Public spending must follow the 'golden rule'

Only a cad would kick a man when he's down, so I'm not going to join the chorus of disapproval which greeted John Tsang Chun-wah's latest budget.

In any event, following a U-turn so rapid and violent it made your head spin, he seems well en route to digging himself out of the political hole that he got himself into, albeit at the expense of his own and the government's credibility.

But I am again going to ask him a question I first put to him on a special RTHK Backchat programme to discuss the budget. In essence, the question concerns what share of the community's economic resources we want the government to have control over, and how much we want to leave in the hands of Hong Kong citizens.

For as long as I can remember, we have had a clear answer to that question. Government spending should take up no more than 14-15 per cent of gross domestic product with a further 4-5 per cent for the wider public sector (for example the Housing Authority), making a total public expenditure of about 19 per cent of GDP.

A further 'golden rule' was applied on top of this 'golden foundation': growth in public expenditure should only grow each year in line with the trend growth rate of the economy. In this way, the range of 18-20 per cent would always be preserved.

When in the early 2000s public spending shot up and GDP fell, thanks in large part to the after-effects of the East Asian economic crisis, firm action was taken. In his first budget in 2004, then financial secretary Henry Tang Ying-yen coined the slogan 'big market, small government' and made a solemn pledge to bring public sector spending back below the 20 per cent ceiling. He repeated the undertaking in his 2005 budget when he had almost achieved the target, and gave himself a well-earned pat on the back in 2006 when he forecast public expenditure for the year ahead would be around 18 per cent of GDP.

When Tsang took over as financial secretary, he also stuck with the '20 per cent or below' rule in his first three budgets, and made a virtue of it. But suddenly in the latest budget, public expenditure is estimated at 21 per cent (even before the U-turn) without any explanation being offered at all.