Financial Secretary Paul Chan has his work cut out. Photo: Nora Tam
Opinion
Opinion
by Mike Rowse
Opinion
by Mike Rowse
The hardest budget Hong Kong has ever had to produce
The scale of the financial secretary’s challenge is monumental. Hong Kong needs to spend more to tackle the health and economic crises even as revenue drops with people out of work, businesses falling apart and property prices softening
Financial Secretary Paul Chan Mo-po faces a monumental challenge as he looks ahead to the 2021 budget. It will probably be the hardest task anyone in his position has faced since the end of the second world war.
At its core, the budget builds on three things: a mid-range economic growth forecast, new spending proposals and new revenue proposals. On all three counts, Chan is in very serious trouble, as all the currents are against him.
The economic growth forecast is critical because it determines how much room there is for additional spending without increasing the government’s share of the economy or the need for extra taxes. Normal practice is to use the five-year average to smooth out any short-term fluctuations.
Thus, if the medium-range forecast is for 3 per cent growth, that is the amount public expenditure will be allowed to grow each year even if the forecast for any one year is higher or lower.
The last time our economy was hit by a serious virus outbreak was in 2003 with the severe acute respiratory syndrome (Sars). Then, the second quarter was simply dreadful as various economic sectors virtually came to a stop. However, the recovery in the third quarter was so robust – triggered by a huge surge in mainland tourists and the government’s imaginative economic relaunch programme – that the full-year economic growth figure was actually slightly higher than the pre-budget forecast. Normal growth resumed thereafter.
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Chan’s problems are different this time because our economy is in recession and a strong recovery soon is unlikely. The coronavirus is not yet under control globally and we are also caught up in the Sino-US trade and economic war. So the medium-range forecast is probably for zero growth: it could even be negative.
The scope for additional spending in the 2020 Resource Allocation Exercise is correspondingly reduced. With the government spending record amounts to tackle the health crisis and its economic overspill – HK$530 million (US$68 million) on the community-wide testing exercise and another HK$24 billion on short-term relief measures, bringing the total to about HK$300 billion – the cupboard is looking a bit threadbare.
Also, Chief Executive Carrie Lam Cheng Yuet-ngor will want to announce new spending proposals in her policy address next month to shore up her credibility.
The only way to make space is to require that bureaus and departments make cutbacks, either by eliminating some services or using fewer staff.
Chief Executive Carrie Lam will deliver her policy address on October 14. Photo: Nora Tam
Chan could relax the 20 per cent guideline for public-sector spending as a share of gross domestic product, but he cannot go too far without creating pressure for tax increases and undermining confidence in the government’s management of public finances – hitherto a strength of Hong Kong.
Some desirable but non-essential spending plans will have to be cancelled – the proposal to reduce from 65 to 60 the qualifying age for concessionary public transport is an obvious candidate. A case could even be made for an increase in passenger contributions, from HK$2 to HK$2.50 or HK$3. In tough times, we all have to share the burden. The massive HK$624 billion Lantau Tomorrow Vision, desirable though the scheme may be from a public housing perspective, will also come under renewed pressure.
In the past, financial secretaries have often found room for tax cuts by increasing allowances. This is popular and, during periods of substantial budget surplus, can be implemented without damaging public finances. That is not the situation now.
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Those not working or earning less can hardly pay more income tax, nor can hard-hit businesses with corporate taxes. Soft property prices do not point to higher land revenues. At a time of record deficits, it is hard to see any scope for tax cuts.
On the contrary, I would expect more emphasis on the “user pays” principle in setting fees and charges. Postal rates and water charges look like obvious targets and transport licence fees could be in for an increase. If you can afford a car, you can afford to pay a bit more towards the public coffers. Issuing government bonds would solve the cash flow situation, but is not a permanent solution.
There are several skeletons in the financial secretary’s cupboard. The first is the Airport Authority, which is committed to spending over HK$140 billion to build a third runway when there is insufficient air traffic to fully utilise one.
The cost is intended to be covered by a surplus on operations, a new levy on departing passengers, plus loans and bonds. But loans and bonds are not free money: they have to be repaid. If the airlines and their passengers fail to show up, then the government may have to step in to rescue the statutory body.
Another skeleton is the MTR Corporation. It already bears the cost of the widespread vandalism during last year’s social unrest. Yet another of its projects – the Sha Tin-Central link – has run into fresh problems. Already over budget and behind schedule, a recently discovered signalling problem threatens further costs and delays.
This is disappointing as the work was supervised by the Electrical and Mechanical Services Department. The previous head of the department – Frank Chan Fan – is now the transport secretary and therefore directly accountable for the MTR Corp’s work and sits on its board. He has not done his colleague Paul Chan any favours here. Our theme parks will also need recapitalisation.
So there is the scale of the challenge. Pressure to spend lots more, but with less revenue coming in, while upholding the dollar peg and keeping speculators at bay. Good luck, Paul.
