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Every year when we have a budget surplus, especially one as large as last year’s, we expect a chorus of demands from politicians, social activists and, surprisingly, quite a few economists for more spending.
They aren’t talking about just any kind of spending. What they call for are long-term social and economic programs that will result in a marked increase in recurrent expenditure in years to come.
Listen to what scholar and executive councilor Cheung Bing-leung said. “To meet the challenges in its economy and changing demographics, Hong Kong needs to invest more in the younger generation through education, and in infrastructure development to improve the quality of living,” Cheung wrote in a column published in a local newspaper. And there is more. “It (Hong Kong) needs to enhance the city’s competitiveness while catering for (its) rapidly aging population through health and social security measures,” he added.
Legislator Regina Ip called it a “disgrace” that the needs of the “poorest of the poor” have again been overlooked in the distribution of the city’s “bountiful surplus”. This lack of concern for the “multiple have-nots” of Hong Kong can be tracked to the guiding principles of public finance management, which, according to Ms Ip, “seem to be stuck in a time warp, and unable to go beyond (the government’s) traditional role simply as a custodian of the public finances, as in the (former) colonial days.”
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Despite their strong words, hardly any critic of note has called for a total abandonment of the old “colonial” principle of economic management widely known as “positive non-interventionism”. Applied to government fiscal policy, that principle dictates that recurrent expenditure must not be allowed to exceed recurrent income, which excludes proceeds from land sales.
Such budgetary discipline, as we all know, was born out of necessity rather than from mindless adherence to conservative dogma, as some critics suggested. Political constraints have practically ruled out the possibility of long-term debt financing. For that reason, the government must try its best to ensure a balanced budget. In doing so, it tends always to err on the side of caution.
For that reason, any debate on fiscal policy, which seems to have been in vogue in many developed economies, is pointless in Hong Kong. Let’s face it. An expansionary fiscal policy is never going to happen in this city.
It’s understandably difficult to predict the performance of an external-oriented economy which is subject to many different factors that are beyond the government’s control. The stewards of the city’s finances often are criticized for being overly cautious. The budget for the past fiscal year is a case in point. It has been roundly criticized for having, as Ms Ip noted, “grossly underestimated” the vitality of the Hong Kong economy.
It seems to make sense to suggest, as Ms Ip did, that persistent underestimation of the economic potentials can result in under-investing “in the physical and knowledge infrastructure of the economy”. Cheung seems to agree, and said it’s time for the government to “reconsider how income and expenditure items are classified and how different sources of revenue are managed”.
Citing a proposal from SynergyNet, a think tank he founded, Cheung urged the government to establish a fiscal stabilization fund tapping land and investment income, so as to provide a mechanism to support recurrent expenditure. But those incomes, especially from land sales, should never be considered “recurrent” in nature. In the past, the use of land sale proceeds was strictly restricted for funding capital expenditure. Such discipline is as relevant now as it was before, considering the cyclical nature of the property market.