• Fri
  • Aug 22, 2014
  • Updated: 4:12am
CommentInsight & Opinion

Now all John Tsang has to do is come up with a long-term fiscal plan

PUBLISHED : Thursday, 27 February, 2014, 4:06am
UPDATED : Thursday, 27 February, 2014, 4:06am

The public could be excused for feeling unimpressed by yesterday's budget. With fewer sweeteners and a less rosy forecast, the blueprint failed to instil much feel-good sentiment. That the speech's message was heavily leaked also made it one of the least exciting in years. That, however, does not mean it is irrelevant to the public. In a step in the right direction, Financial Secretary John Tsang Chun-wah posed a challenge to the people - how to maintain fiscal discipline in the long run.

It is true that the budget does not taste as sweet as in previous years. Waivers of public housing rents and property rates have been halved, while there will be no more electricity subsidy. It would not be surprising if the middle class and the underprivileged feel left out, while the public coffers continue to be flooded with piles of cash.

There are initiatives to enhance competitiveness and welfare services, though. These include setting aside land for hotels and housing, developing information technology and boosting job retraining. Tsang rightly said manpower, land supply and an ageing population are the major constraints to future development. Whether the measures can make up for the lack of immediate relief for the masses remains to be seen.

Tsang could have continued the largesse to win applause. But he took the unpopular course. In the worst-case scenario of a government working group, a structural deficit may occur within seven years. Even if no new services are provided, such a deficit would surface within 15 years. The forecasts are hardly reassuring. If government spending growth outpaces economic and revenue growth, a deficit is bound to emerge.

The warning that our public finances are not as healthy as appears is a timely one. Under the Basic Law, government spending should be kept within the limits of revenues and not run into deficit. As expected, Tsang denied the problem stemmed from reckless public spending over the years. But identifying the symptoms is just part of the task. It does not help when the diagnosis does not come with a prescription. It confuses things further when there appears to be no clear plan to curb public spending or raise revenues in the long run.

Tsang ended his speech with a quote from philosopher Edmund Burke: "Society is a partnership." We trust he is prepared to work with the community to meet the challenges ahead. The public awaits his strategies to ensure today's spending will not become a burden for future generations.


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Indeed a prerequisite for China to develop her currency into an international reserve currency is that China needs to have a well developed debt market, like America’s!
That said, Hong Kong’s Basic Law won't be easily changed.
So, facing greater growth rate of government expenditure relative to GDP, our government has to be a cost minimizer, which is not easy, especially considering our getting-old population.
The only way out is that she has to be a revenue maximizer, subject to constraints.
The importance of revenue extraction can’t be stressed more.
Edmund Burke (1790) succinctly asserted over two centuries ago: "The revenue of the state is the state. In effect all depends upon it, whether for support or for reformation."
(Reflections on the French Revolution.)
Of course at the end of the day the Hong Kong people and their future generation have to foot the bill.
So, expect to pay more to the government in the coming years.
'Under the Basic Law, government spending should be kept within the limits of revenues and not run into deficit.'
I think this stipulation of the Basic Law doesn't make much sense, economically speaking.
Don't believe me? Read Chapter Thirteen of the book "The Little Book of Market Myths."
The issue isn't debt per se, but whether that debt is affordable, either in Hong Kong or in China, or elsewhere.
Debt, used wisely, is a right and normal part of a healthy economy.
Avoiding all debt wouldn't improve anything.
There was a point in time when America had no debt --- after Andrew Jackson paid off all of America's debt in 1835 with proceeds from Western land sales.
Which effectively led to the Panic of 1837 and the Depression of 1837 to 1843 --- one of the three worst recessions in America's history (the other two started in 1873 and 1929).
Also, during the 1998-2003 adjustment period, Hong Kong also had no or very little debt, but, thanks to the linked exchange rate mechanism, she still had to undergo painful internal devaluation to regain her external competitiveness. (Now you know why Hong Kong has world-class competitiveness in recent years --- not because of CEPA and the Chinese tourists!)


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