Budget a warning of bigger government coming

The budget brouhaha may have died down, but further examination shows a trend to bigger government involvement in the economy.

While many saw the budget for the 2019-20 fiscal year, unveiled on Wednesday, as one bearing few surprises, Mr Nicholas Sallnow-Smith, Chairman of the Lion Rock Institute of Hong Kong, believes it is an important one that sends a signal about a change in the direction of the administration of the Hong Kong Special Administrative Region.

“This budget is a story of a bigger government,” he says. “Before this, not only did we have a fiscal surplus, low taxes and a small government, but also a government that said that was a good thing. Now we’ve lost that.”

Government expenditure has been growing faster than GDP. According to the Basic Law, this should not happen. Article 107 of Hong Kong’s de-facto constitution, the Basic Law,stipulates that government expenditures should be kept within the limits of revenues in drawing up the budget and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its GDP.

In this year’s budget, Financial Secretary Mr Paul Chan estimated that government expenditures for 2018-19 would be $537.7 billion and would further rise to $607.7 billion for the next fiscal year, up 9.5 percent. Meanwhile, estimated GDP growth for 2019 is projected at somewhere between 2 to 3 percent.

Government expenditures in terms of percentage of GDP also rose from 20.2 percent last year to 21.6 percent this year.

Breaking the cap

“In the British days, there was a specific cap on expenditures. Then former financial secretaries Donald Tsang and John Tsang also regarded that as the limit of the size of government expenditure,” says Mr Sallnow-Smith.

But last year, that was breached for the first time under Mr Chan’s budget.

“And this year it’s 21.6 percent. So, there is now not only no respect for the idea that government expenditure shouldn’t increase faster than GDP but the old… 20 percent is also now completely disregarded,” he adds.

He says now there are no official rules that will restrict how fast the government can grow in size.

And indeed, Hong Kong’s civil service establishment is only getting bigger. Mr Chan said 6,700 new posts have been added in 2018-19, representing growth of 3.7 percent.

“[It is] higher than the average growth of 1 to 2 percent over the past decade,” Mr Chan said.

Another proposal that seems controversial to Mr Sallnow-Smith is that the government will spend $20 billion on buying 60 properties from the private sector to build welfare facilities such as nursing homes, instead of building them on government land.

“So not only is the government taking a larger and larger share of economic activity every year, it’s now also taking assets that were in the private sector and converting them into the public sector by buying them,” he adds.

Mr Sallnow-Smith says the message from Mrs Carrie Lam’s administration is clear: “We want a bigger government and we are not interested in any constraints on the government’s size, either in terms of expenditure rates of growth or the size of the civil service.”

Shaking confidence

“If the constraints on expenditure have been thrown away even though the Basic Law requires so, what’s next? In this case, can we still rely on the article of faith that the government will remain a low tax environment because it says so in the Basic Law?” he questions.

Even though the tax rates and the size of the government still look good in Hong Kong compared to other places, he worries that the latest budget shows an early warning sign that the Hong Kong government’s attitude is changing – from upholding the principle of “a big market and small government” to the opposite.

“We can only guess how this will go, but it’s not going to be as good as now,” says Mr Sallnow-Smith.