Budget Blues

The 2020-21 budget that Financial Secretary Paul Chan Mo-Po is due to unveil on Wednesday will be a real test of his mettle. He will also have to be very vigilant in the aftermath. It is always a challenge for the money man to justify prudence in the management of public finances when everyone can see we have substantial fiscal reserves. This time will be particularly tough as Hong Kong is now suffering a real crisis. This is the proverbial “rainy day” for which accumulation of the reserves over the years was justified in the first place. Chan is sure to be under pressure from all sides. That Legco chamber is going to seem a lonely place.

Everyone’s eyes are on the Legco elections in September. The traditional opposition forces, fresh from their overwhelming victory in the District Council elections last autumn, will have little hesitation in sucking up to the electorate by pressing for the spending taps to be turned on. However generous Chan’s initial set of proposals, it will be argued he could and should have done more. And the normally pro-establishment camp is unlikely to come to his rescue. Still smarting from the drubbing they took in November, they will remember that they stood by the government right to the end of its ill-fated attempt to overhaul the extradition legislation, only to have the rug pulled out from under them at the last minute when Chief Executive Carrie Lam Cheng Yuet-ngor finally dropped the Bill without consulting them. If they suspect the government might be ready to give further concessions in the budget, they won’t make the same mistake again.

How about the Executive Council members, how about other officials? The picture here is no more encouraging. Bernard Chan and his colleagues have been almost invisible since the extradition crisis exploded. Their modesty is understandable -- at least they recognise their own limitations. There is no sign of similar self-awareness among their official colleagues. In her famous CNN interview at Davos, Lam was still blaming the political unrest of the last nine months on the failures of government PR and Hongkongers lack of understanding of the Basic Law.

In addition to the inevitably large fiscal shortfall, our administration is suffering from an even more serious deficit -- its own credibility. Official statements that supply of necessities was stable were followed by armed robbery for toilet paper, making our city a global laughingstock. In the pre-budget leaks and semi-official announcements of relief measures there is more than a hint that some of our senior officials would like to spray public money around in the hope of rescuing their own reputation. The sad truth is even the wealth of Croesus could not rescue the government’s credibility.

An example of the boondoggle wind sweeping Tamar was the sudden proposal to lower the age of eligibility for the $2 transport concession from 65 to 60. This is not a one-time relief measure, it is a permanent increase in recurrent expenditure. Over time it would cost the taxpayer billions. Was the idea seriously thought through and evaluated in the annual resource allocation exercise against other possible uses of the money? Or was it just tossed out as a scheme to buy some temporary popularity?

Governments everywhere are struggling to cope with the financial implications of their aging populations. We should be pushing everyone here to accept 65 – even 70 – as the normal retirement age and gearing taxpayer help for the aged accordingly. Sending a signal that subsidies should start at an even younger age is simply wrong.

Chan needs to focus on the fact that we face not one crisis, but three. The first is the Wuhan coronavirus outbreak. This is a short-term phenomenon which is causing serious economic dislocation and hardship. Scientists and doctors will solve the health aspect of the virus in due course and we have the funds to cushion the blow in the interim.

The second crisis derives from the decision by the United States of America to categorise China as a strategic rival and to introduce a barrage of measures to halt or slow our country’s economic rise. In addition to the tariff war, there are bans on sales of high-tech products (advanced computer chips, aircraft engines etc) to Chinese companies, stiff vetting of proposed takeovers of US companies by Chinese enterprises, talk of denying Chinese companies access to American capital markets and so on. The combined effect of all these measures will be major changes in the economic relationship between China and the United States with spillover effects on other economic relationships also, most significantly with Europe.

In response to these and other developments, the Hong Kong economy faces a period of substantial restructuring, accommodating changes to basic industries such as tourism and logistics. Hong Kong’s entrepreneurs are among the most creative in the world and we will survive – even flourish – in the long term. But there will be short term pain. The government will need to invest heavily to ease the community through the transition. The need to conserve public resources to finance the changes is a strong argument for continued prudence in future budgets.

The third crisis of course is the political one triggered by the extradition brouhaha. It has not been resolved, only interrupted by the virus outbreak. It needs to be tackled comprehensively in a way which restores community harmony.

Once the virus situation has been quelled, the economy starts to recover and begins its transformation, there will still be pressure for short term relief measures. But budgetary largesse is no substitute for political accommodation and reform. Chan will need to resist attempts to prove otherwise.

My advice to the Financial Secretary this time round is simple: be generous now but with one-offs, not recurrent programmes; garner savings for long-term restructuring and growth; resist attempts to buy political peace with candies. It won’t work.