What I would propose for the upcoming budget
The Honorable Paul Chan Mo-po, the financial secretary, is preparing his budget, which is expected to be announced in February next year. I have some ideas to share with him. As financial secretary, he has two key responsibilities: to bolster the economy, so that it will be vibrant and competitive; and to address the needs of the community, so that people can improve their livelihoods.
Although Hong Kong has huge fiscal reserves, and although it was reported that Hong Kong’s fiscal surplus for this current fiscal year might surpass the HK$100 billion mark, the financial secretary will still face dilemmas. Although we have big fiscal surpluses, the trajectory of fiscal expenditures, given our rapidly aging population, the increasing aspirations for the quality and availability of affordable healthcare in the community, the rising needs for social welfare and education, will be on a steep upward trend in the coming years. It is unlikely that the budget surpluses will continue, given the current tax structures and the economic trends that are expected to prevail in the next decade and beyond.
My first advice to the financial secretary is that the traditional rule of thumb public spending limit at 20 percent of the GDP should be history. We really should spend more — even if we have to raise taxes. Of course we should spend carefully so that every item of spending should bring a social benefit that can justify the social cost. But if a spending brings more social benefits than costs, we should not worry about raising taxes, unless we can prove that some current spending deserves to be cut because benefits are smaller than costs.
My own research has shown that Hong Kong’s optimal public spending is a lot higher than 20 percent. Given Hong Kong’s quality of public governance, its demographic structure, and stage of development, Hong Kong’s optimal public spending is well over 30 percent of the GDP, even after allowing for the fact that we have no military spending. I would argue that even if we have to raise taxes, with a good design of the tax structure we can still remain competitive.
To bolster the economy, the current administration has committed to increasing spending on research and development, which is definitely well justified. It also has prioritized investment in the smart city, which is again well justified. Hong Kong will continue to invest in much-needed infrastructure. But so far results have been rather disappointing. There really should not be so many traffic accidents in Hong Kong – to the extent that pedestrian safety is dragging down our safe city ranking significantly. The time we are losing on account of traffic jams, including those arising from traffic accidents, and the loss of life and limbs, cast doubt on the effectiveness of the smart city effort. More recently, people are increasingly concerned about air traffic safety — with apparent malfunctioning of our new air traffic control system from time to time. The Vision Statement of the Report of Consultancy Study on Smart City Blueprint for Hong Kong reads: “Embracing innovation and technology to build a strong economy, bring quality living and make Hong Kong a well-known Smart City.” But smart city requires thoughtfulness and care about people as much as innovation and technology. The new air traffic control system is a case in point.
To bolster people’s livelihoods, again, thoughtfulness and a genuine concern about people must come first. I have already given my high praise for the ingenious proposal to subsidize public transport using the Octopus card for heavy public transport users. I would also give praise to the proposal of paying for some expensive drugs for rare diseases. For the latter proposal, I would add that cost sharing may be considered for those who can afford to pay up to a point. I have already proposed in this column for the government to pay for the Mandatory Provident Fund contributions for those whose incomes are presently so low that they are exempted from having to pay employees’ contributions. Related to the smart city initiative, I have always found the direction signs on our highways need much improvement. Sometimes, citing specific notable destinations are far better than using less clear directions such as Tai Po North and Tai Po South. The existence of socalled traffic blackspots usually signals that there are problems in the design of the roads or in traffic management. Another concern is the number of accidents involving service vehicles parked on highways. The Transport Department really needs to study what can be done to improve traffic safety.
A result of my research on optimal government spending is that as population aging advances, we should spend more rather than less on education as a percentage of the GDP. A labor economist friend explained that this may reflect the fact that as fertility declines and the student population to overall population ratio declines, it may be necessary to increase education spending so as to increase labor productivity. Lest people think that I have a conflict of interest here as I belong to the education sector, here I am recommending more spending especially on early childhood education and on parenting education.