Budget Blues

Financial Secretary Paul Chan Mo-po faces a monumental challenge as he looks ahead to the 2021 budget. It will probably be the hardest task anyone in his position has faced since the end of the second world war.

Financial Secretary Paul Chan Mo-po faces a monumental challenge as he looks ahead to the 2021 budget. It will probably be the hardest task anyone in his position has faced since the end of the second world war.

The economic growth forecast is critical because it determines how much room there is for additional public sector spending without increasing the government’s overall share of the economy, and the need for extra taxes. Normal practice is to use an average figure over a five-year period in order to brush aside short-term fluctuations in any single year. Thus, if the medium range forecast is for three per cent growth, that is the amount public expenditure will be allowed to grow each year even if the forecast for any one year is higher or lower.

The last time our economy was hit by a serious virus outbreak was SARS in 2003. Then the second quarter was simply dreadful as various sectors of the economy virtually came to a stop. However the recovery in the third quarter was so robust – triggered by a huge surge in the number of mainland tourists and the government’s imaginative economic relaunch programme -- that the full year GDP growth figure was actually slightly higher than the pre-budget forecast. Normal growth resumed thereafter.

Chan’s problems are different this time because our economy is in recession. and a strong recovery is unlikely in the short term. The coronavirus is not yet under control globally and we are also caught up in the Sino-US trade and economic war. So the medium range forecast is probably for zero growth: it could even be negative.

The scope for additional spending in the 2020 Resource Allocation Exercise is correspondingly reduced. At a time when the government is spending record amounts to tackle the health crisis and its economic overspill – over $500 million on the community-wide testing exercise and another $24 billion on short-term relief measures, bringing the total to over $300 billion – the cupboard is looking a bit threadbare. At the same time, chief executive Carrie Lam Cheng Yuet-ngor will want to announce some new spending proposals in her policy address next month to shore up her credibility.

The only way to create sufficient headroom for this will be by requiring bureaus and departments to find savings from existing activities. That means a cutback by eliminating some services altogether, or by maintaining current service levels with fewer staff. Chan could relax the 20 per cent guideline for public sector spending as a share of GDP, but he cannot go too far without creating pressure for tax increases and undermining confidence in the government’s management of public finances – hitherto a Hong Kong strength.

Some desirable but non-essential spending plans will have to be cancelled – the proposal to reduce from 65 to 60 the qualifying age for the concessionary public transport scheme is an obvious candidate. A case could even be made for an increase in the passenger’s contribution from $2 to $2.50 or $3. In tough times we all have to share the burden. The massive $600 billion Lantau Vision scheme, desirable though it may be from a public housing perspective, will also come under renewed pressure.

In the past, financial secretaries have often found room to make some reductions in the tax burden by way of increased allowances. These are popular and during periods of substantial budget surplus can be implemented without damaging overall public finances. That is not the situation now. Those not working or earning less can hardly pay more Salaries Tax. Hard hit businesses will not be able to maintain present Profits Tax payments. Soft property prices do not point to higher land revenues. At a time of record deficits, it is hard to see any scope for cutting taxes. On the contrary, I would expect more emphasis on the “user pays” principle in setting fees and charges. Postal rates and water charges look like obvious targets and transport licence fees could be in for an increase. If you can afford a car, you can afford to pay a bit more towards the public coffers. Issuing government bonds would solve the cash flow situation, but is not a permanent solution.

There are several skeletons in the financial secretary’s cupboard at present. The first is the Airport Authority which is committed to spending over $140 billion to build a third runway at a time when there is not sufficient air traffic to fully utilize one. The cost is intended to be covered by surplus on operations ($33 billion) a new levy on departing passengers ($26 billion) plus loans and bonds ($69 billion). But loans and bonds are not free money: they all have to be repaid. If the airlines and their passengers fail to show up then the government may have to step in to rescue the statutory body.

Another skeleton is a second statutory body, the Mass Transit Railway Corporation. It already bears the cost of the widespread vandalism during last year’s social unrest. Yet another of its projects –- the Shatin-Central link – has run into fresh problems. Already over budget and behind schedule, a recently discovered signaling problem threatens further cost and more delay. This is disappointing as the work was supervised by the Electrical and Mechanical Services Department. The previous head of the department – Frank Chan Fan – is now the Secretary for Transport and Housing and therefore directly accountable for the MTRC’s work and sits on the corporation’s board. Transport Chan has not done his financial namesake any favours here. Our theme parks will also need recapitalisation.

So there is the scale of the challenge. Pressure to spend lots more, but with less revenue coming in, while upholding the dollar peg and keeping speculators at bay. Good luck Paul.