Excessive caution leaves reserves going to waste

There has been much talk about what the appropriate level of reserves should be. I don't think we need a complicated formula. A common sense rule of thumb says an amount equivalent to 12 months' recurrent expenditure is a prudent minimum, while 24 months would be excessively cautious.

Mike Rowse, 
Insight page, March 4

Needless to say, our excessively cautious financial secretary does not agree. One of the reasons he cited in his budget speech for not touching the reserves is that in 2004 they dipped to only 13 months' worth of expenditure. Oh, the horror.

But you can never trust John Whiskers with numbers. He made the comparison against total expenditure, capital as well as operating. For these sorts of exercises, it is generally considered best to look only at operating expenditure, as Mike Rowse did. We are now at about 17 months' worth of expenditure for that annus horribilis in 2004.

In his miser's campaign to let no one touch his fiscal savings, our scrooge of a financial secretary pretends they consist only of government deposits with the Exchange Fund.

He entirely ignores the investment profits the fund has accumulated, although every cent of these is a public asset. He also ignores the fund's holdings of deposits by other statutory bodies, again 100 per cent government-owned. Together, they amount to more than those government deposits.

Treat them all as one, as they should be treated, and at the worst in 2004, our savings stood at about 40 months' worth of operating expenditure.

Things have improved mightily since then. Our attributable savings - government plus statutory body deposits plus profits - now amount to just under HK$1.6 trillion, the equivalent of HK$670,000 for each and every household in this city.

Say it: wow!

Our government expenditure has also shot up way past its target range recently, of course, but even so, we have savings at present of about 58 months' worth of operating expenditure.

And nothing says that we have only our savings as a cushion for government expenditure. If need be, we can borrow money. Our credit rating is excellent. The United States federal government, for instance, carries a debt of US$16 trillion, equivalent to 55 months' worth of total government expenditure, and we don't decry the financial position of the US. We think it so strong, in fact, that we keep our currency hitched to the US dollar.

If we were ready to incur proportionately only half as big a debt load, we would have access to 84 months' worth of recurrent government expenditure. Our government could run for seven years at current rates of expenditure without collecting a cent of revenues.

So how much do we really need in reserves?

The International Monetary Fund conducted a study on just this question several years ago and said we needed the equivalent of between 30 per cent and 50 per cent of gross domestic product, less if we took certain steps to smooth out government drawdown from the fund. We took these steps.

As the chart shows, the figure has never dipped below 50 per cent of GDP over the last 10 years and currently stands at 70 per cent of GDP.

I'm of Mike Rowse's view. Let's use the money for something like a universal pension fund. All that we do by keeping it stashed away is tempt thieves to enter public service and squander it on needless infrastructure projects that reward them with yummy contracts.

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