Hong Kong budget highlights: no coherent fiscal policy and more half-baked ideas about innovation
Philip Bowring says this year’s budget is again full of handouts and discretionary funding for different sectors, including huge sums given to bureaucracy-driven projects that would supposedly boost innovation, but where’s the effort to ensure a more sustainable fiscal system?
I have written about Hong Kong budgets every year since 1974, and recent ones have left me with a sense of intellectual vacuum. The latest is no exception. It is yet another simplistic bookkeeping exercise with taxes cut here, spending increased there, with barely an attempt to frame these within a coherent fiscal policy linked to economic and social goals.
One might have thought that, after so many same-again years, there would be an attempt to look at why overlarge surpluses have become the norm, and why fiscal policy has done nothing to alter the wealth gaps – almost the highest in the developed world.
Does the financial secretary stop to ask why budget measures consistently make the revenue base ever narrower and less stable, despite pronouncements about the need to reverse this trend? Or why so much investment in physical infrastructure has neither economic nor social justification. We have a new financial secretary, but no new fiscal policies.
Yes, much of the increased recurrent spending is badly needed. But, overall, it is just a repeat of efforts made to please the public and reduce the surplus – temporary rates relief, cuts in income and some other direct taxes, and huge new sums thrown at bureaucracy-driven projects that will supposedly raise the economy to a new level driven by innovation and technology.
Capital revenues and stamp duties now account for about 40 per cent of revenue. For sure, 2017-2018 was an exceptional year, but the government still plans on the basis that land revenues will continue to amount to 3.6 per cent of gross domestic product, implying that land prices will rise at roughly the rate of nominal GDP, swelling the coffers of government and the land oligarchs but continuing to be a drag both on consumption and on the profitability of most businesses. There is a lot of talk about a “new economy”, but nothing about a more productive and sustainable fiscal system.
The supposed boost to the “new economy” of innovation and technology largely boils down to massive government investment in – guess what? – concrete. Thus HK$50 billion is to be set aside supposedly for developing innovation and technology centres. Of this, HK$20 billion will go to the Lok Ma Cha loop, an 87 hectare piece of land supposedly acting as a technology centre interacting with Shenzhen.
Lok Ma Chau: an overview
In other words, the government will create buildings and pray IT companies will come, presumably to be lured by special deals offered by the government which are unavailable to the bulk of Hong Kong businesses.
Then there’s another HK$10 billion for the existing Science Park for infrastructure and subsidies for the favoured few, and another HK$10 billion for the Innovation and Technology Fund, an outfit where money is doled out by bureaucrats, not venture capitalists.
Yet more money is to be thrown at Cyberport, a past example of collusion between government and private-sector interests, to develop the “digital technology ecosystem” and e-sports.
If the government were seriously interested in market-driven innovation, it would start shifting its tax base not only away from land but also from profits tax. It would make the “user pays” principle generate realistic returns from the likes of road, tunnel and bridge users, charge realistically for water and waste disposal and rely more heavily on rates, a reliable de facto tax on business and household consumption.
Instead of giving freer rein to “animal spirits”, this budget increases the role of government in areas where it is not needed – hence ensuring more waste on politically driven projects. The bloated Hong Kong Monetary Authority, already invading private-sector insurance space, is to be gifted an “academy of finance”, as though there were not enough universities and private institutions already.
Then it is a billion here, a billion there, for a new Construction Innovation and Technology Fund, the CreateSmart Initiative, HK$5 billion for the Elite Athletes Development Fund, and so on. All these are discretionary handouts.
The idea that the Hong Kong bureaucracy can drive innovation must surely be a joke in bad taste, judging by its total failure to innovate in the areas it directly controls – taxis, for example, or computer-driven road pricing. This budget is that of a junior accountant mouthing phrases like “belt and road” and “innovation and technology”.
One link to both of those should, of course, be immigration of talent – perhaps IT experts from India or Russia, as encouraged by other economies such as Singapore, which Chief Executive Carrie Lam Cheng Yuet-ngor seems to admire so much. Innovation is about people.
Hong Kong has fallen behind more wired economies, and some aspects of the mainland, largely because of the sloth of government, and the extent of monopolistic private-sector practices. Lack of money is surely not the problem. But waste clearly is.
And why is Hong Kong, a mature economy with a slow growing and ageing population, spending ever larger amounts on new physical projects – remember the desalination plant? While much existing fabric needs upgrading, the government is forecasting inexorable rises in capital spending, mostly for concrete. It was HK$101 billion this year, a rise of 30 per cent in just three years, and is forecast to hit HK$138 billion by 2021/22.
Philip Bowring is a Hong Kong-based journalist and commentator