• Fri
  • Dec 19, 2014
  • Updated: 5:18am
Monitor
PUBLISHED : Thursday, 27 February, 2014, 1:23am
UPDATED : Thursday, 27 February, 2014, 6:16pm

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

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.

tom.holland@scmp.com

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This article is now closed to comments

impala
Couldn't agree more. Invest those hundreds of billions of infrastructure dollars into some kind of General Healthcare and Old Age Fund, and any looming structural deficit will melt away.

Especially the 'Lantau Metropolis' island idea makes you think our government has gone completely looney. If our population is ageing so much, then surely we won't need that much more land in the coming decades? Or could it perhaps be for the mainland immigrants, of whom we can expect another 1 million (50k per year) in the coming 20 years?
impala
Also, another thought. Even if we were to be faced with a government deficit in 10 years... given the government's embarrassingly large reserves, how long would it take before those would be depleted? 10 years? 25 years? 100 years? Since that will really be the time period that we will have then to decide whether we have to raise taxes, make curs or do anything else.

The Chief Financial Nitwit is silent on that. Why not share those projections with us too if he is so concerned about the long term future? I wouldn't be surprised if the problem solves itself long before our reserves are anywhere near depletion. The large cohort of elderly (ageing population) that will press on our finances (worsening dependency ratio etc) won't live forever. At some point, the average age of the population and the dependency ratio will become lower again.

And either way, this whole 7~15 years down the line possible future budget deficit scaremongering is a red herring. Who knows what might happen between now and then. It is only distracting from the real issue: it is how the government spends its money and conducts its policies NOW (and in the recent past, which just makes you want to cry) that matters. We have a government that prefers to build bridges to nowhere instead go using its funds to improve the healthcare, education and housing of Hongkongers,
anthonygmail
The elderly won't live forever but our civil servants would and so they will continue to suck us dry until we are all dead.
keresearch
Excellent. A journalist who understands the accounts at last
daily
As most people would probably agree.............Tsang really is not qualified or competent enough to be the city's FS..............he just lucked out and got the job because bowtie Tsang had no one else to offer the job to at that time.
John Adams
Agreed 100% !
Being now retired I find I spend most of my time at home ( or going to the hospital )
I certainly don't want to drive to Macau or take a high-speed train to GZ
I don't even want to go and explore the new TST cultural district when it's finished .
whoaman
Yup, business as usual, with the John 'middle class' Tsang once again being TOTALLY OUT OF TOUCH with the common person in Hong Kong. Dd anyone tell him that waiving government rates benefits the landlords instead of the tenants??? Duh!!!!!!!! What a disaster this guy, totally unqualified to be FS.... but what else is new...??
rpasea
Good article as are 2 other editorials in today's paper. It is unfortunate that JT and CY don't really care what the rest of us think. The mandarins are in a world of their own and are oblivious to the reality of their (in)actions.
richardg23
Exactly, good article. Bang on the money Tom. Any chance you want to be FS next year?
pragmatist
government-imposed calamity.

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