How Not to Budget for Hong Kong

The 2020-21 Budget demonstrates the Hong Kong government’s inability to address structural reforms and responsibly plan for the city’s fiscal future.

Photo: Hong Kong by Diane Robert.

True to form, when the foundations of Hong Kong shake, financial secretaries offer one-off token gestures to appease the public rather than delivering serious structural reforms. In keeping with the long tradition laid down by his predecessors, Finance Secretary Mr Paul Chan Mo-po has once again deftly side-stepped the opportunity to do something meaningful.

This year’s HK$20.8 billion worth of handouts includes $10,000 per person, which will be available to expats in Vancouver (and London!), but not to locally resident domestic helpers. As usual, this wealth redistribution – don’t call it a rebate until at least half the people pay taxes – will further pare down one of the world’s narrowest tax bases. And, true to form, the actual cash-in-pocket effects will be postponed well into the recovery period, ensuring yet another excessive boom to follow the unnecessarily deep bust.

What might have been?

Over the past decade, Hong Kong has spent an average of 16.4 percent of government revenues on education. The second largest pocket was 13.1 percent; this amount is dumped into the fiscal reserves each year. That reserve isn’t 13 percent of revenues – this is the amount committed to increasing the reserve. It exceeds the share spent on housing, social welfare, or healthcare. That, in a nutshell, defines the priorities of this and previous financial secretaries.

No wonder people are angry.

In 2008, during the worst global economic and financial crisis in 75 years, the government increased the $492.2 billion sitting in the bank by a further $640.1 billion – an unintended goad to the politicisation of Hong Kong society. There was no need to do so, but that’s what you get when there is a profound lack of  imagination and leadership necessary to rethink the relationship between the policy book and the pocketbook.

Fortunately (but, only if one believes Mr Chan’s numbers), that will now change, but not by much. After taking $28.5 billion from the reserves in the past year, the new plan is to draw down another $195.6 billion over the next five years. That’s nearly 5.5 percent of revenues. 

If past predictions are anything to go by, this will not happen. Financial secretaries tend to under-estimate revenues and over-estimate spending, and as a result end up with piles of useless cash sitting in the bank doing no one any good at all.

Here’s a novel thought: why not stop taking unneeded money out of the economy?

Just as an exercise in what-if-ology, imagine taking only half of that amount out of the economy. What if after SARS the amount added to the fiscal reserves each year was just half as much? For a start, the much-championed rainy day umbrella would have averaged 14.2 months worth of public expenditure, and never fallen below the one-year mark. For policy wonks, that’s public, not government expenditure. The more common measure would have been 15.2 months.

Maybe another 10 percent might be available for education? And, an additional tithe for healthcare, housing, and social welfare? Add it all together and the total happens to be… half of the increase in the fiscal reserves.

Might I also suggest that if one wants to give taxpayers a rebate, that it be done very fast and on the basis of what was paid in the past, not based on depressed earnings during a recession? Just a thought.

Let’s not have any whining about how the government can’t afford to reduce the reserves, because it might, theoretically, have to borrow someday. COVID-19 really doesn’t care, and neither should we. Governments borrow all the time, both sovereigns and municipalities. Those that don’t borrow have the best credit ratings, and if the money is used for long-term infrastructure (for which Hong Kong pays cash), so much the better. 

If the fiscal planners can’t get their heads around the restaurant buffet notion of “don’t take more than you need,” then they shouldn’t be seated at the adult table. 

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Post note: The Duty-free City

For the curious, the online tax calculator allows the public to find out how much tax is owed. It also allows analysis of how much income under various scenarios is totally tax free.

A single person, no dependents pays no tax on the first HK$132,000 (US$16,923).

A married couple pays no tax on the first HK$262,000 (US$33,590).

A married couple with two kids pays no tax on the first HK$500,000 (US$64,103).

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the author

David O’Rear moved from his native California to Asia in 1980, first to Taiwan for language study and later to Hong Kong where he worked in the areas of economic, political and business conditions analysis. After 18 years with The Economist Group, he accepted the post of Chief Economist at the Hong Kong General Chamber of Commerce in 2002. In 2015, he resigned to follow his wife to London, where he exercises his analytical skills on a more ad hoc basis. David has bachelor’s and master’s degrees from the University of California, Berkeley, and is a regular commentator on current events in print and electronic media. He is married to Bonny Fay Landers.