Hong Kong's government is sitting on an embarrassment of riches. But don't expect any radical stimulus measures in this month's budget. Fiscal conservatism is far too deeply ingrained in our official culture for any big budget boost to be likely despite the economic slowdown. In recent weeks, Financial Secretary John Tsang Chun-wah has said repeatedly that this year's budget will focus on creating jobs and enhancing Hong Kong's competitiveness. With the economy sinking deeper into recession and the unemployment rate climbing, these are sensible aims. What's more, the government can afford to pursue them. Despite last year's deterioration in business conditions, the revenue department still collected an estimated HK$19 billion more in profit taxes than in 2007. According to Deloitte tax partner Yvonne Law, that gain is likely to push the budget's balance into a HK$10 billion surplus (see the first chart below), well in excess of the government's initial forecast of a HK$7.5 billion deficit for the year. That windfall will further swell the government's accumulated fiscal reserves, a war chest which at the end of last year contained a massive HK$524 billion, equivalent to more than double Hong Kong's entire economic output last year (see the second chart below). Add to that sum the accumulated surpluses of the Exchange Fund, and the government's overall surplus rises to more than HK$1 trillion, or almost five years' worth of gross domestic product. That places the government in an enviable position. Unlike countries elsewhere, Hong Kong, with its minimal public debt and massive accumulated surpluses, does not lack fiscal firepower to battle the recession. But very little of that firepower is likely to be deployed. To be fair, there are good reasons for the government to hoard its surpluses. Plentiful fiscal reserves help bolster faith in our pegged exchange rate, reassuring investors that there will be no repeat here of Argentina's 2002 devaluation. And those reserves will be needed in the future. With an ageing population, Hong Kong's welfare spending on the elderly is sure to rise over the coming decades. In any case, the Basic Law requires the government to aim for a balanced budget. Yet even that obligation should not dissuade the government from dispensing fiscal largesse when the economy turns down. Most people interpret the Basic Law as meaning the budget should balance over the whole economic cycle. In other words, the government has the flexibility to act countercyclically, setting aside excess revenue as reserves in fat times and collecting less tax and spending more during the lean years that inevitably follow. This is exactly what the government did in the early years of this decade. Between 2000 and 2004, it ran a cumulative deficit of HK$177 billion, a hole it has more than filled in the boom years since. With the world now facing its most severe downturn in almost 80 years and Hong Kong's economy sorely exposed to the global slowdown in trade, the government should now be preparing to dip generously into its fiscal coffers. Other governments are leading the way. Last month, Singapore, which also boasts plentiful reserves, presented an ambitious package designed to support jobs and competitiveness. As a result, the government plans to run a consolidated fiscal deficit this year worth 3.5 per cent of GDP. Translated to Hong Kong, that would equate to a budget deficit of roughly HK$60 billion for the next fiscal year. Compared with that sum, the HK$20 billion deficit forecast by Deloitte appears parsimonious, while Mr Tsang's projected deficit of more than HK$7.5 billion looks positively stingy. The government can afford to be a lot more generous than that. What's more, there is no reason why running a large deficit should involve wasting money. There are plenty of innovative and imaginative ways the government could use its fiscal resources to create jobs, boost demand and strengthen Hong Kong's competitiveness, all without splashing out recklessly. Monitor will examine some of them next week. But don't get your hopes up; our government officials might be rich in terms of cash, but they do tend to suffer from a dire poverty of imagination.