“Money Tree

Although the 2024 Budget is still many months away, a great deal of the preparation work has already been completed. The first half of each financial year is spent inviting ministers to put forward proposals for spending on new and improved services. The Treasury arm of the Financial Services and the Treasury Bureau advises how much room there is within trend growth rates to increase recurrent public expenditure. A committee chaired by the chief secretary then conducts the Resource Allocation Exercise and puts up a raft of proposals to the chief executive. A similar exercise takes place for capital projects. Based on the feedback from public consultation, which John Lee Ka-chiu is now conducting, and his own views, the final package emerges and will form the basis of his Policy Address in October.

Between then and the budget announcement itself, usually late February or early March, the financial secretary considers ideas on the revenue side -- tax cuts if circumstances permit, increases if they don’t.

I don’t have a fly on the wall in the corridors of power to brief me on progress but I think it is already possible to outline some of the main likely outcomes. On spending, there is going to be very little room for manoeuvre. We can say goodbye to cash handouts. A lot of money will have to be committed to funding the (unwise) decision by Lee’s predecessor to lower eligibility for the $2 transport scheme to age 60, unless that can somehow be reversed. Most of the rest is likely to go on improving care for the elderly, either providing more places in dedicated facilities or on vouchers for the seniors to buy services direct.

On the revenue side, I don’t think there is going to be scope for big reductions anywhere, more likely a hard look at raising fees and charges wherever possible. Postal charges look a prime target as the trading fund is still in deficit, the subsidy on water charges could be trimmed, firm application of the “user pays” principle everywhere else.

On overall public finances, Hong Kong has been clocking up significant deficits in recent years. For example, in the current financial year the government is expecting a deficit of $120 billion, or as financial secretary Paul Chan Mo-po put it in his budget speech “$55 billion after taking into account bond income of $65 billion”. A similar form of words had been used to describe the anticipated outcome of the 2022-23 financial year. In the first four months of the current financial year the government reported expenditure of $243.4 billion against revenue of $99.7 billion. The deficit of $143.7 billion is reduced in cash flow terms by proceeds of $46.6 billion from sale of Green Bonds. There is nothing nefarious or sinister about such verbiage because Chan in each case is clearly spelling out the bond proceeds. Accountants and other professionals will have no difficulty in understanding the situation. But members of the public need to understand that proceeds of bond sales are not income in the normal sense of the word. They are loans which have to be repaid at a future date.

As at 31 July these debts totaled $168.2 billion, but were more than covered by fiscal reserves of $834.8 billion. So Hong Kong has been very prudent over the years and has net assets, unlike the net debt positions of most other governments, e.g. the United States with accumulated deficits in excess of US$31 trillion.

But there is no room for complacency as it is easy for debts at municipal level to spiral out of control. Birmingham has just become the seventh city council in the UK to effectively declare bankruptcy. And many local administrations in the mainland are believed to be “under water”. Moreover there are two dark clouds on the horizon: rising interest rates and falling property prices.

The first is a global phenomenon of course but Hong Kong has already been affected. The recent Silver Bond offering promised five per cent. It was oversubscribed which enabled the tranche to be increased to $55 billion. The coming Green Bond sale of $15 billion will offer a minimum of 4.75 per cent. While it is encouraging that there is still enthusiasm in the market for government paper, we have just about reached the safe limit of the interest rate we should be prepared to pay. Much higher than that and a government would be in third world territory.

As at the end of August only one of the 18 land parcels slated for sale during the current financial year had been sold, and that was in Kennedy Town at a price well below market expectations. Other sites have been withdrawn from sale when the premium offered did not meet the minimum reserve price. Developers have been offering deep discounts to unload stocks of completed units.

It seems inevitable that proceeds from land sales will be sharply lower than forecast, yet traditionally these have been the source of funding for our capital works projects. There are major ones just ahead – Northern Metropolis and Kau Yi Chau Islands to name but two – and the idea has been floated of meeting the cost by issuing more bonds. For example Liu Pak-wai, an emeritus professor of economics at Chinese University, has proposed issuing infrastructure bonds. These would cover the cash flow until the new land was completed and could be sold. This is an attractive idea in principle but assumes land prices will recover in the interim which may not turn out to be true, and moreover does not cover the many other capital costs. Investors will require a plausible plan to repay the funds borrowed within a reasonable time frame. After all, as the public well knows, but excitable politicians sometimes forget, there is no magic money tree that can be shaken to produce extra resources.