Lai See | It's more a scaremongering act than a poor job of forecasting

In the previous financial year, Financial Secretary John Tsang Chun-wah forecast a budget surplus of HK$3.5 billion and we ended up with a surplus of HK$65 billion. The forecast 2012 budget surplus of HK$8.5 billion turned into a surplus of HK$66.7 billion, and in the year before, a forecast deficit of HK$40 billion turned into a surplus of HK$26 billion. The government's efforts at medium-term forecasting are no better. The forecast in 2009 spoke of fiscal reserves in 2012-13 of HK$401.2 billion, but three years later the reality was a surplus of HK$734 billion.

So what are we to make of the story in yesterday's South China Morning Post that Tsang's forthcoming budget will feature a warning that Hong Kong's fiscal reserves of HK$734 billion will disappear in 20 years due to the cost of supporting an increasing elderly population. When the government has proved so inept at forecasting its budget for one year ahead, it is hard to believe it will do any better at forecasting the situation in 20 years' time. This dire warning is supposedly the work of the handpicked team - the Working Group on Long-Term Fiscal Planning - that was set up after the last budget.

One cannot help but feel there is an element of pre-determination here. This is the answer the government wants since it is itching to introduce a goods and services tax. However, a cursory look at some of the figures suggests the situation is not nearly so gloomy as the group suggests.

Firstly, the HK$734 billion fiscal reserves are what the government has in terms of cash accounting. Hong Kong is one of the few governments in the world to use this approach. Most use accrual accounting. It therefore makes no sense to talk in the same breath of cash reserves and long-term assets and liabilities such as pension liabilities and infrastructure spending. If we are to compare like with like, these long-term liabilities should be compared with the reserves on the accrual accounts, which the latest figures, released last month, show they are now at a massive HK$1.465 trillion.

Even this presents a highly conservative picture since the government presents the civil service pension liability as a lump sum. This has been massaged upwards from HK$534 billion in 2011 to HK$714 billion in 2013 by tinkering with the discount rate it uses to arrive at this figure. Also, the increase in the figure is strange, given that the government's final salary pension scheme closed to newcomers in 2000. It is therefore a declining liability since the people benefiting from this pension die over the next 20 to 30 years. At present, the pension liabilities are being funded to the tune of about HK$20 billion a year out of cash.

In addition, we need to consider the capital works reserve fund. which comprises funds from land sales, which amount to HK$70 billion to HK$80 billion a year. That is not going to disappear overnight. In the unlikely event that government finances do come under pressure, the government should do what governments elsewhere do and raise funds for infrastructure in the bond market, so that money for infrastructure that will last a number of generations will be paid for by the present and future generations that stand to benefit.