Hong Kong and Singapore’s tale of budgeting for senior moments
Andrew Sheng says demographics underlie the challenges of matching needs with revenue
In the past 10 days, both Singapore and Hong Kong have announced their budgets for the 2014-2015 financial year.
The theme of the Singapore budget was "Opportunities for the Future, Assurance for our Seniors". The Hong Kong Budget speech by John Tsang Chun-wah had no such catchphrase, but his press releases emphasised the need for fiscal planning and aim to strengthen the city's competitiveness.
On the other hand, in welcoming the budget, Chief Executive Leung Chun-ying stressed the need to "alleviate poverty, support the disadvantaged, nurture the young and enhance the quality of public health care services".
Both the Singapore and Hong Kong budgets targeted surpluses for the coming fiscal year. In 2013-2014, Hong Kong ran a surplus of HK$12 billion, (whereas Singapore had a surplus of S$3.9 billion (HK$23.9 billion). Both budgets spent considerable effort on trying to raise growth by stimulating innovation, improving productivity and encouraging small and medium-sized enterprises and start-ups.
But underlying any debate about productivity and growth is the structural demographic problem of the size of the labour force and an ageing population.
Because Hong Kong does not allow cheap labour imports, other than foreign household help, it has a more stable population than Singapore. But it also has a more serious ageing problem. Already, almost one million citizens are aged over 65. By 2041, one in three Hongkongers will be over 65.
In contrast, Singapore has been able to increase its non-resident labour force to 1.55 million, or 28.7 per cent of the population of about 5.4 million. Singapore was able to take in such foreign labour because it was critical for competitiveness, plus it could accommodate the larger labour force's housing needs.
The proportion of people over the age of 55 in Singapore is lower than in Hong Kong, at 23.6 per cent, but there are already some 450,000 who make up its pioneer generation (those over 65). The Singapore budget singled out special benefits to these pioneers because these are the people who helped create Singapore's success after nationhood in 1965.
Singapore tackles its competitiveness question through increasing land and its labour pool and by using technology and foreign capital to boost productivity.
Neither Hong Kong nor Singapore lack capital and the ability to import know-how, but Hong Kong has been slow to increase labour and available land, a constraint that is more political than technical.
Hong Kong rightly justifies its reputation as one of the most competitive and freest markets in the world, but its high cost of land is increasingly a barrier to entry.
With Hong Kong located in the fastest-growing region (still) in the world, there is no reason why it cannot aspire to grow at about 5 per cent per annum, allowing that mainland China is growing by around 7.5 per cent per annum and the countries that are members of the Association of Southeast Asian Nations are growing at a minimum of 5 per cent per annum.
One of the innovative ideas in the Hong Kong budget is the "future fund". This is a no-brainer. With total fiscal reserves of HK$745 billion, the investment income (based on that 2014-15 estimate of HK$27 billion, disclosed in the budget) works out at 3.6 per cent per year, lower than the 4.6 per cent inflation rate. Hence, a long-term fund to get better returns on scarce savings makes sense. Singapore already has Temasek and GIC for that purpose.
The Hong Kong budget rightly identifies the threat of a structural deficit. With no change in spending on health, welfare and education, a structural deficit would emerge in 15 years; if spending increases, the deficit could appear in seven years. Actually, as any accountant will tell you, the government budget is still reported on a cash flow basis, not an accrual basis. If you read the fine print in the appendices and include the unfunded pension fund liabilities of civil servants, untaken leave and government bonds and notes, you will see that total unfunded liabilities, at HK$751 billion at the end of March 2013, are even higher than the projected fiscal reserves for March 2014.
The government should do a medium-term projection of how the balance sheet would look, including the pension right commitments, the potential health care and old-age services in an ageing environment. My senior moment tells me that the numbers will not look as rosy as the budget has presented.
The Hong Kong financial secretary should be congratulated for presenting a responsible budget, carefully balancing the need for welfare spending while sticking to prudent fiscal books as required under the Basic Law.
But there are many hard choices to be made in this competitive world and the citizens will have to be advised how tough some of these choices are, and what the right options are to take.
Andrew Sheng is president of the Fung Global Institute