Filibustering lawmakers say fiscal crisis is government bogeyman

Filibustering lawmakers behind a budget impasse say city's fiscal crisis is a government bogeyman

PUBLISHED : Monday, 19 May, 2014, 5:07am
UPDATED : Monday, 19 May, 2014, 6:22am

Hong Kong is on the brink of paralysis as the government struggles to get its budget passed by lawmakers this month.

Government operations and services will be suspended if a filibuster is prolonged by lawmakers and new funding fails to reach departments.

The origin of the filibustering is in Financial Secretary John Tsang Chun-wah's warning in his budget speech in February that the city should address the impact of the growing number of elderly by cutting growth in expenditure, particularly sweeteners to please the public.

His warning was followed by the release of a working group's 252-page report on fiscal projections in March.

The report said Hong Kong could become as heavily indebted as Greece if nothing was done to address the long-term fiscal deficits expected to emerge this decade.

But the warnings failed to impress some lawmakers and commentators, who accuse the government - with reserves of HK$734 billion - of crying wolf.

They say the government predictions are unconvincing, and that forecasting future deficits is an uncertain business, given the city's constantly evolving budget situation. They are urging top officials to spend more by introducing a universal retirement protection scheme.

In 2000, former treasury secretary Denise Yue Chung-yee led a task force examining the city's fiscal health. She concluded in 2002 that Hong Kong was facing a structural deficit and that government revenue would not be able to cover expenditure. But she was proven wrong, with the deficits only lasting from 2000 to 2003. Surpluses started reappearing in 2004.

But the situation is changing again, some argue. The city's workforce is expected to shrink by 2018, they say, and spending on welfare benefits and health care is likely to surge.

How big a slice of the financial pie will be needed for services for the elderly remains the most daunting question.

Official statistics show the number of Hong Kong residents aged 65 or above is projected to grow by 161 per cent, from 980,000 in 2012 to 2.56 million in 2041. Those aged 85 or above will increase by 230 per cent by 2041.

Mak Hon-Kai, 74, echoes the sentiments of many seniors when he says that universal retirement protection is necessary for a world-class city like Hong Kong. "At least the government should float proposals for public discussion. People have hoped to see the launch of such a protection scheme for more than 20 years," he said.

Mak, who retired from teaching 17 years ago, added: "Seniors nowadays have little savings. Much of the money they earned went towards servicing their mortgages."

According to the government report, the growth in government spending on seniors and most other segments of the population rose at a faster pace than growth in revenue.

The growth in government expenditure since the city's return to Beijing's rule in 1997 reached 94 per cent by last year, while revenue increased by only 57 per cent over the same period.

At the same time, a large portion of Hong Kong's revenue comes from a small group of companies and taxpayers.

In the fiscal year from 2011 to 2012, 64 per cent of the profits tax came from fewer than 1 per cent of the city's 94,900 registered companies.

During the same period, 82 per cent of salary tax came from the top 200,000 taxpayers, up from 71 per cent in 1997 to 1998, according to government data. The two taxes account for more than a third of the city's revenue.

The city's reliance on revenue from land sales has also been a source of worry for some. The most land revenue recorded in one year since the handover - HK$84.6 billion in 2011 to 2012 - is more than 15 times the HK$5.4 billion that went into government coffers in the worst year, 2003 to 2004.

But Dr Brian Fong Chi-hang of the think tank SynergyNet, who has been monitoring the city's finances, said the government was exaggerating when it spoke of a financial crisis.

For example, the report warned of outstanding pension liabilities for civil servants that amount to HK$700 billion. But Fong said this was misleading, as the pensions would not be paid all at once.

"It's like saying a flat owner cannot spend more because he is facing a mortgage of HK$7 million. In fact, the mortgage only requires the owner to pay a small sum each month," he said.

"By the same token, civil servants won't all retire at the same time."

He said it was also unconvincing for the government to advocate spending less when it sits on huge reserves, made up of HK$734 billion in fiscal reserves and HK$642 billion accumulated by the Exchange Fund.

While the government argues that spending the accumulated surplus would weaken public confidence in the city's financial stability, the Monetary Authority says the money is not untouchable and can be spent.

Fong urged the government to be clear about how much of the reserves could be used for public purposes before going ahead with the working group's proposal to set up another money-saving mechanism - namely the future fund.

Under that proposal, the future fund - which combines the existing land fund of some HK$220 billion with one-third of future budget surpluses - will be set up for emergencies.

"The government will have to convince lawmakers why we need to set up another fund when we have so much money," Fong said.

