Last Blast
I apologise for returning so soon to the subject of Hong Kong’s public finances, but I still don’t think the population at large, and in particular our legislative council members, have fully grasped the extent of our present difficulties.
Part of the reason is a presentational issue. The established practice is to report on the Operating Account on a cash basis, literally cash in and cash out. This includes what is happening on a fiscal basis, but also brings in all sorts of extraneous items that can obscure the underlying situation. Let me explain.
The fiscal balance is the difference between government revenue and government expenditure. If the balance is positive, we call the result a surplus, if it is negative we call it a deficit. Hong Kong used to record fiscal surpluses and indeed we amassed a large amount of reserves so much so that there were complaints the government was being too tight-fisted and not spending as much on improving services as it could and should. Those halcyon days are well in the past and for some years now we have been incurring fiscal deficits with the result that we have gradually whittled away the accumulated surpluses.
In his budget speech last month, financial secretary Paul Chan Mo-po forecast the deficit on the Operating Account for the current financial year would be $87.2 billion. But this figure was after taking into account two extraneous items, viz net proceeds of new bond sales of $107. 9 billion (new bonds issued $130 billion, less old bonds redeemed $22.1 billion) and reclaiming the unspent balance of $15 billion from the Anti-Epidemic Fund. In other words, the pure fiscal deficit is estimated at $210.1 billion.
Chan also estimated the fiscal reserves would be $647.3 billion as at 31 March 2025. This number needs to be set against the figure for outstanding government debt ($286.3 billion as at 31 January). In other words we are about $360 billion to the good as the financial year ends. Chan forecast a deficit of $67 billion for 2025-26. However once again that is the number for the Operating Account, the forecast for the pure fiscal account is for a deficit of $224.9 billion (the $67 billion plus the two extraneous items, $95.9 billion for net bond proceeds and $62 billion from reclaiming uncommitted balances of six capital funds). In other words, by the end of the coming financial year our accumulated savings on a net basis will be almost all gone.
In order to finance development of the Northern Metropolis and other vital infrastructure works, Chan is planning to issue bonds of some $860 billion over the next five years. Adding in a sixth year would take the total past the trillion-dollar mark. This is the right way to finance long term strategic investment of this kind and for an economy of our size the numbers should be manageable. But I flag them up now to draw attention to an important point which should be obvious but is often overlooked. These bonds are money that we have borrowed and which need to be repaid – from future fiscal surpluses.
I cannot see any likely way of achieving those surpluses unless we can find substantial new sources of revenue. The plain truth is we relied for too long on the proceeds of land sales. Though it was never admitted, we in effect adopted a high land price policy, but that model is broken and I don’t think it is ever coming back.
We can tinker at the edges, reviewing fees and charges regularly, enforcing the user pays principle more rigorously, and so on. We should do these things because they are right. But they will not raise anything like the sums required. Readers with long memories may recall that in my column looking forward to last year’s budget I suggested we make a start on preparations for some form of goods and service tax. I realise it will not be popular and will require very careful presentation and explanation. But we are kidding ourselves if we think the debate can be deferred indefinitely. It is inevitable and we should begin the conversation forthwith.
My suggestion is to start small and gradually increase the range of goods and services covered. How about starting with something simple like utility bills (gas, water, electricity, telecommunications etc). In later phases we could bring in restaurant bills, luxury goods and so on. As far as possible we should keep collection at the wholesale level to simplify administration. There will be lots of special pleading for exemptions – there is bound to be opposition to imposing the tax on kindergarten and school fees, medical expenses for example. It will take a strong financial secretary with the support of a disciplined legislature to resist. But the general aim should be to include everything eventually.
We can also set the tax at a low percentage initially – say three or five per cent -- and increase it later as necessary. Singapore followed this route, increasing GST to 9 per cent last year without noticeable loss of competitiveness.
In sum, we need to borrow very large sums in order to finance essential capital expenditure. We can do so – we must do so – but to maintain our reputation for fiscal prudence, and keep borrowing costs low, we must show capital markets that we have a credible plan to achieve fiscal surpluses to repay whatever we borrow. That means GST.