No worries on fiscal front but, on balance, Henry is still out of line
with Jake van der Kamp
PARDON ME IF you think I have harped on this theme too often recently but some people just do not get it, in particular the one person who most needs to do so, our Financial Secretary, Henry Tang Ying-yen.
Our government is no longer in a fiscal deficit. Its books on the consolidated account now show a fiscal surplus, even when excluding the $26 billion proceeds from two bond issues last summer, and this surplus looks set to continue growing.
Yet with only four weeks to go before he delivers his next budget, Henry is still not ready to concede that circumstances have changed drastically from a year ago when he forecast a deficit for the year to March of $46.2 billion. In a chat with reporters last week he spoke as if a return to surplus is still years away.
Let me go through the basics again. The first chart shows that our government's revenues and expenditures during any given fiscal year are mismatched. The red bars represent a six-year average of revenue every quarter as a percentage of the total for the year and the blue bars represent the same figures for expenditure.
It is immediately obvious that revenue collections are relatively low in the first quarter of the fiscal year, which begins in April and the second quarter beginning in July, in both cases substantially less than expenditure, which remains roughly consistent from quarter to quarter throughout the year.
In the third quarter, however, revenues rise above expenditure and then soar with tax collections in the final fourth quarter, the one we are now in. Thus if you are trying to assess the government's ongoing deficit position in any fiscal year, the worst way to do it is to compare revenue and expenditure since the beginning of that year.
If you do it this way you invariably wind up with a big deficit in the first two quarters of the year and then a recovery towards balance or surplus in the last two quarters. All you get for your efforts, in other words, is an annual roller coaster that can only confuse you.
But this flawed way of reporting the figures is unfortunately the one our government has adopted and even Henry, who should know better, looks at them this way.
The much better and only consistent way of doing it is to eliminate the seasonal fluctuations by looking at a running 12-month total of the deficit. The red line in the second chart shows you what results from doing things this way. It tells you that the fiscal balance went back into surplus in November.
And what then of Mr Tang's quibble that it could only be made to appear so through inclusion of the $26 billion proceeds of those two bond issues in July, which he quite rightly thinks we should not include?
Simple. The blue line shows what happens if we include them. Our 12-month rolling total would now show a surplus of $28 billion rather than $2 billion. We have a surplus even without these bond issues. I grant you that the chart also shows a slight dip at the very right in the December figures, which are the latest available, but I would not make much of this. It is probably a distortion attributable only to a delayed impact on revenues from the Sars epidemic in 2003.
The fact of the matter is that the general state of our economy has an exponential effect on the fiscal balance. A little improvement in the economy produces a great deal of improvement in the government's revenues and vice versa. What we have at the moment is a solid economic recovery and it has had its predictable effect, one to which Henry seems to have blinded himself.
You may have noticed the photograph we published of him on Friday, sitting out in his garden with his feet up and his hands behind his head. It is a pose he is justified in taking with the present state of fiscal affairs but only if he first sat at his desk with his feet on the floor and his head bent over his paperwork. I wonder if he did. It does not seem so.