Sitting on a pile of money
Financial Secretary Henry Tang Ying-yen must be taken to task for setting himself very loose goals in the budget he released last week. He said his 'first targets are to keep our accounts in balance and the share of public expenditure in [the] gross domestic product at 20 per cent or below'.
The first part of this statement is clear enough, and he has more than delivered on it. The government's accounts have returned to the black, and surpluses for the next five years are projected to climb steadily from 0.4 to 1.8 per cent of GDP. But the second part of his statement has a major problem, as he has failed to specify how 'low' government expenditure's share of the GDP can go. His medium-range forecast shows that public spending in 2006-2007 is an estimated 18.2 per cent of GDP, which is projected to fall to 16.1 per cent by 2010-2011.
But why 16.1 per cent, and will it fall further? Mr Tang has provided no answers. What if the figure fell to an unrealistic 10 per cent? Should that happen - an unlikely, but theoretically possible, scenario - the financial secretary would still be meeting his target. How big the government's share in the economy should be is a most fundamental issue. There is a world of difference between public expenditure constituting, say, 15 and 20 per cent of GDP - in terms of how much the government should tax and spend. It would help if Mr Tang came up with a more precise target - by specifying an optimal range for how much of the GDP should be formed by public spending - as the basis for discussion.
To be fair, the financial secretary may have a reason for being imprecise. His plan to continue to drive down public spending might have to do with the fact that projected recurrent revenue will continue to fall short of recurrent spending for several years. The medium-range forecast appears to show the operating account is already in surplus, but that positive balance is the result of treating the government's investment income as recurrent revenue. That dubious practice, introduced in recent years, is contrary to the standard accounting rule of treating investment income as capital revenue.
If investment income is not treated as recurrent revenue, the operating account will not return to the black until 2010-2011, when, as noted earlier, total public spending is projected to form 16.1 per cent share of GDP. Is it the long-term aim of the financial secretary to keep public spending at that level? The medium-range forecast also points to the emergence of a worrying situation. If the projections are correct, the government's fiscal surpluses will continue to grow - and that will not help its plan to introduce a goods and services tax to widen the recurrent revenue base.
At present, the government's $300.8 billion fiscal reserves are equivalent to 16 months of government spending. Mr Tang said his plan was to maintain the reserves at about the 15-to-17 month range over the next five years. But the notes to the budget say the long-term aim is to maintain the reserves at about 12 months of total government expenditure. Does the financial secretary have an unspoken plan to run down the fiscal reserves?
Much has been said about the need to widen Hong Kong's recurrent revenue base, but that is only half the challenge. The government must also stop raking in too much capital revenue, which it does not know how to spend.
C.K. Lau is the Post's executive editor, policy