Sustainable budget to ensure viable growth
The government must move from reliance on ‘unexpected’ budget surpluses toward a long-term sustainable budget strategy based on investing reserves in human capital, argues Ken Davies
In the Bible, Joseph interprets the Pharaoh’s dream of seven fat cows and seven lean cows as foretelling seven prosperous years followed by famine and advises him to use the former to prepare for the latter. Some 4,000 years later, we still have business cycles; downturns follow upturns and the government must be ready.
Where are we now? At the moment cows look fat. Most major economies enjoy steady growth, with unemployment at record lows and inflation (and, consequently, interest rates) also low. The government is about to enjoy yet another revenue windfall from the property boom: The Hong Kong Institute of Certified Public Accountants predicts about HK$180 billion in financial surplus for 2017-18. This is far higher than the government’s forecast of HK$16.3 billion, and is equivalent to nearly 7 percent of current-price GDP.
In the good (or bad) old days of Keynesian economics, when fiscal policy was considered a more effective way to “fine-tune” the economy, economists would urge governments to run budget deficits to stimulate the economy during recessions, and surpluses during inflationary upturns.
Nowadays, inflation is dealt with entirely through monetary policy — pushing up interest rates. In any case, the overall economy (other than the property sector) is not overheating, as would be apparent if low unemployment (currently 2.9 percent) were accompanied by rampant inflation (now still right down at 1.7 percent); and GDP growth is not high by Hong Kong standards (estimated by the government at 3.7 percent for last year). So even a Keynesian would not recommend running a budget surplus right now.
In recent years, the government has regularly underestimated the budget surplus in its budget forecasts as a result of property tax windfalls but this is not very professional and also not sustainable. There are already indications of a housing-market growth slowdown, for example a turn toward land flipping rather than land holding for development. The United States Federal Reserve is expected to make at least two, more likely three, interest-rate increases, bringing matching rises in Hong Kong as a result of the fixed link to the US dollar. And there is little scope left for stamp-duty increases.
It could indeed be argued that the government should reform the current land allocation system, which creates an artificial land shortage and limits competition, pushing private housing costs beyond the reach of local people who wish to buy a place to live. Doing so would depress property tax revenues, at least in the short term, especially if housing prices actually fell to affordable levels.
Accumulated budgetary reserves could well cross the HK$1 trillion threshold this year. Combined with other government funds, the sum available is probably nearer double that, about threequarters of annual GDP. If this is saving for a rainy day, it is difficult to think how bad the rain would be to need such a large umbrella. Earthquake? Nuclear war? This is money that should be put to good use, not left to gather dust. As the English philosopher, Francis Bacon, said in 1625: “Money is like muck, not good except it be spread.”
How should the government use its great wealth? How can it design realistic spending plans, since “unexpected” massive budget surpluses have occurred but are ultimately unsustainable and Article 107 of the Basic Law constrains the government to “keep expenditure within the limits of revenue in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product”?
Whatever it does, the government would be wise to avoid one-off handouts to gain popularity. At the same time, it cannot simply commit to massive annual increases in recurrent expenditure which will land it in deficit territory when, sooner or later, a falling property market cuts revenues.
So reserves and surpluses must be spent on long-term investments in areas that underpin Hong Kong’s future economic and social development. Doing so will benefit Hong Kong people and promote future government revenue expansion. The new budgetary pattern must be part of a sustainable growth strategy for the whole government.
Major infrastructure projects that relieve bottlenecks and promote real economic activity should be completed but money should not be squandered on ostentatious follies. More important is investment in human resources, especially basic education and healthcare, as well as improvements in welfare provision, as part of a strategy to raise productivity throughout the economy. Pension provision needs to be regularized so the increasing number of old people can retire comfortably after a life of hard work.
Hong Kong’s success in boosting living standards has been exemplary in overall terms. GDP per head is now $46,000, above that in the United Kingdom and France, according to the International Monetary Fund’s 2017 World Economic Outlook.
But this statistic masks the fact that most inhabitants are not well off. Hong Kong’s Gini coefficient, at 0.53, is among the highest in Asia and the world. During the recovery from the 2008 global recession, inequality grew as incomes of rich cohorts rose sharply; those of lower-income groups stagnated or declined.
Some inequality is inevitable in a competitive market economy but the degree of inequality Hong Kong is now approaching is dysfunctional, discouraging rather than encouraging effort and potentially threatening social stability.
On Wednesday, the budget speech should show Hong Kong is moving toward a sustainable balanced budget by investing in its people.