Good policies, not scare stories, are expected of John Tsang and company

Philip Bowring says the financial secretary's dire warning about Hong Kong's depleting reserves only masks official incompetence in tackling the city's key challenges

PUBLISHED : Sunday, 26 January, 2014, 5:00am
UPDATED : Sunday, 26 January, 2014, 5:00am

The worst senior appointment made by Chief Executive Leung Chun-ying was the retention of John Tsang Chun-wah as financial secretary. In his first five years in the job, Tsang exhibited widely inaccurate budget forecasts and, worse, presided over a series of mini-measures and one-off handouts of cash, rate rebates and the like that exacerbated the imbalances in the fiscal system.

Tsang is the epitome of the all-change-is-dangerous mentality of top bureaucrats.

Now we have him making dire warnings about welfare spending and future deficits without a shred of analysis to back them up. Some committee of tame academics has added to his roster of rubbish by suggesting that Hong Kong needs to ring-fence its capital revenue from recurrent spending.

Some acquaintance with the facts would help, Mr Tsang. For more than 30 years, almost all capital revenue has been siphoned off into the separate Capital Works Reserve Fund, introduced by the colonial government as a way of disguising surpluses. So not only has the ring fence long been in existence but it has had damaging results, thanks to the willingness of officials to agree to fund projects with no clear economic or even social return - the HK$36 billion for the Wan Chai-Central bypass, for one.

Far from needing to protect capital spending, it is now recurrent spending that needs protecting from Tsang's concrete-pouring boondoggles, most of which over-run their budgets.

Tsang's 2013-14 budget documents show just how destructive these boondoggles are. This year, spending from the Capital Works Reserve Fund is forecast to exceed revenue. And, in the following four years, it will total HK$364 billion against capital works revenue of HK$199 billion. In other words, a deficit of HK$165 billion will, all else being equal, be met by squeezing recurrent spending!

Thus, the appeals by Tsang and his tame advisers are nothing more than an attempt to squeeze spending on health and welfare to fund projects created for political reasons or to please bureaucratic or commercial interests. Of course, these capital revenue projections are probably wrong, but one can only use Tsang's figures to address Tsang's claims. And they show the dishonest intent behind the scare stories.

The distinction between capital and recurrent revenue is anyway artificial when it comes to land, of which the government has a near monopoly on new supply. If the government were serious about the need for more stable revenue than one geared to property and share prices, it would have moved to a leasing system, which would reduce capital revenue but increase recurrent. It has failed to do so, despite expert advice, partly because of the vested interests of the big corporate landholders and the Heung Yee Kuk.

The bureaucracy loves to propagate the myth that there is something virtuous about governments constantly showing surpluses. That is nonsense. It means that either there is too much taxation or too little spending on public goods and services - or both. The government has taken HK$1.4 trillion out of the economy and invested it in what? Low-yielding foreign government bonds and now, following the herd, into London real estate. The Exchange Fund's 5.4 per cent average return over 20 years is abysmal.

Meanwhile, the government glosses over its own wealth by using an accounting system which forgets the existence of assets which should be corporatised and subject to public ownership and market discipline.

The surpluses have, to a large degree, been the result of two government-backed trends which have impoverished a large sector of the community. One is land prices, which have forced an excessive amount of middle-income household incomes into mortgage payments rather than savings invested in other assets.

Reserves have also benefited from the decline of the pegged Hong Kong dollar and an inflation rate which has, for years, been above savings interest rates and often bond yields, thus eroding the savings of lower-income people. The beneficiaries of both trends: the government and corporate and other early owners of property.

The surpluses are thus not yours to protect, Mr Tsang, but yours to dispense to those who earned them. But the overpaid, overprotected, self-regarding elite has such a poor opinion of Hong Kong people that they believe they cannot be trusted to invest on their own behalf but instead must come begging to the bureaucracy for occasional handouts, reluctantly given.

Of course Hong Kong does, like many economies, face ageing's demands on health and pension systems. But these need to addressed rationally and with fundamental changes in fiscal policy and attitudes.

For instance, the government has yet to acknowledge its own contribution to Hong Kong's world-record low fertility rate - housing costs and poor job protection and care facilities for young mothers; or the impact of its own ridiculously low retirement age on keeping the elderly self-sufficient; or the high costs and low esteem of the Mandatory Provident Fund. In short, there is no policy, fiscal or social, just stupid scare stories from underchallenged officials.

Philip Bowring is a Hong Kong-based journalist and commentator