In his last budget speech as financial secretary in the current administration, John Tsang Chun-wah reflected on the necessity for fiscal discipline. He attributed the sovereign debt crises in some advanced economies to their lax fiscal discipline, and was determined to ensure the structural integrity of public finances in Hong Kong and keep adequate fiscal reserves for future challenges.
But fiscal discipline is an unpopular notion in an election year, especially if the government has a lot of reserves.
As Tsang has pointed out, Hong Kong is an open and small economy, thus inevitably vulnerable to any fluctuations in the world economy. An adverse external economic environment would immediately affect us. Fiscally speaking, we need to maintain enough reserves to cater for rainy days. Equally important, Hong Kong has a narrow tax base and low effective tax rates. Some 60per cent of our working population do not pay any salaries tax, and nearly 90per cent of our companies do not have to pay tax. Any reduction of tax rates will only narrow the base further.
Fiscal discipline is no doubt essential; indeed the Basic Law requires the achievement of a fiscal balance and keeping the budget commensurate with growth in gross domestic product. So far, the government has exercised prudent management of public finances and continued to accumulate handsome surpluses - the annual surplus for 2011-12 is estimated to reach HK$66.7billion and HK$662.1billion in total fiscal reserves is expected by March 31, representing 35per cent of GDP or 22 months of government expenditure.
However, a huge surplus also makes it politically difficult for any financial secretary to resist demands for more public spending, tax cuts and revenue concessions. The widening wealth gap has added pressure for government relief. Over the years, the government has had to offer various one-off concessions and rebates (dubbed 'sweeteners'), though it is reluctant to commit to more recurrent spending. This has created an annual budget syndrome where the public expects sweeteners and paybacks.
During Tsang's term as financial secretary, government expenditure has grown by 70per cent (and recurrent expenditure by 33per cent), well above the 21per cent GDP growth. Over half of recurrent expenditure has gone to education, health care and social welfare, benefiting the grass roots and middle class alike. He has not been a mean treasurer, as some have accused him of being. In the medium term, the financial situation is forecast to be stable, with fiscal reserves estimated at HK$670.4billion by March 2017, representing 27per cent of GDP or 18 months of government expenditure.
With such healthy conditions, how can the government convince the public of the urgency to overhaul the tax system to broaden the tax base, as urged by some economists and taxation experts? One should recall how the proposal for a goods and services tax six years ago suffered a humiliating death.
The government has all along resisted committing to major expenditure of a recurrent nature. Similarly, it has treated income like land revenue as non-recurrent. Together, these help keep recurrent expenditure growth in check.
Yet, the paradox is that it still has to spend, given the huge surplus it has accumulated. If the government grants only regular one-off concessions and handouts, that will further narrow the revenue base and reinforce a culture of short-term fiscal management.
To meet the challenges in its economy and changing demographics, Hong Kong needs to invest more in the younger generations through education, and in infrastructure development to improve the quality of living. It needs to enhance the city's competitiveness while catering for our rapidly ageing population through health and social security measures. Using the reserves on essential long-term investment, including infrastructure, also carries an anti-cyclical effect and helps us cope with economic fluctuations due to external factors.
It is time for the government to reconsider how income and expenditure items are classified and how different sources of revenue are managed. The recent proposal from SynergyNet to establish a fiscal stabilisation fund tapping land and investment income, so as to provide a mechanism to support recurrent expenditure, is worthy of consideration.
The problem is that any deviation from the pattern of providing 'sweeteners' can be easily criticised by political parties and media commentators as not 'returning wealth to the community'. Fiscal discipline requires a new mindset in politics.
Anthony Cheung Bing-leung is an executive councillor and founder of SynergyNet, a policy think tank