Monitor
PUBLISHED : Monday, 02 September, 2013, 12:00am
UPDATED : Monday, 02 September, 2013, 4:51am

With fewer grand projects, Hong Kong can afford its health care bills

It's true the city's medical expenses will grow with an ageing population, but the problem can be solved without the need to impose new taxes

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.
 

In his Sunday Morning Post column yesterday, Jake van der Kamp called for a pin.

He is not, so far as I know, going into business as an acupuncturist. Rather, he wants to burst what he believes is a trial balloon being floated by the Hong Kong government for the introduction of a goods and services tax.

Let's see if we can deliver a little prick.

What alerted Jake's attention was a report in last Thursday's paper in which unnamed officials said the government had massively underestimated the future costs of providing health care for Hong Kong's growing army of old folk.

Tax changes would be needed to plug the gap, warned one of the government's fiscal advisers.

This is no surprise. In his budget speech earlier this year, Financial Secretary John Tsang Chun-wah issued a similar warning.

"With an increase in the number of the elderly … the growth of government revenue will drop substantially if our tax regime remains unchanged," he said. "Meanwhile, expenditure on welfare and health care will soar. We may not be able to make ends meet."

When government officials talk about tax changes, it's a safe bet they mean tax increases. And in this case it's odds-on they want to resurrect the idea of imposing a goods and services tax, a notion we'd all thought dead and buried back in 2006.

Yet whether Hong Kong's public finances are really facing the sort of old-age health care spending armageddon that the government keeps warning about is highly doubtful.

Yes, it is true that according to government forecasts, the proportion of those aged 65 and over in Hong Kong's population is set to double from around 13.5 per cent today to 27 per cent in 20 years' time.

And it is true the elderly need more health care. According to consultancy Mercer, Hongkongers aged 65 and over go to the doctor - and are hospitalised - twice as often as those in their late 30s or early 40s.

And it is also true that health care costs tend to rise faster than overall inflation. The reasons are complex, but in a nutshell, it's partly because of the escalating costs of drugs and medical technology and partly because, as a non-traded service, health care offers relatively few opportunities for gains in productivity.

So as a result, it is reasonable to expect that Hong Kong's health care burden is set to rise in the future. Analysts at reinsurance company Swiss Re estimate the city's total health care bill will almost double in real terms by 2020.

But that doesn't mean Hong Kong will be facing a fiscal crisis. For one thing, the government currently pays only 46 per cent of the city's overall health care bill. Private insurance and out-of-pocket spending cover the rest.

That means Hong Kong's public spending on health care is low by developed-economy standards. As the first chart shows, government spending on health care amounted to just 2.5 per cent of the city's gross domestic product last year. Britain, with its National Health Service, spends about 8 per cent, and the United States, which doesn't even provide blanket health protection, spends even more.

Look more closely and it becomes clear health care is a relatively minor component of Hong Kong government spending. This year, the government expects to spend just 11.5 per cent of its total budget on health. That's only 50 per cent more than it plans to spend on the police. And as the second chart shows, it's 30 per cent less than it is splashing out on infrastructure projects.

But with an ageing population, Hong Kong won't need so much new infrastructure in the future.

So it's hard not to conclude that with a little less spending on new bridges and railways, and rather more on medical expenses, Hong Kong's government should have few problems meeting its future health-care-spending commitments without the need to impose any new taxes.

tom.holland@scmp.com

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