Era of small government in the SAR is long gone

Hardly any mention is made these days of “small government, big market,” a catch phrase of Hong Kong’s economic policy in the past. And for good reason — as the government is not that small anymore.

In his budget speech at the Legislature on Wednesday, Financial Secretary Paul Chan Mopo noted that government expenditure now accounts for about 20 percent of total output, or GDP. As such, it has become a major engine of growth alongside fixed asset formation and export trade.

The size of the government is set to get even bigger in coming years. Latest figures cited by Chan show that government spending has increased by an average of more than 15 percent in the past three years, far exceeding the city’s GDP growth rate at about 3 percent.

Rapid increases in government expenditure, mostly of recurrent nature, weren’t much of a problem against the backdrop of large annual budget surpluses which helped boost the fiscal reserve to more than HK$1 trillion, equivalent to more than two years of public spending. The question is how long can Hong Kong indulge in what some conservative economists described as the addiction to popularism politics.

In his budget speech, Chan asked rhetorically whether the government should adopt austerity measures to spare financial and labor resources for the private sector to meet the projected challenges of 2019 — as dictated by past economic policy — or increase spending to stimulate economic growth and protect jobs.

With such large fiscal reserves, Chan has the obvious answer — spend more. His budget set out a long list of expenditure to shower on various sectors of the economy to help boost growth. It also includes additional spending on social welfare to help the needy and set aside funds to relieve the hard-pressed medical services which are severely strained by the rapidly aging population.

Neither has Chan skimmed on budget handouts, which include tax relieves for businesses and individuals and higher direct subsidies to low-income families and individuals. The budget also has made available funds for sporting activities and to improve various public amenities, including more than 200 public toilets.

Popularism or not, the progressive economic policy as the one pursued by the government is the right and, some would say the only, choice to meet the increased demand of the majority of Hong Kong people, hard pressed by escalating property prices and static wages despite the persistently low unemployment rate.

In the short term, such a policy can help the government win back the public’s confidence which has been seriously undermined by blunders at a number of major infrastructure projects, dreadful overcrowding at various public hospitals and the loud complaints of many over stressed medical staffers at those facilities.

Unsurprisingly, there have been instant complaints from critics arguing that the government is doing too little for the underprivileged and the elderly poor. The budget made no mention of the highly controversial universal pension scheme. The commitment to improve elderly care is widely criticized to be too little to meet the rapidly growing demand.

But there is a limit to what the government can do while trying to maintain a low tax base and avoid raising debts to finance fiscal expenditure. Indeed, some economists argued that the government already is doing too much by allowing its recurrent expenditure on social and medical welfare to expand at the current rate.

But it’s important for traditionalists to understand that the old economic policy has already lost its magic in this service-oriented economy when cost of funds and labor is no longer the major consideration in the competition with the various emerging financial centers and business hub around the region, but innovation is.

For that reason, the government has budgeted sizeable funds to promote the technology industry, with particular emphasis on fintech. In this area, Hong Kong is seen to be playing catch-up against some of its neighboring competitors, especially Singapore. And to catch up it must in order to stay in the game.

The author is a veteran current affairs commentator.