John Tsang Chun-wah's maiden budget certainly lived up to its billing as a bumper giveaway. The financial secretary dished out HK$125 billion - and there was something for nearly everyone. But his approach was that of a thrifty company in a windfall year - there were substantial bonuses but few pay rises. His largesse was largely confined to one-off measures rather than longer-term benefits.
The giveaway was a political necessity given the record surplus resulting from our city's booming economy. Mr Tsang found himself with an embarrassment of riches and has come up with a variety of ways to return wealth to the people. He was, however, reluctant to make longer-term commitments on spending, especially with dark economic clouds on the horizon arising from the subprime-mortgage crisis in the US.
His concerns may be well placed. Only a few years ago, Hong Kong was suffering deficits and deflation and budgets were all about trimming fat and sharing the pain. Yesterday's one-off giveaways, combined with a cautious approach to the future, are therefore a reaction to our boom-and-bust fiscal cycle.
The spending spree wipes out the HK$115.6 billion surplus the government expects to accumulate this financial year. Indeed, Mr Tsang seemed anxious to ensure all the money was spent. As a result, a small deficit is projected in the next financial year, though surpluses are expected thereafter.
Government revenues have always fluctuated wildly. They mirror the business cycle. This is because they rely heavily on stamp duties, land premiums, and profits and salaries taxes from a very narrow tax base. The result is that revenues are as volatile as the general market. Consequently, the government finds it difficult to project future revenues accurately and budget for long-term planning; the record surplus of HK$115.6 billion projected this year is more than four times its original estimate.
Yet, as our population ages and expands, the costs of education, social welfare and health care will rise. Unlike revenue, government expenditure has fallen in the past decade because of painful cost-cutting. This trend needs to be reversed. The government ought to plan for constant but gradual increases in annual spending in these key sectors each year. They need bigger operating accounts, with funding enhanced annually, in cycles of five to 10 years. Only then can we spend more on long-term social programmes, instead of holding them hostage to the economic cycle. But for this to happen, we need a long-term and stable revenue base. This has been a key concern among senior officials but it remains unclear how - or when - they intend to resolve it. For the time being, accepting that yearly tax receipts will fluctuate, the government needs to find a prudent means of spending more.
Indeed, with the fiscal reserves expected to reach a staggering HK$485 billion by the end of March, the public is justified in wondering why the government cannot afford to spend more. Rather than resorting to extraordinary one-off measures to run down the reserves, the government should consider tying annual recurrent spending to a rolling average of recurrent revenue over the medium term by smoothing out the highs and lows. The exercise would likely show that we could confidently spend more on a sustained basis without being imprudent.
Plans for the future
Yesterday's budget contains some positive initiatives for the future, such as creating an HK$18 billion fund to replace annual government funding to support research and development at universities. The idea of establishing endowment funds for worthwhile undertakings is one that could be applied more widely. For example, how about privatising one of our public universities by giving it a big endowment? This would free it from the constraints of public finance and its rigid rules, so it could use its resources more creatively to become a truly independent centre of excellence.
Health care reforms have been stalled because of a lack of public consensus on the way forward. By earmarking HK$50 billion for a health fund, the government has regained the initiative by putting some money on the table first before asking people to contribute towards their medical services.
The government's decision to consider relocating its offices in Revenue Tower, Immigration Tower and Wan Chai Tower and selling the site in the central business district for office development is a good one. Mr Tsang said this would be a more efficient use of commercial land. But the argument would carry more weight if the government had not decided to place its new headquarters on the prime Tamar site in Central.
Meanwhile, the government has finally scrapped taxes on wine and beer. This long-overdue move will boost Hong Kong's fine-wine trade and enhance its expertise in the field, enabling our city to compete for a slice of the multibillion-dollar auction and storage industry monopolised by London. The giveaways and tax cuts in the budget will provide at least a short-term stimulus to the economy by putting money in people's pockets. This will help cushion us from the effects of the global downturn expected because of the credit crisis originating in the US. Mr Tsang is right to insist on being prudent when considering long-term commitments. But this is all the more reason for the government to put its revenue on a more stable footing.