SCMP Wednesday, March 7, 2001
Looking beyond 'grocery' budgets
Former British prime minister Margaret Thatcher was often derided by economists of the Keynesian persuasion for her "housewife" economics. They hated her fiscal hawkishness and saw a compulsion to "live within one's means" as naive and economically foolish.
They should have met Hong Kong Financial Secretary Donald Tsang Yam-kuen, whose obsession with balancing budgets makes the Iron Lady's resolve look decidedly wobbly. Mr Tsang has a constitutional obligation to match incomings and outgoings, yet his bookkeeping obsession has a grocery-shop quality.
His sixth and final budget today will, no doubt, reflect this imperative. Big tax-reforming initiatives seem unlikely, given his May departure, and most reaction will focus on whether the SAR is to post a deficit for the financial year ending March 31.
Mr Tsang will probably soliloquise about the threat of a structural shortfall in recurrent income. Most commentators will chide him for again crying wolf with the latest data showing a fiscal deficit of $2.2 billion in the 10 months to January 31 and suggest any full-year deficit will be marginal. Interest groups will demand more of the fiscal pie. Mr Tsang will hit the media merry-go-round and explain why we can't live beyond our means, even if those means are still deceptively robust.
For any visitor with an eye for budgetary matters, the whole business will have an Alice in Wonderland quality. The SAR has no debt and $442 billion in fiscal reserves. "Deficit problem, what deficit problem?" the visitor might ask. For sure, all governments go through periods of fiscal adjustment that inevitably create societal ructions, but doing it with a fortune tucked away in United States Treasury bills makes it considerably easier.
Our onlooker will be told it is not the size of the deficit but its trend that matters. Expenditure keeps going up, but revenue is static. Demand for government handouts keeps growing, but nobody wants to pay. Yes, there are reserves, but they must be kept for a rainy day, such as the October 1998 financial crisis.
Confused, our visitor might ask about the capital-works reserve fund that scoops up all land-sale revenues but is not counted as recurrent income. Yes, of course, the Government owns all the land and can expect to sell loads more in future, but such receipts are a "separate item", as they pay for big-ticket infrastructural projects, comes the reply.
Our observer might come from a finance background and so be used to an accrual system of accounting that records every financial transaction as an asset or liability. He may wonder why government land transferred to the Housing Authority at nominal cost never shows up on the books of the quasi-governmental body that receives it. He might be further confused by the fact that all construction costs - $35 billion in 2001 - count as public expenditure but receipts for sale of the units are never recorded as government revenue.
Mr Tsang is not so much economic with the truth as stingy with his statistics when he warns of hard times ahead. Almost all debate is framed within the Treasury's petty-cash view of accounting. As a result, fiscal commentary rarely goes beyond the silly ritual of examining the size of the deficit or surplus.
Any stock analyst making stock recommendations on this basis would be quickly fired. Financial professionals long ago learned to look beyond the haze of a firm's accounting profits and analyse its underlying economic profitability and prospects. Advanced countries have increasingly adopted the same method in allocating capital from the public purse and reporting its expenditure - but not Hong Kong.
Such an exercise makes government more transparent, allows rational external debate by fully informed experts and more productive use of public funds. Moving to this approach would require an explicit recognition by bureaucratic elites that they don't necessarily know best. It would also require political vision on the aims of economic policy.
Quite simply, it is impossible to tell whether the SAR is running a "real" structural deficit. Government accounting is designed to obscure subsidies achieved largely through land transfers between different agencies.
Mr Tsang is no fan of the Government providing housing for the masses. A sensible reading of his "grave-deficit" threats is that he was fighting an internal battle to scrap programmes such as the Home Ownership Scheme (HOS). By warning of unpalatable tax increases, he focused the policy agenda on cutting "cuttable" costs. Funding a home-starter mortgage for a first-time buyer accounts for about one-eighth of the cost of a HOS flat, according to rough estimates. As such, the administration's abandonment of its grand flat-building schemes seems to have been decided as much by fiscal arguments as by a need to stall further price falls.
Viewed as a commercial entity, the SAR appears to have a solid, under-geared balance sheet unlikely to go into the red. By getting out of building subsidised homes for sale, $20 billion to $30 billion could easily be trimmed annually. If the Government was a company, any analyst would view it as ripe for takeover. Sales of franchised monopolies, such as the Airport Authority and Post Office, could yield one-off gains but also cut future recurrent and capital expenditure.
Land sales might have been cut, but they will restart sooner or later. Then, revenues will flow to the Treasury rather than be transferred to the Housing Authority free of charge.
The analogy, of course, only goes so far. Countries are more complicated than companies, and profit maximisation cannot be the sole motivation for fiscal policy. Viewed in static terms, the SAR has solid finances. But the real question is how to direct policy to maximise the economic potential of the entire economy.
When Mr Tsang warns of structural deficits, chances are he is looking at ratios the rest of us cannot see. He is right that the tax base is too narrow and the user-pays principle for service provision should be extended. Spending on health and education will rise sharply in coming years while revenues from direct taxation are likely to remain flat.
There are good reasons to revamp the tax system. Dependence on government cross-subsidies and structurally high land prices imposes costs across the economy. A lot of people could have a better life if the mercantilist aims of the Treasury and the Lands Department were subordinated to broader economic aims.
Chief Executive Tung Chee-hwa and Mr Tsang might harbour such ambition. Yet presenting tax reform as deficit avoidance undermines their credibility.
Mrs Thatcher launched her counter-revolution to change Britain from a tax-and-spend state addicted to handouts and subsidies. Today, few doubt the success of her economic-revival programme, yet the public sector's share of national income remains above 40 per cent.
Hong Kong faces the challenge of reform with an immensely stronger hand: the SAR Government spends only 20 per cent of our national income (by official accounting measures, anyway). Its fiscal reserves provide the cushion to smooth the transition from a land-revenue-based fiscal system. The alternative is to retain the status quo and watch expenditure rise remorselessly.
A good starting point would be a more transparent fiscal system that allows us to see where and why our money is being spent.
Simon Pritchard is a staff writer for the Post's business desk.