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  • Aug 28, 2014
  • Updated: 6:10am
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FINANCE

Hong Kong could face Greek-style financial crisis, warn government advisers

Government could face massive deficit in coming years if spending continues to soar amid impact of ageing population

PUBLISHED : Tuesday, 04 March, 2014, 12:33am
UPDATED : Tuesday, 04 March, 2014, 7:26am
 

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Hong Kong could be as heavily indebted as Greece - facing a structural deficit of HK$1.54 trillion by 2041 - if the city's spending grows at the current pace and nothing is done to mitigate the impact of an ageing population, the government's fiscal advisers warned yesterday.

The deficit, accounting for almost 22 per cent of the nominal gross domestic product (not adjusted for inflation), would be even higher than the 10 per cent disclosed by Greek officials when they came clean about the true state of their country's public finances in 2010.

By that time, the advisers said, Hong Kong would have had to borrow HK$10.96 trillion to cover the sustained deficits experienced from 2021 onwards - about 15 times the existing reserves of some HK$750 billion.

The projections, released by the government-appointed working group on long-term fiscal planning, do not take into account the impact of the chief executive's target announced last year to build 200,000 public rental flats in the next decade and 5,000 subsidised flats a year.

The aggressive public housing programme would speed up the emergence of a structural deficit and depletion of fiscal reserves by three years, the group warned.

After the release of the report, Financial Secretary John Tsang Chun-wah said the city's finances were still sound but caution was needed.

"I do not think that the working group is pessimistic on the future of Hong Kong," he said.

"Our public finances are still in good shape in the short to medium term, but it does not mean our economy and fiscal position will remain healthy forever."

Tsang appointed economic analysts, academics and officials from his treasury unit in March last year to study the impact of the ageing population on public finances, which are subject to land revenue fluctuations and rely increasingly on direct taxes on salary and profits.

In 13 of 16 projected scenarios, based on various GDP growth rates and spending rates in education, health care and welfare that account for some 60 per cent of the government's recurrent expenditure, structural deficits will emerge in 10 years.

But having rung the alarm, the working group avoided controversial ideas including higher rates and introduction of a goods and services tax. Instead, they suggested the government adopt a "multi-pronged" approach.

This included containing public expenses at 20 per cent of GDP and screening policies costing more than HK$100 million a year to see if they could be sustained without threatening the government's solvency.

The report also suggested raising fees for public services, banning the use of one-off land revenues to finance recurrent expenses and setting up a future fund - combining the existing land fund of some HK$220 billion with one-third of future budget surpluses - to save and invest for future emergencies.

"We didn't rule out new taxes. The public will be more receptive to new taxes only when we better control our spending," said working group chairwoman Elizabeth Tse Man-yee.

Terence Chong Tai-leung, professor of economics at the Chinese University, said the government needed indirect taxes, like a gambling tax, to widen the scope of revenue.

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38

This article is now closed to comments

shayliu
If this guy can't even do a propper one year budget projection. What makes him believe that he or the consunltants he hired can do a propper 25 projection. In the financial industry it is nearly impossible to do a reliable 3 years projection where I work.. Lets say 25 years..
amunro
The greek crisis was brought on by financial incompetence, lack of foresight and a bloated civil service - in which case there is a perfect match with hk and the projection of an upcoming crisis is probably correct!
John Adams
Can anyone believe ANYTHING John Tsang and his team say these days about financial matters ?.
.
The duffer cannot even get his budget forecasts right from year to year by a factor of 100% !
.
So applying the same logic to his 2041 forecast by his long-term forecasting team / headed by the not-so-eminent "John Tsang Esq / top mathematically in-accurate accountant of the year 2013/2012/2011/2010/ etc " we could either be in debt by 2041 to the tune of HK$1.5 trillion - or in surplus to the tune of HK$1.5 trillion (as we are at present) .
.
And by the way, Mr Tsang, for Heaven's sake use accrual accounting in the government, as columnists like Jake and Tom have been begging for eons !
.
Seriously ! CY needs to lay off this utter duffer and appoint a suitable FS who will give us the facts as they really are.
.
If we do need to raise taxes then so be it , but let's do so based on the advice of a well- trained / accountancy-based FS, not a total duffer . PLEASE !
joyalsofi
This is simply fear mongering in order to prevent using taxpayers' money for people instead of enriching the entrenched monied interests including the property developers. A tiny financial transactions tax, similar to the one enacted last year in France would raise considerable revenue which could then be used to implement a universal pension scheme and increase spending on public health services. The government could encourage Increased opportunities for seniors to contribute to society through establishing volunteering projects of various types.
boondeiyan
The one sure thing about the long-term projections is that they will be wrong. Meanwhile, extrapolating expenditure growth as it's done in this report is merely an exercise in reductio ad absurdum. The government would be quickly become unable to finance even modest recurring deficits under the existing currency board. Adverse debt dynamics will ensure that none of the 10+% of GDP deficit projections are ever realized. Using such fantasy scenarios as the basis for policy arguments would be the height of disingenuousness.
anthonygmail
John thinks the HK population is as stupid as he is (like he thinks our middle class is similar to him).
.
Key assumption : if spending increases at CURRENT pace from 2013 to 2041.
.
Who are the idiots within this expert group?
.
Predictions and forecasts are easily manipulated to achieve results that the preparer wants to see. A percent higher here, a percent lower there...and viola...a 1.5 trillion surplus!
@madams
Tycoons and successful HK business owners in general are paid the same salary as a high school principal or a mid level employee at a bank or trading company. Then they take millions tax-free as dividends. At the same time they buy luxury cars, boats, planes, shopping, and even flats and put them on their company's books, deducting living expenses as operating expenses, reducing their business taxes, their living expenses, and increasing their dividends. Effectively they are having all HK tax payers subsidizing their lifestyles. In a society where wealth is highly concentrated in the hands of a few, you can help solve a lot of long term social problems by taxing people more fairly, while closing abusive tax dodges.
Dai Muff
Some of us would be happy to keep on working, but the civil service leads our private employers in kicking us out at 60. Not even making it optional. Really, it's stupid to do this and keep complaining when the elderly need support.
captam
With an aging population we don't need to waste money on giant infrastructure projects such as the airport's third runway which, according to the A.A is required "to create jobs".
THC
Good leaders must be good problem solvers not alarmist and pointing out problems as if it is the public's responsibilities to solve them. There is no good economist and entrepreneur in the government now. God bless HK.

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