Next Magazine (2014.04.17, A002, Second Opinion, Bill Stacey)

Criticisms of Financial Secretary John Tsang’s Working Group on Long Term Fiscal Planning in the month since it was released have been rather odd. On the one hand there are those, particularly in the English language media, who criticized the working group as an excuse to justify massive ongoing public works spending. On the other hand, the vested interests of Legco factions complain more about the implied limits to their welfare state dreams.

Both criticisms miss the purpose of the report, i.e. to project forward the implications of current policies. By shining a light on what is planned, it is clear that down the road harsh choices will need to be made. Whilst the report itself does make some recommendations about fiscal rules and discipline, it is essentially policy neutral about the purposes that public funds are used for.

The criticism that the working group favors infrastructure spending is bizarre. The specific recommendations of the report are to reduce projected 7.6% nominal growth in capital works spending to a more sustainable 3.2% – the only area of spending where such a specific recommendation is made. Whilst some criticize the recommendation to keep capital funds raised from land sales separate from operating funds, it is clear this is seen as a way of limiting rather than growing wasteful excess investment.

If there is a criticism to be made of the Working Group, it is that it is not very radical in thinking about the way that government can be reshaped, and the possibility that the slowing in economic growth that it observes over the past 30 years might owe something to the faster growth of government it documents. The report calls for containing the size of the public sector and improvement in efficiency. However, this is proposed so that the government can maintain its still too extensive responsibilities.

Perhaps that radicalism is implicit in the report. We cannot keep government spending to 20% of GDP if all that we do in Hong Kong is mimic the health care, pension, housing and education systems of other countries. As Professor Richard Wong has pointed out, health care is the big expense, potentially twice as large as other welfare support for the elderly. Health care costs rise with an aging population, but the efficiency of health care systems also varies greatly, with OECD countries spending from 6.6% of GDP to 17.7% of GDP on health care. We know that incentives matter a lot in health care. In Hong Kong, private doctors deliver a huge range of efficient and effective services outside of hospitals and the public health system. In other countries some of these services are only available in costly run hospitals. Buildings in Central are full of private clinics with some of the best equipment available. This significantly reduces the burden on major hospital facilities, so that they can concentrate on the most difficult cases.

The health care provided by these clinics relies largely on private insurance and self-funded visits, while private hospitals have capabilities and service that match, if not surpass, the public system. We can see from the private system of health care in Hong Kong that the answer to the fiscal challenges of health is not expanding the health budget, but maximizing the amount of total health spending that is provided by private facilities and is privately funded. Efficiency relies on lowering the barriers to entry for health care providers and ensuring the best doctors in the world can easily practice in Hong Kong, whilst the private insurance market is highly competitive.Many important policy issues have been put on the back burner this year whilst constitutional debates dominate public discourse. One of the most important is a review of health care funding. The work on our longer term fiscal outlook has played a vital role in making clear the choices that Hong Kong has ahead, no matter how those constitutional debates are resolved.

Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.We are now on Facebook http://www.facebook.com/Next2ndOpinion