Hong Kong Budget 2015-2016

Hong Kong launches rainy-day fund despite prediction of HK$950b reserves by 2020

Despite massive reserves, finance chief launches a fund to prepare for a deficit in 10 years' time and raises prospect of a tax on goods and services

PUBLISHED : Thursday, 26 February, 2015, 5:28am
UPDATED : Thursday, 26 February, 2015, 9:55am

Hong Kong is to set up a savings fund for a rainy day, the finance secretary announced yesterday - despite the fact the city's massive fiscal reserves are predicted to reach HK$950 billion in five years.

John Tsang Chun-wah also revived the possibility of broadening the tax base in his budget speech yesterday when he raised the prospect of introducing a goods and services tax. A similar proposal made by Tsang's predecessor Henry Tang Ying-yen in 2006 was shelved after a public outcry.

Tsang said the idea would be explored "in due course" to stabilise government revenue and create room for direct tax concessions.

A government spokesman said the administration would not rule out any options for broadening the tax base, including a goods and services tax. "We have been doing preparatory work but we need to consider whether a proposal is politically acceptable," the spokesman said, adding that it was too early to say when measures to broaden the tax base would be introduced.

According to the government's medium-range forecast, the fiscal reserves by the end of the financial year 2019-20 will reach HK$948.8 billion, representing 33.6 per cent of GDP and enough to cover 22 months of the government's projected expenditure. The figure represents a 16 per cent increase from the present level of HK$819.6 billion, the equivalent of 25 months of government expenditure at the current rate.

"Despite the mid-term budget surpluses, a structural deficit is expected to emerge in 10 years," said Tsang. "I'm very concerned. We need to get prepared for it. [Setting up the fund] should be seen as an opportunity to save money or an investment strategy … the money will be used to cope with financial problems."

The concept of a "future fund" was floated by Tsang's working group on long-term fiscal planning last year. It could be made up of HK$220 billion from the existing land fund and one-third of the government's annual budget surplus. Assuming an annual investment return of 5 per cent, the fund would grow to HK$510 billion in 10 years.

Earlier this year, the group handed Tsang a second report on the fund along with measures to better manage government assets. It will be released on Monday.

Some of the advisers had said earlier that the fund was aimed at generating high returns that could be spent on policies to help cope with the city's ageing population, including pensions.

However, Tsang gave no such specific purpose for the fund yesterday, saying only that the Financial Services and Treasury Bureau and the Hong Kong Monetary Authority would hammer out the specific management and investment mechanisms.

He added that the Exchange Fund, which affects the value of the Hong Kong dollar and where the government surplus is held, had a long-term investment portfolio that yields a double-digit annualised return.

The Long-Term Growth Portfolio, set up by the authority in 2008, invests in private equity and property. As of the end of 2014, its value stood at HK$115.2 billion - accounting for 3.6 per cent of the Exchange Fund - with an annualised return rate of 13.5 per cent.

The Post reported earlier that Tsang's working group had proposed that money from the future fund could be withdrawn only when the city's reserves dropped to a level that threatened the government's financial sustainability.

The group warned last year that the city could face a structural deficit by 2022-23 as the number of people retiring grew and the workforce shrunk.

Tsang also announced in his speech that in the two fiscal years from April 2016 to the end of March 2018 he would be handing over the HK$50 billion that Chief Executive Leung Chun-ying had called for in his policy address last month to set up a retirement protection scheme.

The public consultation on how the scheme is to be set up will not be launched until later this year.