CAN a government have too much money? Should Hong Kong have a tax holiday? Should public spending be dramatically revised? Should taxes be cut substantially? With the transition from British to Chinese rule, expectations are high that the community should share part of the massive wealth inherited by the Special Administrative Region. Some say the Government does not need $320 billion in the kitty. Others consider it a sheer waste to lock up hundreds of billions of dollars in reserves. The consensus appears to be: spend it. But, if those who advocate this course take a step back and appraise the future more carefully, perhaps they will be more cautious about running down reserves. True, over the years the Government has been highly successful in building up Hong Kong's wealth. But, with the new challenges ahead, the question is being asked: is it in Hong Kong's best interests to preserve its present strong financial cushion? In the 13 years since the signing of the Sino-British Joint Declaration, except for the small deficit recorded in the 1995-96 financial year, Hong Kong has been showered with almost endless surpluses. By March this year, its fiscal reserves had reached an impressive $163 billion. The SAR Land Fund - which transfers to general revenue on July 1 - has almost exactly the same amount. But that is not all. In this year's medium-range Budget forecasts, Financial Secretary Sir Donald Tsang Yam-kuen has predicted Hong Kong will still be heading for a period of high surpluses. From 1997-98 to 2000-01, Hong Kong's ever-growing wealth is expected to snowball to $418 billion. In the past 13 years, the Government has constantly argued that Hong Kong has to save for a rainy day to justify its modest expenditure and the need to build up massive reserves. But that argument seems to be losing effect as people begin to question whether the Government is accumulating money just for the sake of accumulating it. The community demands more spending on welfare, education, housing and infrastructure. Taxpayers - corporate and individual - are demanding tax cuts. 'We can afford it,' you can hear them chorus. As expected, officials have resisted all such demands. If there are to be any changes, they maintain, the time to consider them is after the handover. Financial experts agree this is a sensible approach. Before the Government can embark on any new direction in managing public finances, it has to be absolutely clear what role the reserves will play in future. It also has to take into account any potential policy reforms so as to work out whether Hong Kong can afford a shift in deploying public money. George Leung Siu-kay, Hongkong Bank's economic adviser, said: 'Our foreign reserves and the fiscal reserves have played a very important role in ensuring Hong Kong's stability in the past. 'What we need to ask now is whether this role will still be needed after the handover.' Mr Leung believes the reserves will continue to play a critical role in maintaining people's confidence in Hong Kong and in the SAR's monetary system. While Hong Kong has enjoyed a good reputation in the past, the economist believes the SAR will need time to establish its own credentials. He dismissed any suggestion that the danger of outside challenges to Hong Kong's monetary system would disappear after the handover. 'The credibility, the performance and the effectiveness of government policies will still be subject to test. That can't be done in one or two years,' Mr Leung said. 'The SAR will need about five years to gain a track record, to prove that the Government remains a powerful, effective and credible administration. 'While I disagree that Hong Kong should aim for endless accumulation of surpluses, in the first five years after the transition maintaining a high level of reserves to ensure the stability of our monetary system is very important. I don't think it's right to substantially scale down our reserves. We need them to sustain the good reputation of the Government.' Appreciating that the community might consider Hong Kong could afford a spending spree, Mr Leung urged caution, saying a change in government land policy might affect land and other property-related income, which formed a substantial part of the total revenue. 'We are still not quite clear about what the future land policy will be. If the Government were to modify the land policy, it would certainly affect the Government's land income.' Mr Leung said that if the SAR Government decided to increase land supply substantially it would translate into higher land production costs. And, with a greater supply, it was not clear how seriously land sales would be affected. High land incomes might not be able to be sustained. Mr Leung believed that, given this uncertainty, Hong Kong should consider very carefully before depleting the reserves now. 'At the moment, it is not suitable for the Government to spend excessively. Such a policy in the next five years is not right for the SAR,' he said. 'Hong Kong's biggest cornerstone is financial stability. Once it is lost, everyone here will suffer.' That said, he conceded there was scope for sharing out wealth within the community. 'If such spending did not have a big impact on fiscal reserves, I'd agree to spending a bit more. It would help Hong Kong's competitiveness,' he said. Tax expert Marshall Byres also supported an increase in spending so as to avoid having too much money in reserves. Noting that the Financial Secretary could not allow surpluses to build up endlessly, Mr Byres said there could be different ways of distributing Hong Kong's 'dividends'. Spending some on the community was one. Over the years, while the Government was prepared to spend more on capital projects, it consistently resisted any big increases in recurrent expenses because of their longer-term implications. But Mr Byres, chairman of tax services for Ernst & Young, believed the SAR should reassess this approach. In drawing up its spending programme, the Government has always followed the budgetary guideline that government spending over time should grow no faster than the economy. At present, this means the real growth rate should not exceed 5 per cent. Until now, there has been no serious challenge to this tenet, but it remains problematic whether the present base for spending is high enough. That issue has not been seriously debated because the focus of the community and politicians has always been on specific spending proposals, so the big picture assessment was deferred year after year. For many years, public sector spending has accounted for 17 to 18 per cent of gross domestic product and according to forecasts for the next five years, the percentage is tipped to stay at that same level. 'Perhaps we have started at too low a base for spending, and that needs to be revised,' one analyst said. 'But the larger strategic debate hasn't taken place. Probably, that is one thing the SAR should look at.' Mr Byres agreed the Government should consider the merits of raising spending limits to 20 per cent. Based on present GDP, an increase of two percentage points translated into about $25 billion a year extra to spend. 'That's a lot of money,' he said, adding that even a 20 per cent rate would not 'get rid of all our surpluses'. Once a consensus is reached on adjusting the rate the question will arise of how to introduce it. A sudden one-off increase would add to inflation. To avoid this pitfall, one analyst suggested allowing for something like 5.5 per cent annual growth in real terms for a few years to ratchet up spending at a more manageable pace. He added that, regardless of what the Government wanted to do in trying to share out part of Hong Kong's multi-billion-dollar wealth - whether by tax cuts or community investments - the strategic debate on expenditure would still be necessary. This will benefit not only the community by resulting in better deployment of public finances, but also Hong Kong by assuring it of a reasonable financial cushion to withstand any financial winds of change the new era brings.