This year earnings on them fell to $12 bn.
For the coming year they are expected to bounce back up to HK$21 bn.
That represents an expected return on investment of 9%, or roughly twice
what it would now earn on a portfolio of US treasury securities. Clearly
assumptions are being made about asset price inflation. Tsang may think
he was very clever buying the Hang Seng index in 1998 but if he thinks
he can go on financing recurrent spending with windfall capital profits
his successor may be in for a shock
. · Fiscal prudence. Spending is not supposed to be growing faster
than GDP. However, the huge gap between nominal and real GDP caused
by the official GDP deflator is making it easy to muddy the waters.
Instead of comparing "real" GDP with government spending, why not compare
actual spending with actual GDP? This shows a continuing rise in operating
spending to GDP. Spending rose 5% to an actual HK$191bn this year against
a 3.2% increase in actual dollar GDP. For the coming year, recurrent
spending is set to grow 10% to HK$210bn though GDP in current dollars
is forecast to rise by only 4%. This may well be justified, primarily
a consequence of an aging population, but let us not disguise it, or
avoid facing the need to pay for it with recurrent income.
· Deflation.While on the subject of what constitutes "real" GDP, this
column has complained often enough about what I regard as the exaggeration
of GDP numbers over the past two years. Last year the deflator increased
GDP growth from 3.2% in current dollars to the so-called "real" level
of 10.5%. One reason was, bizarrely, that import prices rose while exports
ones did not thus a decline in Hongkong terms of trade translated into
an increase in GDP! But it is not just the past two years of deflation
which may the GDP claims look dubious. Since 1990 the overall GDP deflator
has consistently risen much more slowly than either the domestic demand
deflator or the consumer price index even though there has been almost
no net change in the terms of trade over that time. Deflated by the
CPI, GDP would have grown by 18% less than reported and 9% less using
the domestic demand deflator. Does this suggest that the GDP growth
has been persistently overstated? Or that there has been a gigantic
shift in income distribution? Or what? I do not claim to know. But an
explanation is needed.
. · Capital spending. Whilst recurrent outlays continue to grow apace,
comparison of this year's budget with last year's shows a huge drop
in capital spending. Project spending this year at HK$28bn is HK$5bn
down on the original projection and below the actual level in 1999/2000.
Only a small increase is budgeted this year. The picture is even worse
when one includes the Capital Investment Fund. It spending this coming
year will fall from HK$8bn (mostly for the West Rail) to HK$2 bn (mostly
for Disney) at which level its spending will be less than its income
from loan repayments and dividends! In other words, the government is
consuming capital. Of the other major funds, the Loans fund will increase
its net payments but do not assume this means more investment in housing.
The housing society is repaying loans used to build homes. The increase
is in loans from the Home Starter scheme. In other words, the Loan Fund
is yet another mechanism being used to help developers unload inventory
without dropping their prices further. Given this concern with assets
prices rather than the real economy it is not surprising that the government
is forecasting a further fall in construction activity this year despite
the large ongoing railway projects. Construction is already at its lowest
level since 1995.
· Gambling. Mr Tsang implicitly recognised the drawback of currently
forbidding all gambling other than via the highly taxed Jockey Club
monopoly. He raised the possibility of allowing football betting. But
again, words not action. Meanwhile the government proceeds with an attempt
to outlaw offshore internet gambling without bothering to consider that
it offends against two articles in the Basic Law which officials purport
to regard as their bible. Hopefully in his new capacity Mr Tsang will
bring some common sense to the civil service.
· Pollution.Finally, a word of praise for Mr Tsang's comments on the
need for tax policies, for example on diesel fuel, to reduce pollution
and user pays principles to reduce waste. But if he feels so strongly
about it, why leave diesel taxes unchanged and leave the door wide open
to continued smuggling of tax-free fuel? This smuggling is at least
as big a racket as illegal gambling and seems to have more covert support
from influential people. In other words, Mr Tsang: it is time to stop
talking, ease up on your PR effort and take some hard decisions which
will make you unpopular in diverse quarters but will earn you the respect
that Mrs Chan enjoys. ends ends
TOP OF THE PAGE