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Hang Lung Properties Chairman Ronnie ChanChi-chung recently criticized Financial SecretaryJohn Tsang Chun-wah for not spending properly.儲存 Chanparticularly disliked Tsang’s one-off measures in lieuof investment for the future, saying the HK$200 billion handed out in recent years was sufficient to have built 30 universities or hospitals instead. Chan further said that history will prove such action to have been both a problem and policy oversight. Tsang responded by saying that whilst it is his duty to maintain fiscal prudence and spend whenever necessary, he welcomes criticism and concrete suggestions. Tsang also explained that government expenditure had increased by 80 percent over the past six years.Chan’s comments have sparked debate as to the level of reserves kept and howfrequently short-term measures should be used. Joseph Li spoke with an academic, a tax expert and veteran lawmakers who have known Tsang for years to enlist their views.Best is 18 to 22There is no international standard as to the level of reserves that a government should keep. Many economic scholars suggest 18-24 months of government spending as healthy and safe. Since the Hong Kong government’s financial philosophy is ‘to make ends meet’, it is pragmatic to maintain a higher level of reserves equivalent to 18 –22 months of government expenditure.Given Hong Kong is a small, open economy, it is easily affected and also relies closely on other giant economies. It therefore needs bigger reserves to stabilize the economy. In recent years, non-recurrent revenues such as investment income and stamp duty have been increasing. But as they may fluctuate, it is necessary to maintain a higher level of reserves as a precaution. In addition, reserves can generate recurrent investment income to stabilize the economy.For the financial year ending March 31, 2013, government expenditure totaled HK$377.3 billion. Reserves topped HK$733.9 billion — which is equivalent to 23.4 months of government expenditure and within the forecast range of 18–23 months of government expenditure from 2012-13 to 2017-18.We think reserves above the safety level may be used for public expenditure. In fact, the government has an agreement with the Hong Kong Monetary Authority to transfer a portion of the investment income from the reserves to the treasury.Another question is whether the government can spend more than 20 percent of the GDP? Some economists suggest governments may spend between 30 percent and 50 percent of GDP. We think 20 percent is not a golden rule. The government may spend more if there are strong reasons but within 25 percent is an optimal level.According to government forecasts, public expenditure in terms of percentage of GDP in the next five years ranges from 19 percent to 22 percent within the comfort zone.Is the government spending too much on short-term, one-off measures? We think such measures are still the most useful relief for low earners in economic hard times. It is fair to say that the government has increased capital expenditure from HK$76 billion to HK$103 billion over the past five years. The notable projects are: the local section of the Hong Kong-Zhuhai-Macao Bridge, the airport’s third runway and redevelopment of the old airport site.The government can certainly do more. With such handsome reserves, it can tackle such long-term problems as the wage disparity and aging population, propel economic development and enhance the competitiveness of Hong Kong.Dual approachThe financial secretary’s management philosophy is conservative. It is true that over the past six years, John Tsang has spent hugely on short-term, one-off measures but little on building the long-term future of Hong Kong. Hang Lung Properties Chairman Ronnie Chan Chi-chung is an outspoken person. His comments on the government’s financial policies are correct.The financial secretary has always underestimated income, even though public expenditure (e.g., civil service salaries and pensions, welfare and healthcare) are quite stable. Every year he predicts a budget deficit but ends up with a big surplus because of bigger income from stamp duty, profits and salaries taxes resulting from the economic boom.This is an “error zone” because the government cannot grasp the economic development prospects and estimate the income level accurately. The underestimation of income happens every year, giving the impression that the government has a lot of money but it is unwilling to spend.Inaccurate, conservative revenue forecasting is also the reason why the government is reluctant to commit to recurrent expenditure but prefers one-off measures instead.Hong Kong maintains fiscal reserves of more than HK$600 billion. Those reserves are not immovable. I think gains from investment income can be used while a big sum is kept to safeguard the Hong Kong dollar.Assuming a 5-percent return rate, which is very safe, an additional income of more than HK$30 billion will be generated. It may be spent on improving the people’s livelihood in such areas as welfare, healthcare and elderly services.Another question is whether the government should spend within 20 percent of the GDP. This is not a strict rule. The government may spend a little below or above this line if necessary.Past financial secretaries have set safety