Paul Chan outdid himself with the budget, but there’s so much that can be done for Hongkongers
If Hong Kong continues to fill its coffers without spending it on the people who deserve it, there’s a good chance it may all end up with the central government in 2047
These pages have been full of well-intentioned advice to Financial Secretary Paul Chan Mo-po about how to spend our enormous pot of gold. Hong Kong now has HK$1.1 trillion (US$14 billion) of reserves, plus another HK$3.6 trillion in the Exchange Fund. He had to come up with a BMW – a “Budget that Must Work”, and he went further than most expected.
Chan must be Hong Kong’s luckiest Financial Secretary. He presides over probably the largest net financial reserves in the world for a single city. The economy is growing at 3.7 per cent per year, with inflation running at 1.7 per cent (we don’t believe the government’s inflation figure either, but let’s run with it). We have achieved budget surpluses for the last 15 years and in his first real budget he has managed to smash and grab HK$138 billion from us – in one year.
He is also lucky to be Financial Secretary after the chaos that preceded his elevation through political patronage. In 2012, he was found to be close to several properties that had been illegally subdivided. When caught in the lights, he followed government minister standard operating procedure (refer the unfortunate Justice Minister Theresa Cheng Yeuk-wah) of embarrassed silence followed by contradictory public statements.
Controversy struck again in 2013 when it transpired that his family had an interest in 18,000 square feet of farmland in the New Territories. As he was Development Secretary at the time there were (outrageous) accusations of conflict of interest. Not a man to stay out of the news, he doubled down when he and his wife were found guilty by a jury of the libel of two schoolchildren, which he later successfully appealed. He is a survivor – helped by consistent use of the BMW defence – the acronym for “Blame My Wife”.
So the prospects for a good budget were not bright as Chan stood up on Wednesday. He is not a financial specialist but an accountant – and being a bean counter does not a Financial Secretary make. However in his defence, he has obviously listened to calls to spend on the people of Hong Kong. New health, tax rebate, and poverty measures are indeed welcome and can be backed up by the fact that spending allocations on education (21 per cent), social welfare (20 per cent) and health (17 per cent) comprise 58 per cent of recurrent expenditure.
That is laudable – but the problem is that there is just not enough expenditure. Indeed, the level of reserves is so monstrous that this budget will still only spend 36 per cent of the surplus on the people who made it.
There is still too much frittered on large vanity and kowtow projects, like bridges-to-nowhere and the West Kowloon Cultural Centre. As much money as the social support (HK$50 billion) is proposed to be wasted on experimental “innovation” – something we have never been good at.
The best infrastructure to boost the grass roots economy is to build more flyovers, escalators, travelators, footbridges, public lifts, MTR lines, and spending on developing innovations that are already proven.
Giving rebates to middle class taxpayers ignores the half of workers who don’t earn enough to pay salaries tax. The Scheme HK$6,000 of 2011, which gave cash back to Hongkongers, worked well; it was spent in the economy, circulated fast, and provided a huge feel good factor. If such a tax rebate is good enough for Macau and Singapore, why do Hong Kong financial secretaries fear it?
Let’s have fun with figures. Say that our current total pot is HK$4.7 trillion – by the way, bigger than the GDP of Sweden. Assume an average surplus of HK$20 billion per year between now and 2047 (less than half the average of the last 15 years). If we then compound the reserves (assuming the existing pot has a mediocre after-inflation investment performance of 2 per cent per year), we can forecast a nest egg in 2047 of HK$9 trillion. This requires budget deficits of HK$300 billion each year from now on to mop that up. Or we could give away over HK$1.2 million to each of (say) 7 million permanent residents. The sums are mind-boggling.
The Basic Law will expire on June 30, 2047 – in just 28 years. Until then, Article 106 says that the SAR “shall have independent finances” which shall be used “exclusively for its own purposes and they shall not be handed over to the Central People’s Government”. After 2047, that money can become the central government’s. Does BMW actually stand for “Burn My Wealth”?
Richard Harris is an investment manager, banker, writer and broadcaster and financial expert witness