Financial Secretary Antony Leung Kam-chung insists he is a man with a plan, that he will balance the budget by 2007 and in the process release Hong Kong from its deflationary vice. The trouble is the outside world does not believe him, hearing only words and no action. By switching its long-term outlook on the Hong Kong dollar to negative, Standard & Poors fired a shot across the government's bows. With the deficit apparently spiralling out of control, the ugly scenario is of intensifying financial market pressure, falling stock prices and, in the extreme, a repeat of the financial chaos of 1998.
We are a long way from that point and the market reaction was noticeably mild. Perhaps it was the predictable argument advanced by the US credit-rating agency on Hong Kong's structural economic problems. The analysis repeated trite arguments with little substantive backing. However, on the core issue of the deficit there is no escaping criticism.
The deficit is spiralling and Mr Leung has offered no clear road map for balancing the books. The first five months of this financial year have seen government accounts run into the red to the tune of $56 billion. While nobody believes a debt-free SAR with $316 billion in fiscal reserves faces imminent trouble, markets want to see action to match recurrent income and expenditure. This raises questions about whether a sales tax and increases in fees and charges are needed to boost revenue while spending is reined in by tackling civil service staffing and salaries. More broadly, it demands that government subsidies and direct involvement in a raft of public services be scrutinised. So-called public-private partnerships are a sensible way to reduce direct funding of public services, but can only be achieved against a coherent policy backdrop. To apply commercial charging principles to a new road, for example, will merely cause congestion on those which are free. Changing the basis of public-service provision requires more than quick-fix, ad hoc solutions.
What is encouraging is the official response to S&P's action. Mr Leung appears to be using the warning as a lever to push through painful policy changes. A starting point might be presenting government accounts on a company-style accrual basis, which would show how asset-rich the government is. This will not conceal the revenue shortfall, but will focus everyone's minds on where the fat lies and on the hard choices that have to be made.