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Hong Kong Monetary Authority (HKMA)

Hong Kong government should spend more to boost economy, says former HKMA chief

PUBLISHED : Thursday, 03 August, 2017, 1:54pm
UPDATED : Friday, 26 January, 2018, 4:14pm

The Hong Kong government should spend more to drive economic growth and could even go into budget deficit occasionally if the spending was for the public interest, according to Executive Council member Joseph Yam Chi-kwong.

“Indeed, with Hong Kong experiencing historically slow economic growth rates in the past decade and a strong desire of everybody to invest in the future of Hong Kong and build a more dynamic economy, the contractionary fiscal stance on the economy after a decade of fiscal surpluses seems inappropriate, if not irresponsible,” Yam said.

Yam, former chief executive of the Hong Kong Monetary Authority, the city’s central bank, shared his views on public finance in an article titled “Viewpoints on Public Finance in Hong Kong” published on his personal blog on Thursday.

While Article 107 of the Basic Law requires the management of public finance in Hong Kong to “follow the principle of keeping expenditure within the limits of revenue” and to “avoid deficits”, it also says the government should make sure its fiscal policies promote the public interest, he said.

As such, Yam said it could be acceptable for the government to prepare for a budget deficit if the spending could drive economic growth and be of long term benefit to Hong Kong.

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“Readers will more readily appreciate the wisdom behind all this by considering the example of driving a car: you inject a greater quantity of gasoline when the speed of the car is too slow and less when the speed of the car is too fast,” Yam said.

“In other words, the budgets should be characterised by more spending and less tax to the extent of running deficits when the growth rate of the economy is too slow and the opposite when the growth rate of the economy is too fast.”

Yam agreed that Hong Kong should not live beyond its means and that there was a need to achieve a fiscal balance in the light of the greater fiscal burden as a result of Hong Kong’s ageing population.

But such a balancing act doesn’t need to apply every year, he said.

“It was never the intention that there should be balanced budgets with no deficits year after year. Sensibly, we should be talking about achieving a balance over an economic cycle,” Yam said.

Article 107 doesn’t prohibit counter-cyclical budget deficits that mirror budget surpluses over an economic cycle.

“It also does not prohibit budget deficits arising from, for example, the Hong Kong SAR Government making productivity-enhancing investments in the future of Hong Kong, which will boost future economic growth and government revenue,” he said.