Philip Bowring is
appalled by the report on fiscal
planning that seeks to preserve the status quo, to protect mega
infrastructure spending, yet utterly fails to address our critical challenges
In 40 years of covering Hong Kong budgets and fiscal
issues, I have never seen a document as misleading and contentious as the
report of the Working Group on Long Term Fiscal Planning. It is a crude attack
on health and welfare spending in
order to find money for already bloated infrastructure spending.
To add insult to injury, the group is mainly comprised of
officials and academics enjoying huge health and pension featherbeds at public
expense.
The starting point for the report is true enough - that
Hong Kong has an ageing population and one that is growing only slowly. This
has been known long enough. The government has been aware that years of having
a very low fertility rate has been a major factor in ageing - but has done
nothing to address it.
The document goes on to present a scare story of ever rising deficits caused by a
stagnating workforce and rising demands for health and welfare spending. Yet it
accompanies this with projections for sustained increases in capital works. The
non sequitur is backed by references to guidelines laid down by Philip
Haddon-Cave in the 1970s - that public spending should be no more than 20 per
cent of gross domestic product, and that there should be a significant surplus
on the operating budget
to provide funds for capital works (in addition to capital works paid by
capital revenue).
Haddon-Cave, a realist, not an ideologue, would be
appalled by official inability to see what has changed. Then, Hong Kong had a
young, fast-growing workforce and the need for more infrastructure to support
an economy based on manufacturing and merchandise trade. Today, we have no
manufacturing, a port which is past its peak, and financial and other
high-value services whose input needs are not primarily related to concrete.
Determination to rig the fiscal system to support mega
infrastructure projects is further underlined by the report's curt dismissal of
the widely supported proposal to shift part of land revenues from capital to
recurrent income. This would cause short-term reductions in revenue but
long-term gains in stability. But it would not suit the vested interests who
are dedicated to wasteful spending on roads and bridges as well as businesses
whose profits rely on land price inflation.
Notions of economic return on capital are now alien to
the bureaucracy.
The document also perpetuates a convenient official lie:
that the HK$750 billion surplus of the Monetary Authority is not part of the
reserves. It ignores these assets completely, suggesting the group is so
ignorant of exchange rate mechanisms that it believes these are needed to defend
a currency peg.
The fact is that the HK$1.5 trillion total reserves
belong to the citizens and were accumulated by the government at their expense.
There is a moral obligation to return some of these savings to those who earned
them as they reach an age when they can no longer work. Pensions are not just a
right of civil servants.
Yet, while drawing almost straight-line charts of health
and welfare costs, the report takes no account of the future role of the
Mandatory Provident Fund - a scheme that is inadequate and expensive but
nonetheless will have an impact on retirement incomes in the future.
Nor does the report take proper account of the potential
for increased workforce participation. This is not surprising, given that
government bodies still adhere to retirement at 60. But if the group cared to
look at official data, it would have seen that in the past four years, GDP
rises have owed much to the rise in participation by those over 45 - from 64.7
per cent to 68 per cent for those 45-64; and from 5.7 per cent to 8.1 per cent
for those over 65. This trend is sure to continue as most people need to work
after 60.
There is nothing sacrosanct about limiting public
expenditure to 20 per cent of GDP. And even assuming there is abundant reason
to privatise some public trading activities and impose genuine user-pays
charges on others, a government incapable of adjusting tunnel tolls for car
owners but that begrudges spending on the old and infirm is contemptible.
Of course, Hong Kong must adjust to changing demography
as well as a changing economic base. But that demands that it focuses on
providing health, education, security and similar services and transfer
payments to the old and sick - and assigns much of the capital works to
entities required to be self-financing and thus subject to the discipline of
the market. The government owns far too many assets already.
For sure, the tax system is too narrowly based. But this
report suggests nothing major to change that.
The report is basically a public relations exercise to
protect the status quo. That is not surprising as it was written by officials
with inputs from academic economists and accountants (specialists in tax
avoidance). Where were the entrepreneurs, the demographers, the fiscal policy
experts, the investment bankers, let alone the representatives of low-income
groups?
John Tsang Chun-wah has shown yet again he is incapable
of new thinking, to advance policies that accept welfare responsibilities
ungrudgingly and improve the currently abysmal returns on public investment.
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