HKEJ Column | May 13th, 2010 |

Published in HKEJ ” Professional Eye” on 13th May 2010

Kenneth LEUNG
Vice Chairman, The Professional Commons
www.procommons.org.hk

Until 31st March this year, fiscal reserve has been accumulated to HK$483 billion, which is equivalent to 18 months’ Government expenditure. This amount is far more than what the former FS had suggested, which is 12 months. For this, there is a general view that Tsang’s administration has been hoarding lump sum of financial resources without properly using them. This on the one hand obstructs the capital circulation in general, and stifles the positive effect brought about by proper use of these resources on various social aspects on the other. It is of utmost importance to boost the overall living quality of the people as well as the competitiveness of the local economy. Instead, Tsang’s administration haggles over every penny with the people, highlighting the fact that its policy lacks a long-term social goal. (See “Fiscal Policy of Nowhere”, 1st article of this series, HKEJ, 6 May, 2010)

Resource idling that constitutes extra social cost

In fact, variegated infrastructures are all government asset. Fixed capital investments in the Ten Major Infrastructure Projects, when turned into its passbook, will result in another all-time high. Even worse, Tsang’s administration has been further intensifying its desire to increase fiscal reserve, the more the merrier. As reiterated in his Budget Speech this year, John Tsang stated that “our quick recovery from the financial tsunami is, to some extent, attributable to the Government’s prompt deployment of huge fiscal resources to stabilize the economy” (Para. 39). He further said “in the long run, an ageing population and a shrinking working population will further narrow our tax base. More than ever, we need to prepare for the future by increasing our reserves to meet these challenges” (Para. 42).

Despite FS’s forecast of deficit budget in a few years to come, it is unlikely to happen. The Government always tends to have expenditure overstated but revenue underestimated for the sake of expectation management. This results in poor track record of budget estimation, 3 out of 4 Budgets released in Tsang’s era ended up with revenue HK$50 billion more than what the Government’s forecast had suggested. Conversely, there will be chances for the FS to achieve a surplus budget at least in the coming two years. First, expected increasing direct investment and employment arising from commencement of ten mega projects will generate handsome revenue from profit tax and personal income tax. Second, listed lands in Tung Chung and Fanling will be offered at public auctions; the Government also promised to put lands located in Ho Man Tin and the Peak on auction. Third, extra charge on property worth more than HK$20 million, sales of 4,000 HOS and leftover Sandwich Class Housing flats, as well as possible increase in transactions after revitalization of HOS second-hand market, are all helpful to bring extra revenue from stamp duty to the coffer.

Strong fiscal power in the grasp of the Government

As a rule of thumb, the Government tries its best to maintain the highest level of flexibility in budget allocation. As an example, the Government sniffed at some proposals of earmarking the money to be collected from plastic bag levy for eco-related purposes. We are therefore skeptical that the extra portion of fiscal reserves will be designated to meet the need of the ageing population in the future.

Since Tsang’s assumption of his office, the fiscal discipline of the Government has been deteriorating. It is observed that there existed one-off monetary grants (“distributing sweet” in colloquial term) in the Budgets of the last three consecutive years. But it should be pinpointed that the financial circumstances of these three years are so different that Government’s decision to distribute “sweets” is nothing but arbitrary. It is understandable for Tsang’s administration to distribute sweets in a bid to share with the public the fruit of economic development when abundant fiscal surplus over hundreds of millions was recorded in 2008. In a similar vein, the same generosity in the following year was regarded as measure of alleviation in the wake of financial tsunami. But it seems untenable for the Government to keep giving away sweets in this year when Hong Kong has somewhat weathered the “rock bottom” of financial tsunami.

Great wastage, budget underestimated and demand overstated in infrastructure projects

It is no longer a surprise for us in view of the ineffectiveness of completed infrastructures in recent years. West Rail, East Rail Lok Ma Chau Spur Line, Shenzhen-HK West Corridor and the section between Cheung Sha Wan and Shatin of Route 8 are most of the time under the expected level of usage. This is worrying as it could be the fact that the same miscalculation of demand also happens to the ten mega projects that are about to kick off in succession. Simply put, excessive idled capacity like this is in fact equivalent to extravagant use of public money.

In addition, there has been severe overspending on numerous works projects in recent years, suggesting a deviation of necessary prudency in effective planning and budget estimation. For instance, Phase two of the Harbour Area Treatment Scheme had HK$ 2.3 billion overspent, 30% above the estimation; budget on MTR West Island Line was the double of the original one, amounting to HK$12.7 billion. The most outstanding example must be the exorbitant budget adjustment from HK$39 billion to around HK$70 billion for the XRL Express Rail Link Project, which is tantamount to a staggering 70% over-budget.

There is no excuse for the Tsang’s administration not to address the profound problems ageing population would bring about. The incumbent administration has indeed abdicated its responsibility to put in place a holistic policy to tackle this brain-racking issue. It is obviously evasive to simply let fiscal reserve and its endless accumulation bear the brunt. All these somewhat reflect the bureaucratic routine that has been inherited over the past few decades and therefore explain Government’s reluctance of increasing recurrent expenditure. Given that the “Financial Envelope” system only provides individual bureau with little room for new initiatives, it is highly likely that the remaining task for the Government is nothing but works in relation to bursary and account management. While his term of office is fading out, it is expected that Donald Tsang would not touch the “deep-rooted” problems like the existing narrow tax base, not to mention eradication. In the face of growing fiscal reserve, he is more than happy to “drizzle” small sum of public money in a bid to curry favour with ordinary people.

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