You can't borrow good news
We were greeted recently with news that the government's budget deficit was only $5 billion in the first four months of the current financial year. This compares with $45 billion in the same period last year. Fantastic! What a massive improvement. But wait. Reading on, we find that at least $20 billion (more likely, $26 billion) of the fall is a result of counting bond issues as revenue.
Financial Secretary Henry Tang Ying-yen and Secretary for Financial Services and the Treasury Frederic Ma Si-hang both come from the real business world. Would auditors there, or watchdogs such as the stock exchange, ever allow a company to dress up its profit-and-loss account by treating borrowing as ordinary income? Never. But this is, in effect, what our government is doing.
Its defence - and I am indebted to Treasury staff for their openness - is threefold. First, the press notice does confess to including bonds as revenue. True, although actually it refers only to the $20 billion raised in July; one is left in the dark concerning the $6 billion borrowed in May. Second, the presentation is consistent with past practice. True again - as in the case of borrowing in the early 1990s - but that does not necessarily make it right. Third, this treatment only appears in the cash-based accounts; the more meaningful accrual-based accounts for the full year, when they are released, will not show bonds as revenue. True once again, but it is a long wait; and anyway, to my knowledge, no other governments treat bonds as revenue, even in their cash-based accounts.
The International Monetary Fund, whatever criticism it may face over its economic policy prescriptions, enjoys undisputed authority as the standard-setter for official statistics in this field. It states categorically that revenue comprises non-repayable government receipts. Presumably, the Hong Kong government will honour repayment of its bonds; they should not, therefore, be counted as revenue. Yet the official notice unequivocally records them as such. An incidental consequence is that the government applies a completely different accounting treatment to the issuance of bonds from that which it applies to the liquidation of the financial assets it holds as part of the fiscal reserve. In fact, both are, very plainly, financing items, and so should come together, in accounting jargon, 'below the line'.
The government's mischief is carried through to its balance sheet: its toll-backed bonds, issued in May, were deliberately excluded from its liabilities in the quarterly position gazetted for June, meriting only a footnote; and presumably the more recent bonds will be similarly excluded from the September position. This, again, defies both normal accounting practice and common sense.
Does any of this matter? In one sense, no, since we are dealing with presentation rather than substance. But in another sense it does matter. It puts Hong Kong in none too flattering a light, should outsiders care to examine how we shape up to international standards. It suggests that officials themselves may fail to appreciate the true budgetary position or the principles which should be applied in analysing it. Or it may be seen as a deliberate attempt to mislead the public into thinking that the budget is healthier than it actually is. And it perpetuates misunderstandings that already exist among media commentators and the public over the distinction between the true budget deficit on the one hand, and the means to finance it on the other.
Might one expect any remedial action? Frankly, no - or anyway, not soon. The accounting system is too much set in stone, not least in needing to conform with how the statutory budget appropriations were drawn up. But the presentation ought to be revamped for future years. In the meantime, it would be helpful if all concerned could demonstrate, when opportunities arise, a clearer grasp of the fact that borrowing, although it helps finance the budget deficit, does not cure it.
Tony Latter is a visiting professor at the University of Hong Kong