Tang deserves credit as numbers amount to imminent surplus

PUBLISHED : Monday, 06 September, 2004, 12:00am
UPDATED : Monday, 06 September, 2004, 12:00am

WHEN I WRITE ABOUT government in this column it is most often about a job botched. Today I shall take other tack. It is time to bestow plaudits for a job well done.

Earlier this year, Financial Secretary Henry Tang Ying-yen told us in his budget speech that he expected it would take almost five years to bring the government's fiscal balance back to a surplus on the consolidated account.

Make that about three months, at the rate things are going. We are well on our way there already with an economy booming more strongly than Mr Tang had expected and with every prospect of a return to surplus before the end of this year.

The first chart tells the basic story with the red line representing the fiscal balance as a rolling 12-month total. This is admittedly not the way the government usually presents the figures.

Officialdom likes to report them each year on the basis of a year-to-date total from the beginning of the fiscal year in April. The trouble with this way of doing it is that more than two-thirds of the annual revenue is normally booked in the last six months of the year while expenditures are relatively steady throughout the year.

Thus, looking at these figures on a year-to-date basis invariably gives you a deficit in the first half of every fiscal year and a surplus in the second half. A rolling 12-month total presents a much more consistent picture of the trend.

The red line in the chart is not literally accurate in this case. The official numbers already show the 12-month fiscal balance as only the barest smidgin in deficit. This, however, is only because Mr Tang included the proceeds of his recent $20 billion bond issue in the July revenue figures. I have taken them out again.

The blue line represents a nine-month average of the monthly decline in the fiscal deficit. Follow this line up and it crosses over the horizontal zero axis in November this year. There you go, three months more at most and we are out of the hole at this rate.

Now look at the green line. It shows you Mr Tang's deficit forecast at budget time. Even from where the line starts at the end of the 2003-04 fiscal year it represents a bigger number than actually reported.

It envisages a significant improvement only in the 2007-08 fiscal year, largely because of higher capital revenues with lower capital costs, and brings us back into surplus only in late 2008.

Of course, there is no guarantee that the deficit will continue to be trimmed in coming months at the rate it has been since late last year but the prognosis is a good one.

As the second chart shows, revenue growth is very strong, 30 per cent year over year in July on a 12-month average basis, even without counting that $20 billion bond issue. Economic recovery has magical effects on the government's fiscal position.

It always does and this is not just a one-off bounce from the slowdown during the Sars epidemic last year.

But perhaps of more importance is the expenditure line. The comparable growth rate here in July was only 2.7 per cent. Not only is expenditure growth being kept well in check but other figures show that inflation in government expenditure (deflation actually) has been brought back in line with the private sector for the first time in seven years.

If I wanted to quibble with all of this, I could say that it does not mean that much when Mr Tang can always push the figures where he wants them by selling more land or other government assets and making a few alterations to when he books revenue or expenditure.

But I think we can take it that he is not out to distort the picture in any significant way and that these figures really do represent the underlying trend, in which case he is due congratulations from us.