The Budget's Unanswered $68 billion Question


Only a cad would kick a man when he's down, so I'm not going to join the chorus of disapproval which greeted John Tsang's fourth budget two weeks ago.

In any event, following a u-turn so rapid and violent it made your head spin, he seems well en route to digging himself out of the political hole that he got himself into, albeit at the expense of his own and the Government's credibility.

But I am going to ask him a question.

Technically it will be the second time I have asked the same question as I first put it to our Financial Secretary on a special RTHK Backchat programme to discuss the budget in its immediate aftermath.

In essence the question concerns what share of the community's economic resources we want the Government to have control over, and how much do we want to leave in the hands of Hong Kong citizens.

For as long as I can remember, certainly for many decades, we have had a clear and unambiguous answer to that question. Government spending should take up no more than 14 - 15% of GDP with a further 4 - 5% for the wider public sector (for example the Housing Authority), making a total public expenditure of 19% of GDP for the entire public sector, plus or minus 1%.

A further Golden Rule was applied on top of this Golden Foundation: growth in public expenditure should only grow each year in line with the trend growth rate of the economy. In this way, the range of 18 - 20% would always be preserved.

When in the early part of this century public spending shot up and GDP fell, thanks in large part to the after effects of the East Asia economic crisis, firm action was taken. In his first budget in 2004, then Financial Secretary Henry Tang coined the slogan "Big Market, Small Government" and made a solemn pledge to bring public sector spending back below the 20% ceiling. He repeated the undertaking in his 2005 budget when he had almost achieved the target, and gave himself a well earned pat on the back in 2006 when he forecast public expenditure for the year ahead would be around 18% of GDP.

When he took over as Financial Secretary, John Tsang also stuck with the "20% or below" rule in his first three budgets, and made a virtue of it. But suddenly in the latest budget, public expenditure is estimated at 21% without any explanation being offered at all, either in the speech itself or in response to my question on the radio show.

This silence is not golden, and it is not acceptable.

One can perfectly well argue that in the 21st century, given the demands for government action and the community's expectations, the old rule is no longer valid, and we should now be looking at a range of 20 - 22%. This is an eminently plausible argument (though I do not advocate it myself). But the case needs to be articulated, not just slipped through in passing. And the person who needs to make the case is the Financial Secretary, and the platform for him to do so is the annual budget speech.

The actual level of the guideline is of course important, but the need for a guideline is absolutely vital. For while some might see it as a straightjacket, those familiar with public finances know that it in fact acts as a shield.

Demands for public resources are infinite, but public finances are limited. Without the protection of a Golden Rule, the Financial Secretary of a well off government like ours finds himself defenceless against calls for greater public expenditure, as the events of the last fortnight prove conclusively.

One or two per cent in the overall scheme of things does not sound very much. But the total size of our economy is now about $1.7 trillion, so a 2% shift in the level of public expenditure is equivalent to $34 billion. And every dollar of extra public spending is a dollar less available to be spent at the discretion of private citizens, so the overall swing is double that amount.

Here once again, then, is my $68 billion question. Just how big do we want our "Small Government" to be?


 
Mike Rowse
email: mike@rowse.com.hk