Instead of tightening the purse strings, fund manager Marko Ho Wai-lap said the government could have budgeted additional spending of about HK$60 billion this year instead of the HK$24.9 billion announced in the chief executive's policy address.

Ho's estimate considered the average amount of revenue that had been collected from three sources - land sales, stamp duties and investments - in the past seven years.

"I'm not a supporter of [Chief Executive] Leung [Chun-ying]. Hong Kong shouldn't be too conservative about our fiscal situation," Ho said.

He added that further integration with the mainland had also benefited the city's economy, through increased cross-border investment in flats and companies in the city. Ho said they were a big part of the reason revenue from profits tax had risen 176 per cent over the past 10 years.

Fong said the working group should have considered new policies like encouraging more births, importing labour and controlling costs.

"Why would they assume [in all scenarios] no policy to tackle demographic changes, when there is another government committee studying such solutions?" he said, referring to the steering committee on population policy, which is slated to make recommendations later this year.

The government study projected 16 fiscal scenarios by 2041. But none of them took into account policies that might be devised for tackling the problem of an ageing society.

Paul Yip Siu-fai, a demographic specialist on the steering committee, shares Fong's views. "Instead of focusing on how to save money, the report should stress the government's investments in health and education," he said.

He criticised the government for not committing to family-friendly policies: "Even a little tax exemption would be a gesture by the government to show its appreciation of parents. It won't [cost] a lot of money."

Yip said that only long-term investments could mitigate the effects of an ageing society, adding that the failure to mention population policy in the report gave the public the impression that the government lacked a coordinated policy. Yip said it was stating the obvious to say the city might face a fiscal crisis without careful planning. "With less money and more spending, one can go bankrupt," he said. "The real issue is how we can earn more money."

According to the calculations of fiscal advisers in the working group, if the city continues to spend at the current rate - with an annual increase of 3.4 per cent in education, social welfare and health care - a structural deficit would emerge by 2021.

A structural deficit is the portion of a budget deficit that is not the result of changes in the economic cycle, and will exist even when the economy is at the peak of the cycle.

If the deficit persists, the reserves would then dry up by 2027, the report says. In this scenario, the city would face a structural deficit of HK$1.54 trillion by 2041 - equivalent to 22 per cent of nominal gross domestic product. This is worse than the deficit of 10 per cent of GDP that was disclosed by Greek officials in 2010.

Working group member and tax expert Marcellus Wong Yui-keung said politics factored into their "calculations".

"We have to maintain neutrality. Considering new but controversial policies, like importing labour, could give the public the impression the government will definitely deliver them," he said.

Wong noted that the last administration took "drastic measures" to prevent the emergence of a structural deficit.

Fiscal measures adopted by former financial secretary Antony Leung Kam-chung included cutting the number of civil servants by 10 per cent to 160,000 from 2003 to 2007, partly through the introduction of a voluntary retirement scheme, and cutting their salaries by 4.75 per cent in 2002 and 3 per cent in 2004 and 2005.

But the number of civil servants is on the rise again, with 170,257 employed as of last December.

Wong said the working group had discussed a stability fund concept proposed by Ho, and the conclusion was that it wouldn't add new revenues: "The group briefly discussed the idea. It won't help much. It's just a play with government money."

Another working group member, Professor Liu Pak-wai, an economist who has served as the pro-vice-chancellor of Chinese University, said containing public expenditure was necessary despite his painful experience of the last significant fiscal cuts in 2004 to 20005.

"We had to stop renewing contracts for university staff, lower staff salaries and cut expenses on equipment," he said. "I was under enormous pressure.

"But now what we are asking for is to control the growth in spending, not cutting spending," he said. "People have much higher expectations of their living quality today."

He said future infrastructure spending would need to cover more hospitals, landfills, incinerators and artificial islands for new towns.

The group predicted a large increase in spending on infrastructure due to increasing labour costs, compared to many other cities where importing labour is less controversial.

"The growth of 7.2 per cent [in infrastructure spending] actually includes inflation of 4.5 per cent. The construction costs will be pushed up by wages of construction workers," he said.

Liu hopes the study leads to the formulation of a comprehensive population policy.

He said Hong Kong was in line with the global trend, in that the older health care recipients got, the costlier their services were.

Hospital Authority figures for 2011 show that annual expenses for those aged 75 or above were more than twice the amount spent on those aged 65 to 74, due to longer stays in hospitals and more frequent admissions.

"People criticising the study have yet to fully understand the real impacts of an ageing society," Liu said.

"Containing government expenditures would be the most effective solution. But it is more political than economic."