• Fri
  • Aug 29, 2014
  • Updated: 12:18pm
PUBLISHED : Sunday, 09 March, 2014, 4:02am
UPDATED : Sunday, 09 March, 2014, 4:02am

Another deficit of clear thinking among Hong Kong's fiscal planners

Philip Bowring is appalled by the report on fiscal planning that seeks to preserve the status quo, to protect mega infrastructure spending, yet utterly fails to address our critical challenges

BIO

Philip Bowring has been based in Asia for 39 years writing on regional financial and political issues. He has been a columnist for the South China Morning Post since the mid-1990s and for the International Herald Tribune from 1992 to 2011. He also contributes regularly to the Wall Street Journal, www.asiasentinel.com, a website of which he is a founder, and elsewhere. Prior to 1992 he was with the weekly Far Eastern Economic Review, latterly as editor.
 

In 40 years of covering Hong Kong budgets and fiscal issues, I have never seen a document as misleading and contentious as the report of the Working Group on Long Term Fiscal Planning. It is a crude attack on health and welfare spending in order to find money for already bloated infrastructure spending.

To add insult to injury, the group is mainly comprised of officials and academics enjoying huge health and pension featherbeds at public expense.

The starting point for the report is true enough - that Hong Kong has an ageing population and one that is growing only slowly. This has been known long enough. The government has been aware that years of having a very low fertility rate has been a major factor in ageing - but has done nothing to address it.

The document goes on to present a scare story of ever rising deficits caused by a stagnating workforce and rising demands for health and welfare spending. Yet it accompanies this with projections for sustained increases in capital works. The non sequitur is backed by references to guidelines laid down by Philip Haddon-Cave in the 1970s - that public spending should be no more than 20 per cent of gross domestic product, and that there should be a significant surplus on the operating budget to provide funds for capital works (in addition to capital works paid by capital revenue).

Haddon-Cave, a realist, not an ideologue, would be appalled by official inability to see what has changed. Then, Hong Kong had a young, fast-growing workforce and the need for more infrastructure to support an economy based on manufacturing and merchandise trade. Today, we have no manufacturing, a port which is past its peak, and financial and other high-value services whose input needs are not primarily related to concrete.

Determination to rig the fiscal system to support mega infrastructure projects is further underlined by the report's curt dismissal of the widely supported proposal to shift part of land revenues from capital to recurrent income. This would cause short-term reductions in revenue but long-term gains in stability. But it would not suit the vested interests who are dedicated to wasteful spending on roads and bridges as well as businesses whose profits rely on land price inflation.

Notions of economic return on capital are now alien to the bureaucracy.

The document also perpetuates a convenient official lie: that the HK$750 billion surplus of the Monetary Authority is not part of the reserves. It ignores these assets completely, suggesting the group is so ignorant of exchange rate mechanisms that it believes these are needed to defend a currency peg.

The fact is that the HK$1.5 trillion total reserves belong to the citizens and were accumulated by the government at their expense. There is a moral obligation to return some of these savings to those who earned them as they reach an age when they can no longer work. Pensions are not just a right of civil servants.

Yet, while drawing almost straight-line charts of health and welfare costs, the report takes no account of the future role of the Mandatory Provident Fund - a scheme that is inadequate and expensive but nonetheless will have an impact on retirement incomes in the future.

Nor does the report take proper account of the potential for increased workforce participation. This is not surprising, given that government bodies still adhere to retirement at 60. But if the group cared to look at official data, it would have seen that in the past four years, GDP rises have owed much to the rise in participation by those over 45 - from 64.7 per cent to 68 per cent for those 45-64; and from 5.7 per cent to 8.1 per cent for those over 65. This trend is sure to continue as most people need to work after 60.

There is nothing sacrosanct about limiting public expenditure to 20 per cent of GDP. And even assuming there is abundant reason to privatise some public trading activities and impose genuine user-pays charges on others, a government incapable of adjusting tunnel tolls for car owners but that begrudges spending on the old and infirm is contemptible.

Of course, Hong Kong must adjust to changing demography as well as a changing economic base. But that demands that it focuses on providing health, education, security and similar services and transfer payments to the old and sick - and assigns much of the capital works to entities required to be self-financing and thus subject to the discipline of the market. The government owns far too many assets already.

For sure, the tax system is too narrowly based. But this report suggests nothing major to change that.

The report is basically a public relations exercise to protect the status quo. That is not surprising as it was written by officials with inputs from academic economists and accountants (specialists in tax avoidance). Where were the entrepreneurs, the demographers, the fiscal policy experts, the investment bankers, let alone the representatives of low-income groups?

John Tsang Chun-wah has shown yet again he is incapable of new thinking, to advance policies that accept welfare responsibilities ungrudgingly and improve the currently abysmal returns on public investment.

