Short of a budget deficit shock, here’s how to ensure Hong Kong spends money more wisely
- Philip Bowring says years of huge surpluses have allowed government incompetence to continue unchecked, wasting money on needless capital investment. With budget season coming around again, here are four measures to improve this year’s plan
Time is approaching for the financial secretary to unveil his 2019-20 budget for Hong Kong. It will, as usual, appear cautious, probably suggesting a surplus but less than his forecast of HK$46 billion (US$5.9 billion). Let us hope, however, that for once he proves overly optimistic and that, one year from now, there is the prospect of a HK$30 billion deficit.
This is not the hope of either a frustrated pessimist or the holder of a short position on the Hong Kong market. It stems from the need for Hong Kong’s public finances to escape from the drug of overpriced land. The government will never do anything itself in that direction, notwithstanding promises of increased land supply. It is hooked, to the detriment of the economy and society.
Thus, a sustained fall in land prices, particularly if brought about by higher real interest rates, may finally shake up a government which, for most of the past two decades, has used land-related revenues (stamp duties and a share of profits tax) as a cover for fiscal incompetence. Stable, recurrent revenues from income and profits tax and rates have been slashed, mainly for the benefit of the top 30 per cent of households.
The enrichment of government coffers has been at the expense, directly or indirectly, of the majority of citizens. It has led to poor investment returns and reduced both capital and consumption spending in sectors other than property. Sustained fiscal surpluses are nothing to boast about. They are a distortion, particularly when the costs of capital are so low as to encourage bad investment.
Worse still, the steep rise in land sales revenues has enabled a grotesque blowout in capital spending from HK$75 billion in 2015-16 to an estimated HK$116 billion for 2018-19 and a projected HK$139 billion by 2021-22. Much of this has been on prestige projects with minimal returns which could never be commercially financed. Spending has been inflated by diverting all land sales revenue into the capital budget.
So one can only rejoice if this revenue stream is much reduced and the government is forced to stop wasting public money. At the very least, it should charge users – for example, of the HK$36 billion Central-Wan Chai bypass, which will mainly benefit private vehicles, not least among them government officials heading for their free car spaces at Tamar.
The capital spending also excluded the HK$50 billion earmarked last year for the support of IT development. But much of this is on more buildings and the dubious Lok Ma Chau Loop. Meanwhile, Hong Kong continues to lag behind even mainland cities in the application of technology to urban living, whether it is garbage collection and recycling, pollution control, toll collection or electric public transport. The leadership is locked in 1960s urban planning and the interests of the mega groups that pick up multibillion-dollar deals – one of the latest being New World Development’s deal for the government’s HK$30 billion Kai Tak Sports Park.
The budget should also be a good time for recognising the damage the government itself has done. Land prices are partly a function of supply and partly of interest rates. But there is another factor: tax. The tax relief that is offered on mortgage payments by definition increases perceived affordability and hence buying power, without having any impact on supply.
It also further widens wealth disparities. Likewise, the recent suggestion by the financial secretary that he was considering lowering mortgage down payments is likely to raise demand without increasing supply. Indeed, all measures supposedly to help homebuyers merely reinforce the belief that property is an investment instead of being a necessity.
Four measures are needed in this budget to increase recurrent revenue to support socially desirable measures in the short term and a stable fiscal situation in the longer term.
- End the rates rebate. Rates are one of the fairest forms of tax as they fall evenly across household and business sectors and are quite closely correlated with household incomes.
- Set a long-term goal of ending mortgage interest tax deductibility. A start in that direction could even be made now. Other countries have realised that, among other ills, tax breaks are an invitation to property bubbles.
- Make a huge effort to price services provided by public investment to levels which offer a return. Water and garbage are obvious; roads are another, with or without the electronic road pricing that was originally proposed 30 years ago but dropped because of the opposition of taxi owners who have influence with well-connected figures. (The taxi rentier racket still flourishes, opposing reform of the system.)
- End the privatisation of cleaning, security and other low-end jobs. Begun in 2002, this has contributed much to poverty by reducing wages for such jobs. It is indeed typical of the mean nature of the upper bureaucracy that it submitted its least-educated employees to the rigours of the labour-market contractors while middle- and upper-level jobs enjoyed featherbed protection and no exposure to wage competition.
Talking of poverty alleviation, it will not be helped by raising the benefit-eligibility age from 60 to 65. Although justified by advancing lifespans, it leaves vulnerable those forced to retire at 60. These include not just many manual workers but also university staff who fall out with superiors on personal and political as well as professional grounds.
Philip Bowring is a Hong Kong-based journalist and commentator