Hong Kong leader backs proposal to dump ‘miserly’ fiscal philosophy
Carrie Lam hails Joseph Yam’s idea that deficit spending should be adopted if needed to spur economy; she also says Basic Law provision should not be viewed too rigidly
In what may turn out to be a major policy shift, Hong Kong’s leader has publicly backed an assertion by the city’s former central banker that the “miserly” fiscal philosophy of the past decade should be abandoned even if increased spending leads to budget deficits.
Chief Executive Carrie Lam Cheng Yuet-ngor on Thursday hailed as “constructive” Joseph Yam Chi-kwong’s idea that the approach of past administrations had put a drag on economic development and the new government should ramp up spending, even going into deficit if it was in the public interest.
On a visit to Singapore, Lam also said the provision in the Basic Law, Hong Kong’s mini-constitution, on fiscal management should not be interpreted too rigidly.
She was responding to a personal blog post by Yam, former Hong Kong Monetary Authority chief and now a member of her Executive Council.
Yam, who advised Lam to run against former financial secretary John Tsang Chun-wah, a strong advocate of cautious spending, in the city’s leadership race, also hailed his boss for the “new fiscal philosophy” outlined in her manifesto.
Lam welcomed more public discussion on the issue, saying it would help her carry out her “new philosophy” on public finances.
“My new fiscal philosophy aims to wisely use our accumulated surpluses for the community,” Lam wrote in her manifesto. She also highlighted the need to invest “more generously” for the future, and for “timely investments as preventive measures” so that Hong Kong could reduce the extra costs that might arise from delayed action.
While she maintained she had not asked Yam to write the piece, Lam said his argument was in line with her new approach.
“I worked on public finance for a long period of time before the  handover [to China],” Lam said. “My understanding [is that] Article 107 [of the Basic Law] is not [meant to be] rigid.
She said the government was not prohibited from running a deficit in its annual budget.
Article 107 requires Hong Kong to “follow the principle of keeping expenditure within the limits of revenues in drawing up its budget” and to “strive to achieve a fiscal balance, avoid deficits”, keeping the budget commensurate with GDP growth.
Critics have long complained that the government is sitting on a massive pile of cash and saving up for a rainy day that never comes.
Financial Secretary Paul Chan Mo-po has forecast a surplus of HK$16.3 billion in 2017-18. Fiscal reserves are forecast to hit HK$952 billion by the end of March 2018 – accounting for 37 per cent of Hong Kong’s GDP.
The fiscal reserves grew from HK$734 billion in 2012-13 to HK$936 billion in 2016-17.
Chan’s predecessor, John Tsang, who managed the city’s finances from 2007 to early 2017, was regularly criticised for not sharing the wealth on a long-term basis and only handing out one-off sweeteners or tax rebates.
In 2014, he asked government departments to trim recurrent spending by 2 per cent over three fiscal years.
In his article, Yam said it could be acceptable for the government to incur a budget deficit if spending could drive economic growth and be of long-term benefit.
“Readers will more readily appreciate the wisdom behind all this by considering the example of driving a car: you inject a greater quantity of gasoline when the speed of the car is too slow and less when the speed of the car is too fast,” Yam wrote.
“In other words, the budgets should be characterised by more spending and less tax to the extent of running deficits when the growth rate of the economy is too slow and the opposite when the growth rate of the economy is too fast.”
At the same time, Yam acknowledged that Hong Kong should not live beyond its means and there was a need to achieve a fiscal balance in the light of a greater financial burden ahead due to the ageing population. But such a balancing act did not need to apply every year, he said.
“It was never the intention that there should be balanced budgets with no deficits year after year. Sensibly, we should be talking about achieving a balance over an economic cycle.”
Chinese University academic Professor Terence Chong Tai-leung agreed that Article 107 should not be made a hurdle to economic development. “If, say, we can achieve a fiscal balance over five years during a term of a chief executive, that should be reasonable,” he said.
“The government can be more generous in social welfare to ease the plight of the needy.”
Dr Billy Mak Sui-choi of Baptist University said it was unfair to lay the blame solely on the former financial secretary.
“The Basic Law says you have to avoid deficits and keep the budget commensurate with the GDP growth rate. So, if Yam were the financial secretary, would he take the political risk to draw up a deficit budget?
“In Hong Kong, our problem is more about the government not being able to spend as much as it wishes. We want to invest in infrastructure, say the third runway, to boost our long-term competitiveness, but the Legislative Council is delaying it.”
He argued that the city’s laws and regulations were outdated for the development of the new economy, but lawmakers did not seem to be interested in updating them.
“So it is more a political issue than an issue of finance management,” he added.
Additional reporting by Ng Kang-chung