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Public Finance Sustainability

The 2020-21 Budget will be announced in a month or so. Budget consultation works are now in full steam, providing us with opportunities to understand the views and suggestions of citizens and stakeholders. Yesterday, I attended a radio live broadcast program and exchanged views on the Budget with the audience, radio listeners and netizens.

I have listened to many suggestions from citizens in the programme, including their wish for the government to improve public services, enhance administrative efficiency, develop a diversified economy and relieve the burden of the people. Some citizens also suggested the government to encourage local consumption to support the economy and employment, or simply give a free cash handout to all Hong Kong people.

Many of the views of the public are of high reference value. However, the introduction of new measures would require new public resources, and for some recurrent measures, the related expenses may increase rapidly with the growing ageing population. For example, the annual cost of the Government Public Transport Fare Concession Scheme for Elderly and Eligible Persons with Disabilities, which allows elderly to enjoy a $2 concessionary flat rate, has increased drastically from about $200 to $300 million in 2012 when the Scheme was implemented, to about $1.4 billion today. The Elderly Health Care Voucher Scheme costs about $36 million per year when it was implemented in 2009, but has already increased to about $2.8 billion per year in 2018.

Looking back at the expenditure pattern of the HKSAR Government over the past two decades, we can see that the recurrent expenditure in 1997/98 was about $150 billion; after ten years (2007/08), it increased by more than $50 billion to $200 billion. Another seven years later (2014/15), it increased by $100 billion to $300 billion; and then by another $100 billion to $400 billion in just four years (2018/19). In 2019/20, recurrent expenditures increased by $40 billion in a single year. The government's recurrent expenditure has increased significantly in the past decade, in a rate higher than the increase in revenue. Apart from the rapid growth of the ageing population, another major reason for the surge in recurrent expenditure is to respond to the community's demand for more public services and enhancement to service quality. These expenditures, to a certain extent, could help address the problem of inadequacy in public service provision, which are justifiable and reasonable. However, if the growth trend persists, it will be difficult for the society to bear.

Some commentators believe that the government does not need to worry in increasing its expenditure given its fiscal reserves of more than $110 billion, which can support 26 months of government expenditure. Yet if we look at the seven-year period after 1997 (1997/98 to 2003/04) as an example, economic downturn at the time had caused the government to run a fiscal deficit for most of the time and fiscal reserves decreased sharply. In 1997, fiscal reserves were able to support 28 months of government expenditure but was then dropped to 13 months in seven years. In fact, according to the medium range forecast released in last year ’s Budget, even without economic recession, we expect that our fiscal reserves will only be equivalent to 19 months of government expenditure in 2023/24 due to the continued rise in recurrent spending in the coming few years. Based on the latest economic situation, the decline in fiscal reserves will be even faster in terms of number of months of government expenditures.

2019/20 will be the first time for a deficit budget in fifteen years. In 2020/21, due to the reduction in revenue (especially for land-related revenue), and the additional resources required for the implementation of government's counter-cyclical measures in supporting the economy and relieving people's burden, the deficit will be of even higher level. I stated earlier that a prudent level of fiscal deficit that is acceptable internationally should not exceed about 3% of GDP. I would like to add two remarks here. First, we have to consider whether the deficit is mainly caused by an increase in recurrent expenditure or one-off non-recurrent expenditure. If the deficit is a result of increase in one-off non-recurrent expenditure, the long-term impact on fiscal sustainability will be relatively small. Second, as mentioned above, Hong Kong's fiscal reserves accumulated in the past provide us with fiscal buffer to derive a more aggressive deficit budget when needed. As long as the relevant policies and measures will not cause long-term structural deficits, then we need not be too worried about higher deficit level in particular years.

The ten measures announced by the Chief Executive lately aim to improve the welfare of the elderly and the grassroots, and to address demands of the community over the years. According to preliminary estimates, the relevant measures, which will be implemented gradually in and after next year, involve recurrent expenditures of more than $10 billion. By then, Hong Kong's economy should have recovered, and government revenue should be able to return to a higher level. At the same time, we can explore the need to broaden our sources of income. In addition, the government has persistently introduced some one-off measures in the past, such as tax refunds, waiving rates and business registration fee, etc. The amounts involved are not small. When necessary, some adjustments to the measures may be made to spare more resources.

Hong Kong's economy is currently in recession. The HKSAR Government has launched several rounds of measures to support enterprises and relieve people's burden. In the 2020/21 budget, we will continue to adopt an expansionary fiscal stance and introduce counter-cyclical measures to “stimulate the economy, support enterprises, safeguard jobs, and smoothen livelihoods”. Even if the budget deficit is of a higher level, I will maintain Hong Kong’s financial stability and the soundness of public finance, so as to facilitate the sustainable development of Hong Kong’s society and economy.

January 19, 2020