Northern Lights
Financial Secretary Paul Chan Mo-po now faces the greatest challenge of his career to date. All Hong Kong citizens, and all outsiders who wish our city well, must hope he rises to the occasion. I am talking of the development of the Northern Metropolis in general, and the financing of it in particular.
It now seems to be accepted by all parties that our future growth revolves around turning a large part of the northern New Territories into a giant economic powerhouse and housing hub, with a strong technological component.
There are no detailed estimates at this stage of how much the whole project would cost but the final sum is sure to run into several hundred billion dollars. This is not surprising. After all we are talking about a total of 30,000 hectares and planning in respect of much of the area is only at a preliminary stage. Implementation will in any event have to be in phases bearing in mind professional and engineering resource constraints. I hope we will see some numbers in respect of the first stage in this week’s budget.
The question is how to foot the bill. Chan has already indicated he expects to borrow substantial sums by way of bond issues. This makes sense. After all, the resulting development represents an enduring asset that will serve the whole community for generations to come. It would be reasonable to push at least part of the costs over to those who will be enjoying the benefits, not lump all responsibility on the present generation.
That leads us on to our second question: how to pay back those loans in due course. That is a bit more difficult because of the general nature of the investment, which will mainly be on site formation and basic infrastructure (water, drainage, sewage, power, roads, rail links etc) in the early stages to render the land suitable for development.
It is different when you add an item to an existing community infrastructure, for example an extra harbour crossing, or a tunnel to relieve traffic on a heavily congested route, or an expanded airport to cope with increasing demand for air services. In such cases a toll or fee can be imposed to recoup the cost. But much of the area in the northern NT is not yet developed to the same extent: the government would be building in anticipation of generating substantial additional demand in due course. If our strategy is sound, that economic development and associated demand will come, but it will take time. Then and only then will there be profitable companies and high paying jobs the taxes on which can pay back the loans. In the interim the government – which means the taxpayer eventually – has to carry the financial load.
How do our public finances stack up as we stand on the threshold of this major new investment? As at the end of last year, our fiscal reserves stood at $664 billion, but these must be set against outstanding government debt of $293 billion. So still in the black on a net basis, and far better than comparable figures for the United Staes, United Kingdom and many other advanced economies whose public debts now exceed their GDP. But rather less rosy than a few years ago as we have run deficits in the last few financial years. This has run down our accumulated savings. One key difference between us and those comparators is that they are sovereign nations free to print their own currency which we are not.
Can the private sector help out? There is some scope for this and private landowners can be allowed to develop their lots in accordance with approved layout plans and to carry out their own site formation. But as we know from investment promotion work generally, the private sector has a shorter-term mindset than governments or publicly owned organisations. Most companies will prefer to buy the reality rather than the vision. They will want to see progress on the ground before they put their own dollars at risk.
We also need to keep a wary eye open for interest rates. At one time markets were expecting regular reductions throughout 2025. However with the uncertainty created by the actions of the new US administration, and some signs inflation is more sticky than hoped, most central banks are expected to be cautious. We must pace our borrowing such that we pay only reasonable interest rates.
There is growing public recognition of our deficit budget situation, and a welcome public debate on different options for addressing it. This is all to the good. The discussion is a step in the right direction. I feel it would be even more useful if we were more precise in the terminology being used. The difference between revenue and expenditure is a surplus if positive, and a deficit if negative. Unfortunately, our financial secretaries have drifted into the habit of including the proceeds of bond sales into the equation and adjusting the quoted sum. This practice distorts the real situation. A small surplus can be turned into a large one, a small deficit can become a small surplus, and a significant deficit can be reduced to only a modest one and nothing to worry about. This is misleading and not helpful to a proper public debate.
In his budget speech last year, Chan said taking into account bond issuance of $120 billion in 2024-25, “it is expected that there will be a deficit of $48.1 billion for the year.” In more straightforward terms, that meant there would be a simple deficit of $168.1 billion and bond issuance (i.e. borrowings) would lead to a smaller adjusted one.
In summary: Northern Metropolis yes, funded by bond issuance yes, but more precision on government finances please.