Government likely to violate cherished economic principle Public spending will exceed 20 per cent of gross domestic product this financial year and is likely to do so again in the next one, breaching a pledge made by Financial Secretary John Tsang Chun-wah in his budget and violating a principle cherished by finance chiefs for decades and enshrined in the Basic Law. As a guiding rule for financial prudence, the government has held that growth in public spending should not exceed the growth trend in the economy in any year. As spending was about 20 per cent of GDP when the policy was set, this means in practice that it should be held at this level or below. The higher spending will contribute to a surging deficit that some estimate will hit a record HK$88 billion this year - more than 10 times the administration's original forecast. Mr Tsang had kept spending within the target in the 2008-09 budget he announced in February. But, since then, growth has steadily declined while public spending is going up. Public spending was set at HK$332.1 billion, amounting to 19.2 per cent of GDP, forecast by the government to grow 5.5 per cent to HK$1.7 trillion this year. But that was then. A package of handouts and public spending initiatives that is expected to top HK$9 billion in total has since been announced. They include: Handouts of HK$8.5 billion Chief Executive Donald Tsang Yam-kuen announced on July 16; Old-age allowance starting next year, upon approval by the Legislative Council, that is estimated to cost HK$511 million; and Speeded-up recruitment of civil servants and economy-boosting infrastructure projects, the cost of which has yet to be announced. The handouts and old-age allowances alone push public spending up from 19.2 per cent to 20 per cent of GDP. With the likelihood of zero growth or a contraction in 2009-10, and more ambitious spending plans on the drawing board to boost the economy, the target is set to be breached again next financial year. It stands in contrast to the government's approach during the previous recession when Antony Leung Kam-chung, financial secretary at the time, slashed government spending. Donald Tsang told businesspeople at an economic forum last week that he was trying to preserve Hongkongers' way of life and living standards, which would not be achieved by spending cuts. Keeping spending growth in line with the growth trend is a principle in Article 107 of the Basic Law, which also requires the government to keep a balanced budget. But Chinese University associate professor of economics Terence Chong Tai-leung said he would not be too worried if public spending exceeded 20 per cent of GDP for a year or two. 'It may not cause a lot of problems ... in fact, this level of public spending is quite low. I would not start to worry until the public expenditure consistently exceeds 25 per cent or more of GDP,' he said. Tan Kim Eng, director of sovereign and public finance rating at Standard & Poor's, said the weakness of Hong Kong's public finance was its heavy reliance on volatile sources of revenue. He expected the government would incur deficits in the next year or two, which would raise the possibility of a cut in its sovereign debt rating, making it more expensive to borrow money.