Hong KongÆs embarrassing riches

The Hong Kong government announces a $14.8 billion budget surplus raising questions about its lack of spending on health and social welfare.
Hong KongÆs financial secretary, John Tsang, had an embarrassment of riches on offer in his first budget announcement yesterday when he reported a massive surplus of HK$115.6 billion ($14.8 billion) compared with the original estimate of HK$25.4 billion.

This he said was due to Hong KongÆs robust economic growth of 6.3% over the year. This translated into HK$56.5 billion more than expected in operating revenue and HK$33.8 billion more in capital revenue, largely as a result of higher salaries and profits tax, and higher stamp duty from booming stock and property markets.

Looking ahead Tsang foresees slower GDP growth in 2008 of 4%-5% and inflation at around 4.5%, though he expects his measures could reduce this to around 3.5%.

He introduced a budget of HK$255.7 billion, a 24% increase over last year. But realising that he would come under some pressure unless he gave some of this back, the financial secretary introduced a raft of reduced taxes and giveaways.

These included a one-percentage point reduction in salaries and profits tax to 15% and 16.5% respectively and an adjustment to the salaries tax bands. In addition there were one-off reductions in salaries and property tax.

The government said it would immediately abolish duties on wine, beer and all other alcoholic beverages except spirits. This was done in the interest, Tsang said, of turning Hong Kong into some sort of wine centre. There were also various one-off payments for the elderly.

The upshot of these measures is a forecast deficit of HK$7.5 billion for next year, though there will be few surprises, given the governmentÆs track record, if a surplus materialises instead.

Although the government is patting itself on the back as if it has just announced a rather good set of company results û it has much to be embarrassed about.

The extent of the discrepancy between the forecast and the actual surplus is an indication of the degree to which the budget process has got out of control.

Some years ago a government committee concluded that Hong Kong had a structural deficit problem, a decision that now looks ludicrous in view of the whopping surplus announced on Wednesday.

The first point to make about this budget is that it does not reflect the true state of government finances. The changes instituted last year in the way that investment income from the exchange fund is accounted for, means that this year it has been understated by HK$19 billion.

Under the new system, the rate is the average investment return of the Exchange Fund's investment portfolio for the past six years or the average annual yield of three-year exchange fund notes for the previous year, whichever is higher. The rate of return was fixed at 7% for 2007 compared with the actual return of 11.8%. As a result only HK$27.6 billion went to the treasury instead of HK$46.5 billion.

Further, the governmentÆs cash-based accounting system understates government finances by an even wider margin. On an accruals basis, last yearÆs budget surplus was HK$129.4 billion, compared with the HK$66.3 announced in the 2007 budget. The government has started keeping accrual-based accounts but they are announced nine months later. The 2007-08 budget surplus on an accrual basis will be vastly greater than the HK$115 billion announced on Wednesday but we wonÆt hear about it until the end of 2008.

Despite these riches the government is remaining unduly tight-fisted on health welfare and education. In his budget Tsang commented:

ôWith an ageing population, the number of elderly people is expected to increase from the current 870,000 to about 2.17 million by 2033, or two-and-a-half times the present population. The expenditure on the Old Age Allowance will increase accordingly, in todayÆs money, from HK$3.9 billion in 2008 to HK$9.7 billion in 2033, posing a considerable burden to public finances in the long run. If the Old Age Allowance were increased to HK$1,000 for each eligible person, by 2033 expenditure would surge to HK$14 billion. In the long run, this measure would be unsustainable, and the expenditure involved would become a heavy burden on the community.ö

Yet a glance at the medium-term forecast shows that the government is anticipating significant and increasing budget surpluses of HK$56.0 billion, HK$58.3 billion, HK$61.2 billion and HK$67.3 billion over the four years starting April 2009.

But over the same period capital expenditure on infrastructure is expected to amount to HK$53.8 billion, HK$53.4 billion, HK$48.6 billion and HK$50.0 billion respectively. Why this long-term commitment to such significant capital works spending is also not viewed as a ôheavy burden on the communityö is hard to fathom. The figure of HK$14 billion seems paltry by comparison.

Again looking at the accrual accounts, in the four years from 2003 to 2007, the governmentÆs accumulated surpluses amounted to HK$210 billion. Over the same period spending on social welfare, health and education, which stood at HK$113.7 billion, fell to HK$112.1 billion.

This kind of relative disregard for the elderly and other social issues in favour of more business-oriented expenditure together with the massive surpluses the government is projecting, is something that a democratically elected government could not live with. It underlines the governmentÆs lack of accountability and the extent to which it is becoming out of touch with the population.

This budget illustrates the need for a radical overhaul of the budget process which will become more apparent as people increasingly object to the governmentÆs disregard of social issues while racking up huge surpluses.
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