The SAR must spend its budget surpluses wisely

Ayear ago, I urged the Hong Kong government to develop a series of sustainable annual budgets to achieve sustainable growth. This year’s message is no different, despite the worsening international economic situation and an expected budget surplus of around two-thirds less than last year’s.

Real GDP growth in 2018 is likely to have fallen to 3.2 percent from 3.8 percent in 2017, according to the most recent government forecast.

If, as seems likely, revenues have grown more slowly than expenditures, the surplus will also have declined, as was forecast in the 2018-19 budget speech, which suggested a drop from a surplus of HK$138 billion in 2017-18 to HK$46.6 billion in 2018-19.

When Financial Secretary Paul Chan Mo-po delivers his third budget on Feb 27, he will reveal the scale of this surplus. The question will then be: How to spend it?

I am not alone in insisting that he does not bow to widespread pressure to fritter it away on handouts like the HK$4,000 he decided to dole out last year to 2.8 million Hong Kong residents.

Not only should the surplus be invested in Hong Kong’s long-term future, the government should also draw up plans to use some of the HK$1 trillion in fiscal reserves, which, along with hundreds of billions more in other government funds, are, in the present low-interest-rate financial climate, gathering dust rather than interest.

Of course, some reserves are essential to bolster the economy against the threat of recession, especially since there is little room for maneuver in monetary policy, with US, and therefore Hong Kong, interest rates so low, leaving fiscal policy to do the heavy lifting. Of course, Hong Kong already has little control over interest rates since 1983 because of the fixed link between its currency and the US dollar.

If the worst comes to the worst and GDP decelerates or even shrinks, raising unemployment, it will be necessary to channel resources to those affected, either automatically through existing welfare payments, or by temporary measures such as selective tax cuts.

How likely is the “rainy day” that such funds are kept in store for?

A global recession may not feel imminent, but it is wise to prepare for it after the longest recovery period in recent history (more than 10 years since the onset of the 2008-09 economic crisis).

While China has worked hard on a number of trade agreements with the US that might stave off a disastrous increase in US tariffs on imports from China to 25 percent, it is nevertheless possible that these talks will fall through, putting Hong Kong in the firing line because of its strong trade and investment links with the mainland and the US. It is better to be prepared for such a worst-case scenario than to be unprepared.

Lastly, the economic outlook on the mainland itself is uncertain, as the natural long-term deceleration in economic growth resulting from the Ken Davies is former chief economist, Asia and Hong Kong bureau chief for the Economist Intelligence Unit in Hong Kong. successful expansion of the last four decades of reform and opening-up continues, as do serious structural weaknesses in the financial underpinnings of the mainland economy.

Indications are that there will be a gradual, manageable slowdown in GDP growth in 2019. But uncertainties will persist into and beyond 2020, hence the need for continued prudence. Better safe than sorry.

And the budget is not the be-all and end-all. As Paul Chan said recently, it is up to the chief executive, not the financial secretary, to make policy.

It will be good to see more spending on investment in human capital, especially in education and healthcare, where Hong Kong underperforms compared with many of its peers.

It will also be good to see more spent to ease the conditions of those living in coffin and cage homes. Hong Kong remains one of the most unequal societies in the developed world, and policies need to address this, as well as other major issues, such as climate change and energy efficiency.

But fundamental and bold initiatives on such things as the land allocation system — which needs to be tackled if housing is to become available and affordable for all — require more than an annual budget.

For major decisions such as these, a whole-ofgovernment approach is needed, initiated and led by the head of the government.

In her Policy Address last October, Chief Executive Carrie Lam Cheng Yuet-ngor did deal with these policy areas and promised to build a stronger, more transparent, and more interconnected civil service to implement her 244 new initiatives. Most importantly, she showed that she had listened to the public. Now what is required is to put financial muscle behind these initiatives.