Rising public spending will lead to future difficulties for the SAR

Financial Secretary Paul Chan Mo-po was trying to manage public expectations by forecasting a significantly lower budget surplus for the fiscal year ending March 31, suggesting that government handouts would be less generous than in previous years.

Some economists estimated that the estimated decline in income from transaction taxes following the downturn of the stock and property markets will trim the surplus to about HK$50 billion. Though smaller than the previous year’s surplus by a wide margin, the projected amount is still a sizeable sum of money going into the public coffers.

For that reason, public pressure on the government to giving back a fair chunk of the surplus in the form of tax incentives and direct subsidies to match previous years’ incentives is expected to remain high. That is wrong.

To be sure, returning wealth to the public has always been an integral part of Hong Kong’s free market economic policy which values private sector contributions above any form of government intervention even in social issues. While the free market principle has remained unchanged, the government has been forced by circumstances to take a much more hands-on approach in governance in recent years.

The change was brought about by rising public expectations arising from a much keener sense of belonging compared to refugee mentality of their predecessors. More important was that the increasingly unbalanced economy, depending mainly on finance and property to generate wealth, is seen to have widened the income gap, deepened the social divide and brought about an unprecedented level of social and economic injustice.

Escalating home prices have further fueled public discontent by denying more and more Hong Kong people a chance to buy homes which are generally considered the best storage of value. Young people who cannot afford a home feel that they have been robbed of the only chance to move up the social and economic ladder.

Meanwhile, many more people are retiring as society continues to age rapidly. Without the backing of a comprehensive pension scheme, a large number of retirees will find it hard to make ends meet.

Under such circumstances, the government has greatly increased its recurrent expenditure on social welfare in recent years. But the total recurrent expenditure has already exceeded recurrent income mainly from salary and corporate taxes. That can be a worrying trend because a sharp economic downturn could greatly reduce the windfall income from sales of public land and transaction charges, plunging the government budget into deficit.

Such a scenario is not causing much concern to the public because of the large fiscal reserves amounting to more than HK$1 trillion, sufficient to cover more than two years of recurrent expenditure. The fiscal reserves were drawn down to cover budget shortfalls only a couple of times in the past, most notably in 2003 when the economy was battered by the fallout of the Asian financial crisis and the outbreak of the SARS epidemic.

These incidents, though rare, have served to remind Hong Kong people the importance of keeping large fiscal reserves especially when the workforce is being depleted by the rapidly aging population. That would greatly impede future economic growth as demonstrated in some other developed economies, including Japan.

Some economists estimated that if annual government expenditure continues to increase at current rate Hong Kong will face the dreaded problem of structural deficit in 10 years. Such a time could come even earlier in a prolonged period of slow economic growth brought about by external factors or a shrinking workforce.

External factors don’t bode well for the Hong Kong economy in 2019. It is facing severe headwinds from the ongoing trade dispute between its two largest markets, the United States and the Chinese mainland. The prospects of other markets in Europe and Asia aren’t looking bright either. The IMF has downgraded its forecast of global economic growth in 2019, citing various uncertainties.

The government said it would introduce measures to protect jobs and help businesses, especially small to medium-sized enterprises, which are the largest employer, to weather the hard times. Such measures could incur extra expenses or further reduce government tax income.

The bright side is that the job market has remained robust while the demand for workers in the construction and service sectors continues to be keen. With the unemployment rate staying at below 3 percent, there is really not much excuse to demand ever more generous handouts from the government.

Hong Kong people will have to adapt to small surpluses from now.

The author is a veteran current affairs commentator.