• Fri
  • Apr 18, 2014
  • Updated: 3:32pm
Lai See
PUBLISHED : Saturday, 11 January, 2014, 1:16am
UPDATED : Saturday, 11 January, 2014, 1:16am

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

BIO

Howard Winn has been with the South China Morning Post for two and half years after previous stints as business editor and deputy editor of The Standard, and business editor of Asia Times. His writing has also been published in the Far Eastern Economic Review, the Wall Street Journal, and the International Herald Tribune. He writes the Lai See column which focuses on the lighter side of business.
 

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.

The one problem with this approach is that it imposes a degree of financial discipline, in that if you are borrowing at, say, 5 per cent to finance a bridge, you need to ensure a realistic price is paid by the users, which might put a dampener on some of the sillier, politically driven projects like the bridge to Macau or the high-speed train. It is bizarre for the government to pay cash for infrastructure and talk about borrowing to pay health-care bills.

Indeed, the government doesn't need to look 20 years ahead. If it needs to raise money, it can do so relatively easily since it is currently more or less debt-free. To say that Hong Kong has a structural deficit is simply nonsense. It is evident from the past few budgets that it has an embarrassment of riches and the government's problem has been to try to hide the extent of the largesse. So this exercise, as others have observed, is simply scaremongering in an effort to browbeat the Legislative Council into agreeing to the introduction of a goods and service tax.

But people will not be fooled by this. Coming together with the anger and annoyance with constitutional reform, you can't help feeling that the government is setting itself up for another political crisis with this.

 

Have you got any stories that Lai See should know about? E-mail them to howard.winn@scmp.com

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This article is now closed to comments

johndoe
Let us remember the basic: the money was collected through taxes and not though donations. This is not necessarily an issue of how to spend the money, it is more importantly an issue of why the government needs all of this money. Not that there is not plenty of important items, like the environment, but many of these are policy issues rather than budget issues.
If there is too much money in the coffers and the government has no good idea of what to do with it, then give it back to the hard working residents by reducing or preferably even eliminating the income tax. That would make the economy more resilient.
Byebye
Who is responsible for the performance of the FS? Is he working with a team? Seriously is he capable o being in charge for such a large sum of HK money?
chaz_hen
ASIA'S WORLD CITY!!!
sam.gillespie.184
So get the f&k out of Hong Kong, nobody is forcing you to stay here. Go back to where you came from. Asrwhole.
amunro
We have now become an official global laughing stock. This SCMP story was featured yesterday on BBC World TV channel. The commentator wondered why it was even a story and likened it to the Y2K saga saying that at sometime in the future something undefined might happen. The fact that the scare was based on an ageing population was also a cause for laughter. Couldn't agree more with the earlier comments that with so many good fiscal brains in HK why do we suffer the duffer?
sam.gillespie.184
amunro, one way to stop being the laughing stock is for you, amuro, to leave Hong Kong, is there someone holding a gun to your head forcing you to stay and be a laughing stock. You know what, you are a fricking laughing stock because you are here needing Chinese money and griping about the good life you have here.
johndoe
Well, if BBC was such a credible source, why is the UK economy overburdened with debt? I do not think the UK media has a lot of credibility from their own back yard to go out and tell Hong Kong how to run the economy.
Dao-Phooy
Yet another useless consultation report from the Government - thank you for pointing out all the holes in it. Clearly, the Civil Service model of endless consultations and duff reports is a broken model. It's time for real changes. These so called top civil servants wouldn't last a week in the real world - it's time to shake them up. Can we please start with the removal of Article 103 of the Basic Law which guarantees continuation of the colonial style pay and benefits - it needs to be consigned to the dustbin!
rpasea
The big question is why in the world is Tsang still FS? In a town filled to the brim with financial types, Tsang, a wanna be architect, is the best we can do?
dynamco
FS - Overpaid, under braincelled ,under-performing , incompetent duffer, part of an incompetent administration , in Asia's World City.
Prepare the rotten egg armoury.

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