Tsang's vision of Hong Kong's future is severely out of focus

Instead of building mega-projects that serve no purpose, the government should spend money where it is needed: education, health and welfare

PUBLISHED : Thursday, 27 February, 2014, 1:23am
UPDATED : Thursday, 27 February, 2014, 6:16pm

In his budget speech yesterday, John Tsang Chun-wah did his best to scare us.

If Hong Kong continues on its current trajectory, steadily improving education, welfare and health services, the financial secretary warned we will be plunged into "a structural deficit" in just seven years.

Even if the government were to freeze real per capita spending at present levels, then demographic trends would still push public finances into a long-term deficit within 15 years.

These ominous projections were produced by Tsang's pet "working group on long term fiscal planning".

The solution to the looming problem, Tsang said, "is that government should preserve, stabilise and broaden the revenue base".

If you are not quite sure what that means, the financial secretary made his position clear. "I am all for it," he declared. "I shall not rule out any means to increase tax revenue."

They are being built solely because officials have set aside money to spend on infrastructure

So there you have it. An ageing population means public spending must rise, so taxes will have to go up to plug the hole in the government's finances.

It's a depressing vision of the future; or rather it would be if Tsang's vision weren't quite so short-sighted.

Look carefully, and it soon becomes clear that Tsang's gloomy forecast of a looming structural deficit is the product of a deep structural flaw in his own approach to Hong Kong's public finances.

When Hong Kong had a young and fast-growing working age population, the city had a crying need for more and better physical infrastructure - roads, tunnels, underground railways - to boost productivity.

To fund all that building, the government ring-fenced its income from land sales and lease modifications and earmarked it for spending only on capital works projects.

The idea was a roaring success, and today Hong Kong's physical infrastructure is rated among the best in the world.

However, over the last 30 years our priorities have changed. All those youngsters who entered the workforce in the late 1970s and early 1980s are nearing retirement, and our working age population is set to decline over the coming years.

That means we no longer have such a burning need for new physical infrastructure. We will, however, have to spend a lot more on health care and welfare for the elderly.

Yet the government continues to segregate its land revenues and to insist they can only be used for infrastructure development.

In the current fiscal year capital revenues - consisting overwhelmingly of land premium payments - are expected to reach HK$86 billion, or 20 per cent of total government revenue.

That money has to be spent, so next year Tsang has budgeted infrastructure spending of a massive HK$78 billion.

That makes infrastructure the largest single item of government spending, outweighing either education, health or welfare; the three areas of expenditure Tsang says he is so concerned about.

Hong Kong needs some new infrastructure spending of course. Extending the MTR rail network is a reasonable idea, and major upgrades to our water supply system are long overdue.

But there is no need for the sort of vastly expensive "mega-projects" Tsang was gushing over yesterday. The high-speed rail link to Shenzhen, the bridge to Zhuhai, and Tsang's bizarre proposal to construct "an artificial island … to develop a new core commercial district" are all unnecessary.

They are being built solely because officials have set aside money to spend on infrastructure. And because they have set aside the money, the infrastructure must be built.

Tsang's working group member Liu Pak-wai illustrated this tail-chasing approach to budgeting earlier this month, when he ruled out any notion of diverting land premium income to meet welfare needs.

"Land premium is too volatile to be reliable revenue to fund recurrent expenditure on the long term," he argued. "More significantly … after paying for the capital works expenditure there is little surplus of the land premium left for other use."

This is a wilfully myopic attitude. Land revenues are only volatile because the government insists on collecting payments as lump sums upfront, rather than as regular income streams over the whole lifespan of leases.

And there is little surplus only because the government keeps lavishing tens of billions of Hong Kong dollars on mega projects that serve no purpose except to spend its land revenues.

If our officials were more clear-sighted, they would abolish their artificial and outdated distinction between recurrent and capital income, collect their land revenues as regular and predictable cash-flow streams, and spend the money where it is needed: on education, health and welfare.

Instead, as Tsang made clear in yesterday's budget, the government is going to go on wasting billions on unnecessary infrastructure, while raising new taxes to meet Hong Kong's real spending needs on health care and welfare for the elderly.