ALMOST 70 per cent of the unexpected increase in the Government's massive Budget surplus last year came from underspending, or deferred spending, rather than revenue increases. The Budget outcome, issued in detail in the Government Gazette of July 23, raises serious questions about the Government's management of spending on huge infrastructure projects. It also raises questions about its forecasting on spending programmes, and the reliability of present and budgetary forecasts. This also raises questions about the fragility of the forecasts, especially during uncertain economic times and with China seeking to cool its overheated economy, and Hong Kong's reliance on China's economic health. The figures produced in the Gazette show almost $11 billion of the additional unexpected surplus of about $17 billion came from underspending. The rest came from additional revenues, giving an overall Budget surplus of about $22 billion, compared with an original forecast of $5.1 billion (excluding Government Bond raising). It takes to $23 billion the underspending in the past two Budgets and $28 billion in the past three, most of which is merely deferred spending scheduled for catch-up. As far as estimating its normal day-to-day spending, the Government did a reasonable job last year. The Gazetted figures show that in its General Revenue Account that the Government spent more than $102 billion, broadly in line with the original forecast of $103.4 billion (minor savings of $1.3 billion here). But in estimating its revenues from day-to-day business the Government was way out, with general revenues at $120.8 billion for the year, compared with the original forecast of $113.6 billion - a rise of $7.2 billion. Given the unexpected health of the property and share markets, the healthy corporate profits tax situation and such things as first registration tax on cars, the Government can be partially forgiven for under-estimating revenues. But it is difficult to explain the balances on the capital works programme, especially in the Capital Works Fund. The Gazetted figures show massive underspending on this account, with the Government originally estimating outlays of $28.9 billion and only being able to complete spending programmes worth $19.4 billion. That is underspending of $9.5 billion. Nobody would criticise any Government for underspending if it meant saving money. But this is not the case as the Government reckons its savings on projects last year were, at best, about $1 billion. This means the largest part of underspending was deferred spending, money that was budgeted for last year but still has to be spent in future years. That amounts to about $8 billion in ''deferred'' spending for last year. The Gazetted figures also show small underspending on the Loan Fund and the Capital Investment Fund, but these are insignificant compared with the underspending on the capital works account. TO ITS credit, the Government has moved quickly to attempt to put in place procedures in an attempt to ensure the massive underspending or deferred spending does not recur. As Financial Secretary Hamish Macleod said in his Budget speech in March, the main underspending was the result of the capital works programme making slower progress than planned. ''The trend of underspending was already apparent at the time of my last Budget, and some measures have already been put into effect. For example, calling for tenders while at the same time putting items to the Finance Committee for funding, getting rid of the bottleneck of clearing year-end payments, and the introduction of tighter monitoring procedures by the Works Branch,'' he said. ''This last financial year has brought home the need for more fundamental solutions to this constraint on our capacity. Improved co-ordination and management within the Works Departments will help. ''No less important will be greater use of private sector expertise and resources. ''So as to remove any doubt about where overall management responsibility lies, I have taken steps to place with the Secretary for Works overall responsibility for the implementation of the Public Works Programme. ''Given the variation in size of projects and the inevitable lumpy nature of works programming, it is not cost-effective to attempt to have all our projects designed and supervised by Government engineers and architects. ''We shall be looking at how to entrust more of our projects to outside agencies or the private sector for design and management, as well as letting more 'design-and-build' or turnkey contracts.'' Mr Macleod said he had asked the Secretary for Works to tackle these problems as a matter of urgency. I have mentioned some remedial measures that have been taken already. Others are in the pipeline. He said there would be a new realism which would characterise estimates of project costs and progress in future. And he said to help fulfil his new responsibility for ensuring public works were delivered on time and within budget, the Secretary for Works would establish a more sophisticated, computer-based information and management system. ''This will link at the Works Departments and the relevant branches. It should enable problems to be identified and solved at an earlier stage. And it will allow us to extend systems which have been used successfully in implementing the Airport Core Programme. ''However, I believe these remedial measures will only take us part of the way. What we need is a thorough overhaul of public works procedures, practices and systems. ''Our objective must be to increase substantially our capacity to deliver projects on time and within budget,'' he said. While the Government is examining its procedures, it might also look into some of its estimates in the General Revenue Account. It cannot be expected to always meet estimates and this is reflected in the spending estimate. But it is difficult to understand the outcome in an item such as number 106 ''Miscellaneous Services'', for example. Under that item last year the Government budgeted for spending of $8.09 billion and ended the year only spending about $2.87 billion, up from $600 million the previous year. Why the shortfall here? Looked at with hindsight the Government was lucky to underspend so much on ''Miscellaneous Services'' as it compensated for overspending on other items. But is it good budgeting? Ian Perkin is chief economist with the Hong Kong General Chamber of Commerce. The views expressed in this article are his own and may not reflect Chamber policy.