Philip Bowring is a Hong Kong-based journalist and commentator

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This article is now closed to comments

rpasea
Excellent piece. I am as frustrated reading about the i d i o t s in govt. as Mr. Bowring. Financial "experts" claiming HK with it's obscene resources is on the brink of becoming another Greece. Others with vested interests claiming the best way to deal with far too many tourists clogging our streets is to build more tourist attractions. Our Environment Dept pushing ahead with a mega incinerator on a pristine island using sunset technology instead of a more comprehensive and appropriate waste management strategy. Oh, and the mega incinerator is touted as a "tourist attraction". And let's not forget the long term agenda of developing our country parks. After all, as one member of the Destroy Lantau Planning Committee stated: we can go to China if we want to visit the countryside.
.
What is driving CY and his principal officials into this collective madness? Is it something in the water at Tamar?? When will Beijing step in and make these people accountable? They certainly aren't accountable to the people of HK.
whoaman
LOL...it would've been the water not at Tamar (too recent) but at the old government buildings. Rust in the pipes = rust in the minds of all these jokers like Mr. middle class Tsang
captam
@"John Tsang Chun-wah has shown yet again he is incapable of new thinking,!"
If the truth be told, I don't think he ever had any independent "thinking" so far as past budget preparations were concerned. Donald "Bowtie" Tsang never gave up his old hat when he was promoted and he continued to direct and closely oversee his subordinate's work,
We are now suffering the results of years of economic mismanagement by, basically, one man.
amunro
Well said! Our FS is single handedly holding HK back. Innovation implies looking outwards, not inwards. 'Consultants' as we know will say what they are told to say.
chuchu59
Bravo!
impala
Great piece, summing up brilliantly all that is so horribly wrong with our government's financial management.
keresearch
Public returns on investment are not abysmal - they are zero. The Legco papers all talk about EBITDA as the return measure on operating metrics. This entirely removes return on investment and capital costs
keresearch
Haddon Cave's comments about operating income are irrelevant as land revenue was set aside into the newly established capital works reserve fund by Bembridge in the early 1980's - a few years after this quote was made
artdig18
It's time for spring cleaning ... and CY should start with the FS job.
DinGao
I think they have been told to spend our money on anything we like provided that they are not lumbered with a post 2047 pension bill or be forced to cancel any pre 2047 state retirement pension plans.
keresearch
we are lumbered by a post 2047 pension bill...from the civil servants
whoaman
Yet another typical government fiscal study with a foregone conclusion. These are 'rubber stamp' groups, and with the grossly incompetent FS in charge, a typical hypocritical waste of time and taxpayers money.
Hong Kong is headed steadily downhill, for where you do not make priority for the 'regular' people, infrastructure is of no use in the long run. These things must go hand in hand, with much more emphasis on improving people's livelihood and quality of life. Instead, these jokers are all about protecting the status quo, which in real terms is protecting THEIR way of life.
johnyuan
The biased unprofessionalism conduct displayed by John Tsang in his supervision of the long tern economic study group for Hong Kong, his uttering before and after his last Budget Speech only contributed a cottage industry with comments and posting in SCMP all indulged in the decry of his inability as a FS. It is conceivable that the roll of FS has deteriorated to become a watchdog in the government for the privileged of which LKS typified (the recent FS rebuttal against LKS is not credible to me).
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Hong Kong is not ruled by official alone. It is ruled by business of men who only concern of businesses which they are in. For them, CY Leung as a Chief Executive, like Tung is an inconvenience to do business as usual. I fear for CY Leung’s that he would meet Tung’s fate with LKS again making an attack.
.
Perhaps the Central Government learned a lesson that ousting Tung was a grave mistake since it only invited a populist afterwards for the privileged to run Hong Kong which delayed and expanded social problems.
.
My advice to CY Leung is that if you can’t get rid of John Tsang as your FS then marginalize him and stop him from undermining your policies. Dismiss that long term report. I have confidence that people in Hong Kong and the Central Government are behind you if you do that.
John Adams
Well spoken Sir !
I agree with you all the way, as also do I agree with Philip Bowring.
.
When Mr Bowring feels he has to use words like "appalled" I get seriously worried that our mentally-challenged FS has been given free rein far too long by CY.
.
Bottom line, John Tsang has become a severe liability both to CY's government and to HK's economy.
chuchu59
Free rein not only given by CY but also by bowtie. That led Monsieur Whiskers to be so arrogant.
johnyuan
My posting from elsewhere:
.
Here are three reasons render the work by the working group not credible:
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1. FS picked I believe without public’s participation the members of the study group.
2. The group may not work with data that really counts. They are outsiders and not government officials who hold the data. Only officials have all the data.
3. The study was concluded after a short few months of study yet the result projects into a long 30 years with a thrilling prediction what to come. Yet FS dropped hints way ahead of the final report even before his Budget Speech.
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All indications show that the forecasts from the working group yielded pre-determined agenda requirement by FS. His hidden interests are jarringly absent in the forecasts. Public construction cost as well as officials’ pension payment must continue but the publicly announced social welfare proposal must be curtailed.
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I will not rule out, despite his recent rebuttal against LKS’s warnings, our FS is working tirelessly and continuosly since Donald Tsang's years in the interest of the tycoons and the government civil servants’ pension fund.
..
 
 
 
 
 

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