Deficit Spending
The recently published government accounts show that after eight months of the current financial year the treasury had paid out $471.6 billion for expenditure and taken in $248.2 billion in revenue. That means our public finances incurred a deficit of $223.4 billion. After taking into account net cash of $80.2 billion received from new bond sales less partial redemption of existing ones our adjusted cashflow was negative $143.2 billion.
In his speech introducing the 2024 budget, financial secretary Paul Chan Mo-po said he was forecasting a deficit of about $48.1 billion. In fact he was forecasting negative cashflow of that amount, the actual deficit (revenue less expenditure) would exceed $168 billion. He recently indicated the deficit (as he defines it) would more than double to about $100 billion which suggests a real deficit, as distinct from adjusted cashflow, of well over $200 billion.
I should stress that there is nothing secret about the numbers being quoted here. All the figures are available to any member of the public, simply by googling “government monthly accounts” and reading the press releases and accompanying tables.
I spent six years inside the government dealing with public finances and have been writing about the subject here for more than 10 years. Simply put, for the last few years – admittedly partly pandemic induced – we have been spending public money like drunken sailors on shore leave. We cannot keep “balancing the books” by borrowing increasing amounts even if we give them the cosy name of “bond issues”. They are debts.
Hong Kong is not alone in borrowing, or course, other governments go down this route too. Borrowing is generally easy for governments because they are considered reliable debtors, which generally they are until one day suddenly they aren’t. As recently as September 2022 we had an example of what happens when financial markets abruptly lose confidence in a sovereign borrower, when the Truss government in the UK unveiled a mini budget which would include tax cuts and increased expenditure all to be funded by debt. The government fell within days. Memories of such events tend to linger: the UK treasury recently had to offer interest of over 5% on its 30-year bonds.
In the United States, federal debt exceeds US$35 trillion and is equivalent to over 123 per cent of GDP. Interest payments alone are now a major component of the annual budget. Trump plans further tax cuts and hopes to pay for them with major reductions in government expenditure, relying very much on the status of the US dollar as the global currency to preserve confidence. The HK dollar is sound but we do not enjoy the same status.
Our legislators are beginning to wake up to the situation. Election Committee lawmaker Wendy Hong Wen said Hong Kong ran a serious risk of developing a fiscal structural deficit. She was doubtful the government would be able to straighten things out within its target timeframe of two to three years. I share her doubts. Hong advocated development of a comprehensive 10-year reform proposal to adjust the government’s expenditure and revenue structure.
Other legislators such as Gary Zhang Xinyu emphasise the importance of prioritising projects, not trying to fund everything at once. Lawrence Ng San-wa suggested greater efforts to draw in private sector cash.
The government is not the only body looking to borrow Hong Kong dollars: the Airport Authority and the Mass Transit Railway Corporation have major financing needs ahead, either for new construction or to roll over existing debts, as do the Urban Renewal Authority and other public organisations. Their requirements can be offset by landing charges, train fares, rents and so on. Government borrowing has to be cleared by taxes and fees. Secretary for Financial Services and the Treasury Christopher Hui said recently applying the “user pays principle” to charges for government services could help reduce the deficit. Chan also indicated there was scope to increase taxes for the better off.
Raising revenue is one way of addressing deficits of course and no doubt there will be some modest increases in the coming budget. But by far the better way is to find economies in the cost of existing public services and to exercise restraint in the launch of new ones. The traditional way of doing this is to ask all policy bureaus and departments to achieve an across-the-board reduction in recurrent expenditure of a modest amount, say one or two per cent. I don’t think this is going to be sufficient in the present situation, we need something more fundamental, a root and branch review of all activities across the whole of government.
There must be no sacred cows, everything must be on the table. Do we really need 90 members of the legislative council, each with his own office and support staff? We used to get by perfectly well with 70 or so. Do we get value for money opening up so many new Economic and Trade Offices within the mainland or in countries along the belt and road, or are these vanity projects to meet political goals? Is there overlap between the work of InvestHK and the Office for Attracting Strategic Investments? We are a very safe city, do we need so many policemen?
Pipe down, I can already hear the howls of protest, particularly from my former colleagues. I just selected these examples to make a point: we will have to make some hard choices.
I am not in favour of cutting civil services salaries. We want good, honest people in the public service working productively, not embittered timeservers looking for lai see opportunities. Most important we should ask, when being presented with desirable proposals for new spending, what existing service should we cut to pay for this?