levels in terms of新蒲崗迷你倉12 to 24 months of government expenditure.Tsang has not set any safety level. There is no fixed rule internationally. I think he will not do it because he does not want the reserve level to dominate his spending level. If he sets a low level, people will expect him to spend freely and he will be cursed if he does not. Also, he will be criticized for keeping the money in the public treasury if he sets a high level of reserves.With such lucrative reserves, I think the government can adopt a two-prone approach by spending on both short-term measures and long-term investment (such as education, infrastructure) for the future of Hong Kong.Don’t be Santa ClausIt is true that the Hong Kong government has been handing out a lot of short-term, one-off concessions over the past two decades. Such practice started with Donald Tsang Yam-kuen when he became financial secretary in 1995 and continued the same things as chief executive 10 years later.The incumbent financial secretary has stuck to short-term relief, with the distribution of HK$6,000 in 2011 being the most notable and controversial example. He used fewer short-term measures in the past two years but has not invested in building for the future either. The government seems to be playing the role of Santa Claus by giving out presents whether the economy is good or bad.I can remember only two long-term plans after 1997; the science park and Hong Kong Disneyland, both committed by Tung Chee-hwa, the former chief executive.The purposes of the reserves are to provide public expenditure and safeguard the Hong Kong currency. There is no hard and fast rule as to what the safety level shall be. Former financial secretary Antony Leung Kam-chung set a minimum standard of 9–12 months of public expenditure. In my opinion, reserves equivalent to at least 24 months of public expenditure are necessary.When there is surplus, foreign governments often invest the surplus in long-term planning to increase the economic capacity. It will be good for Hong Kong if the government, with lucrative surplus, invests in economic development, manpower development, technology, education and infrastructure.For example, the government may set up an elderly fund for the benefit of senior citizens. It may grant land and finance the construction of elderly villages to take care of the elderly’s heath, welfare and daily living. This will in turn generate many business opportunities. A crisis fund may also be created to aid people with financial difficulties.If such funds are established, public expenditure in those areas will become stable or even decrease.John Tsang’s fiscal policy is a bit conservative. I also disagree with him that public expenditure should only be policy-driven. It can be top-down or bottom-up. Whilst some policy bureaus responsible for security and constitutional affairs only involve small expenditure, top people like the chief executive and financial secretary may initiate ideas and then ask bureaus to formulate policies and expenditure programs.Invest long termThe Hong Kong SAR government is keeping handsome fiscal reserves of more than HK$669 billion. When Antony Leung Kam-chung was financial secretary (2001-03), he agreed with the Legislative Council (LegCo) that reserves equivalent to 12 months of government expenditure were sufficient. But the agreement did not last long following his resignation. Theoretically speaking, the government can spend more if it maintains more than 12 months’ reserves. Assume a 5-percent return on investment, and an additional HK$33 billion will be yielded.The current financial secretary has no objective, scientific formula for the level of reserves. When he was asked by lawmakers, he kept on replying ‘the more the merrier’.This is John Tsang’s seventh year in office. Each year he miscalculated the level of surplus, with the difference ranging from HK$20 billion to HK$110 billion on an average of more than HK$50 billion per year.He just put the surplus in the treasury. If he spends HK$50 billion on long-term planning per year, he can invest in seven large projects.For example, he can kickoff a universal retirement protection plan, invest in a green economy (with emphasis on environmental protection) and the creative economy (with emphasis on IT and culture).These are long-term projects that require huge resources over a very long period of time. If the government funds the startup of these projects, the business sector can take them up at a later stage. This will result in the emergence of new sectors, without relying too much on finance and real estate.Over the years, Tsang has been offering more than enough one-off relief measures. If my memory is correct, he has only reserved HK$50 billion for a healthcare insurance plan as a long-term investment.Every year, electricity allowances, waiving public housing rents, the rebate of rates, etc, are repeated. People will feel they are permanent measures. If he ceases to do that, people will become disgruntled.In my view, short-term relief measures should be made in economic bad times to help more people. When the economy is fine, such measures should only be offered to low-earners, the elderly and those who cannot support themselves. But now, such concessions are made every year without regard for the prevailing economic conditions.mini storage