Christmas surprise reveals the folly of Tang's arguments for GST

'The cash-based accounts serve mainly to demonstrate that public money has been paid within the limits and ambits approved by the legislature. The accrual-based accounts, on the other hand, aim to present the financial position and performance of the Government.'

Government spokesman,

December 27, 2006

TAKE NOTE OF that date. Our government has an occasional habit of releasing awkward news snippets on days when few people are likely to pay any attention and there are two reasons why this snippet was particularly awkward.

It is first an admission that Financial Secretary Henry Tang Ying-yen based his justification for a goods and services tax on the wrong data. He invoked the cash accounts to argue that the government's fiscal performance and financial position required the imposition of a GST.

As the anonymous government spokesman now concedes, cash accounts cannot support this sort of analysis. Only accruals accounts can do so and Henry never bothered himself with the accruals accounts figures.

The second reason that this curiously timed statement was an awkward one for the government is that it accompanied the release of accruals accounts for the fiscal year to March 2006 and these revealed a surplus for that year of HK$47.56 billion, far more than the cash accounts equivalent of HK$13.96 billion.

Accruals accounting, the style of accounting universally adopted for private corporations, is much better than simple cash accounting at giving an accurate picture of financial position because it matches expenditures with revenues and takes more into its scope.

The government started compiling accruals accounts four years ago and, as the bar chart shows, they have consistently indicated either a much lower deficit on the fiscal balance than the cash accounts showed or a much greater surplus.

The December 27 press release attributed the much larger surplus for the most recent fiscal year mainly to three items - (1) investment and interest income, (2) the profits of government enterprises, and (3) the sale of the Housing Authority's commercial properties.

It then states that these were 'partly offset by the provision for expenses (such as pensions)'.

This gives you the impression, whether intended or not, that it was mostly non-recurrent items that boosted the accruals accounts surplus to HK$47.56 billion and perhaps you ought not to expect it to happen again.

The facts are somewhat different. The three items cited, of which only the sale of HA properties can really be considered non-recurrent, accounted for HK$23.8 billion more than the previous year. The supposed partial offset, however, amounted to HK$27.68 billion for pensions alone.

But only a very small proportion of this reflected any real increase in pension liabilities. Almost all of it was for 'actuarial loss on pensions'.

Let me explain what I think happened here in plainer language. What the people at the Treasury saw when they compiled these accruals accounts for fiscal 2006 was a surplus of more than HK$75 billion. This was so enormous that it would have gone past the point of embarrassment for a government which had only just decided to drop the proposal for a new tax but still insisted on pursuing a public consultation on widening the tax base.

Thus the bureaucrats cast about for some way of pulling this surplus figure down and decided to tinker with discount rates for longer-term pension liabilities although there was nothing in the trend of longer-term interest rates to indicate that such tinkering was needed.

But what they did need was something so confusing to the general observer that it would not be immediately questioned and 'actuarial loss on pensions' certainly fits the bill.

Thus they did their tinkering and down came the surplus to HK$47.6 billion, still big enough to make Henry Tang look silly on his so recently dropped GST proposals but perhaps not enough to make an absolute fool of him.

This, in any case, is my explanation of what transpired and why the bureaucrats had to pick the middle of the Christmas holidays to release their figures.

They can dispute it if they will but what they cannot dispute is that they have a very dead duck on their hands with GST and the shotgun that brought it down, accruals accounting, was of their own making.