Budget 2024

The budget financial secretary Paul Chan Mo-po presents to the legislative council on Wednesday will be the toughest of his career. In his last budget speech Chan had forecast a cash shortfall in the current financial year of $54.4 billion after taking into account bond sales of $65 billion (i.e. a deficit of $119 billion). In recent public statements he has indicated the shortfall could exceed $100 billion. Major accounting firms have issued similar figures. Personally I am sticking to my own estimate of $200 billion for the deficit with net cash outflow of about $150 billion after taking bond sales into account.

As at 31 December 2023 the actual figures were a deficit of $209 billion offset by bond proceeds of $66.7 billion leaving a net cash outflow of $142.3 billion. January is normally a good month for revenue as first installments of salaries tax come in, but February and March will no doubt be in deficit, so the end December numbers are a reasonable proxy for the whole financial year.

Leaving aside that persistent deficits on this scale put us perilously close to being in breach of the relevant provisions of the Basic Law, the present situation has important implications for government finances in terms of spending, revenue raising, and the market for government bonds.

On spending, one doesn’t need to be a genius to see that if we are already running a substantial deficit then scope for additional spending is severely constrained. Despite the clear writing on the wall, one major political party is still advocating a new round of consumption vouchers, without of course indicating where the money is to come from. While a popular idea for obvious reasons (Would you like some more money? Yes please) this is irresponsible behaviour. We need to get serious.

Chan will do well to fund all the initiatives outlined in the chief executive’s policy address last October. At that time John Lee Ka-chiu outlined a number of worthy improvements, particularly in services for the elderly and less well off. Nobody is pretending that everything is now perfect, but if we wish to make further progress in some areas we have got to learn to prioritise. Cutting back expenditure on less urgent matters to free up resources for others. Already some ideas are being floated, for example an across-the-board cut or freeze in civil service salaries. That would be controversial and socially destabilising, so unlikely to be pursued, but having ministers (and Legco members?) set an example of sacrifice might find favour, especially if there are to be tough decisions in livelihood matters that affect the whole community. Departments have as usual been asked to consider how to cut one per cent from their budgets and most could probably trim comfortably, but that might not be enough. Major surgery in one or two areas cannot be ruled out.

On revenue raising, enough hints have been dropped to suggest many fees and charges are set for a revision after being frozen, in some cases for many years. Water, hospital and postal rates all seem set to rise. As these affect the grass roots, the rates of increase will have to be kept manageable. That is likely to put more pressure on expenditure items at the luxury end, for example anything to do with private cars. We have probably the best overall public transport system in the world so there is no need to succour the wealthy’s desire for personalised travel in self owned vehicles , especially if we can find it within ourselves to introduce a path to legitimise Uber (We are the only major business centre in the world yet to do so). Parking charges and penalties must all be set for review. All routine services (e.g. passport issue) must be brought up to full cost recovery level.

I really wonder whether all this will be enough to balance the books. We seem to be at the beginning of a structural shift in public finances where we cannot rely on high property prices to carry us through forever. That suggests we need a major new source of revenue. Some have floated the idea of a capital gains tax, and the administration is understood to have a review in hand. But this kind of goes against the grain of Hong Kong as the capitalist city par excellence.

Partly for that reason I would think we might have to “bear the unbearable” and consider introduction of a goods and service tax. This need not make us less competitive – Singapore has had such a tax for years and increased the rate to nine percent from 1 January this year. We could start lower – say three or five percent – and collect at the wholesale level to keep administration simple. It won’t be introduced in the budget this time because the scheme needs to be further fleshed out. But we have been mulling the idea for quite a while so don’t be surprised if Chan drops a heavy hint that he is getting close to a decision.

Finally there is the matter of government bonds. It is important to remember these are borrowings – sums that have to be repaid one day, not fruit of the magic money tree. As at the end of December, the government had outstanding green bonds of $188.6 Billion and a further $243.7 billion of bonds under its general bond fund. The former were denominated in a mixture of currencies (US, HK, RMB and Euro) and with different maturity dates running up to 30 years, the latter in local currency.

One thing for certain is there will have to be more bonds sold in 2024-25 in order to maintain fiscal reserves at a reassuring level. I would estimate at least $100 billion, perhaps including some for infrastructure purposes as trailed in last year’s budget. One thing is certain: it will be easier to market the bonds, and keep interest rates modest, if investors can see a coherent credible plan to repay them within a reasonable timescale.