Hong Kong’s proposed new budget continues a dramatic shift in the size and role of government that breaks through the boundaries of the Basic Law.

From 1997-2007 Hong Kong grew total public spending at an average of 2.3% per annum. The recently announced budget shows growth since then that will average 10% each year. With the 2012-13 budget, expenditure will grow 70% from 2007-8, compared to nominal GDP growth of 21%. In 1991-92, government expenditure was 12.8% of GDP, whilst this budget will take it to 21.4% according to government figures.

The proposed 2012-13 budget is slightly in deficit. If current trends in spending growth continue, it is likely not the last deficit. The promises of candidates for Chief Executive add further to the potential burden on taxpayers.

The numbers make claims of fiscal prudence look hollow and promises to keep tax rates low look less credible.

The rationale for this massive growth in the size and cost of government, seems to be that global economic crisis justifies fiscal stimulus and spending to maintain livelihoods. Yet we know that fiscal stimulus has not had a good track record internationally and that government spending inevitably impedes structural change in the economy.

The Hong Kong budget is also creating barriers to reform. The budget allows HKD 220 mn to support manpower training for that most pro-cyclical of industries, construction. Promoting work in the construction sector to new entrants lacks wisdom and seems targeted more at supporting vested interests than prudence. Is it sensible to attract Hong Kong people to an industry that has relatively low skill levels, low barriers to entry and where career prospects will be limited by age and physical constraints?

Another example is introducing concessions to the SME Financing Guarantee Scheme. Government and the Hong Kong Mortgage Corporation (HKMC) have reduced the risks to banks of lending to small business, but have also reduced the returns for banks. Lower margins have undermined the traditional lenders to small business, banks that have a higher cost of funds. The guarantee schemes reinforce the market position of large banks and undermine the availability of market based credit for small business.

Similarly, the prospective micro-financing initiative, again using HKMC, proposes lending up to HKD 100mn for new businesses or “self-enhancement training”. There is nothing “micro” about that amount of money. If currently not now bankable, the involvement of government is simply an invitation to adverse selection, higher credit risks and future losses.Like many governments in Asia, the budget addresses a down turn that has not yet happened in Asia. It leaves less capacity to deal with real future problems. Coming before growth has actually slowed, the budget risks being pro-cyclical and inflationary.Budgetary extravagance is changing Hong Kong. The budget speech repeats the mantra that the “market leads, government facilitates”. However, reading the speech there is reference everywhere not to the lead of the market, but the pleadings of interests that have received some benefit. Does this largess with other people’s money make the Hong Kong a more harmonious place? Inevitably it does not. As interest groups see a larger pot of public funds, rivalry for a share only increases. As claims on the pot grow, so do cries that the allocation is inequitable.The only answer is to restore the prudence that in the past guided public finances, with a clearly defined role for government and an understanding that beyond that role, self reliance and a once rich base of “social capital” lies at the heart of Hong Kong’s strength.Rather than growing spending and one-off revenue “concessions”, the budget should have provided tax relief to all taxpayers. That would leave more money in productive private hands and do more than any centrally planned spending to increase the resilience of the economy.Article 107 of the Basic Law obliges the government to keep “expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.” The proposed budget does not “strive” very hard to meet these obligations.

Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.
 
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