Hong Kong Governments Problem is not Deficits

A source has suggested that there is a high likelihood of annual surplus reaching HK$160 billion at the close of the financial year. This information has come at a time when the financial chief has been put under pressure to provide budget giveaways.

This year, Hong Kong is expected to benefit from a good budget surplus as experts foresee a challenge in the structural surplus. Figures obtained by the Post indicate that a total of HK$120 billion is in the bag and the ultimate amount is likely to be close to HK$160 billion when the month of March comes to a close.

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This huge projected surplus has resurrected the criticism leveled against officials for their conservative calculations as well as their failure to help the young and elderly and even invest in public hospitals. This is because it will be seven times of the initial estimate for 2017-18 i.e. HK$16.3 billion.

Experts sought to correct officials for adopting an outlook that is doom-and-gloom as well as for forecasting the occurrence of a fiscal structural deficit by the year 2021. An economist was of the opinion that the challenge was quite the opposite as the city is dealing with a structural surplus.

Paul Chan Mo-po who is the Financial Secretary is under a lot of pressure to provide one-off relief measure during the delivery of his annual budget on the 28th day of February. This is because he has adequate resources within reach.

A source that has been well familiarized with the fiscal position has predicted that the predicted surplus will not fall within the expected range but below. The surplus can be described as the positive difference between the income of the government as well as its outgoings. This year major accounting firms had predicted the figure to lie in the range of HK$160 billion to HK$180 billion by the time March 2018 is coming to a close.

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The projection for this year would be better than the one that was set in the previous financial year. This is because the city benefited from a surplus of HK$92.8 billion i.e. 8 times the initial estimate of a mere HK$11.4 billion.

Last year, HK$57.2 billion was the total amount that the city had cumulated as its surplus by the month of November. This is 4 times the initial estimate for the whole of 2017-18 i.e. HK$16.3 billion.

By 31st December last year, the fiscal reserves of the city of HK$1.7 trillion were exceeded.

However, all the surpluses are against a backdrop of a looming deficit. This will precisely occur due to the ageing population of the city. The revenue is likely to go down because population above 65 is increasing but not paying income tax and are not working. Similarly, public coffers will be used to care for the elderly population thus rendering surpluses a gone case.

2 veteran economists that the Post invited to review the government projections that their long-term fiscal planning panel made 4 years ago mentioned that the supercharged income of the government might cause a 15-year delay in structural deficit or completely eliminate it.

Both analysts were in agreement that the study by the government terribly failed in China factor. This has promoted big rises in the price of land and on Hong Kong’s stock market. Former investment bank analyst and think tank HKGolden50’s founder Franklin Lam Fan-keung believes that China is to blame for Hong Kong’s largest structural economic growth. Franklin actively served the Central Policy Unit of the government in the Asian financial crisis of the year 1997.

He continued to say that Hong Kong did not finance economic and social infrastructure thus didn’t feed the growth. If anything, hospitals, hotels and offices became more expensive.

Official statistics indicate that growth in the government’s revenue was estimated at 6.2% from 2009-2010 to 2014-2015 in the government’s budgets. Reviewing it now, 8.5% was the actual rate of growth while the expenditure was 6.8%.

Lam thinks that the rate would have been as high as 9.9% i.e. 3.7% more than the original if the revenue growth calculation considered one-off relief measures as well as different funds designated by the financial secretary of the entire period i.e. John Tsang Chun-wah.

Tsang made away with huge sums of money in the range of HK$26 billion – HK$77 billion from the year 2010 to 2011. This was in response to the extremely high revenue from stamp duty and land premiums. This was done every year in order to designated funds or bankroll sweeteners to address certain public concerns.

This decreased some annual surplus sizes by close to half and even two-thirds in others.

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Lam mentioned that Tsang took a frugal fiscal approach but failed to grow the economy by investing in opportunities.

Lam mentioned that the long-term fiscal study by the government made future revenue projections from 2014-2015, it was 19.4% of GDP. The realistic figure was 24% when chunks of surplus put aside were included.

The think tank of Lam projected on the larger annual revenue growth that 2036 was the year the structural deficit was likely to emerge. Even if spending by the government rises by 3% annually.

Terence Chong Tai-leung (associate professor at Chinese University) mentioned that the taskforce made a mistake in predicting government revenue growth on the basis of GDP. This is because the growth will exceed GDP due to stamp duty windfall.

Chong recently noticed a structural change in the stamp duty, a growth he expects to continue. This will increase government revenue.

The windfall the city is experiencing comes from its very robust stock markets and property.

The mainland-Hong Kong stock connect was launched in 2014, it allows securities trade by mainland and international Chinese investors on their markets. This has greatly contributed to stamp duty.

Lam that Alibaba (e-commerce giant) had been allowed to list in Hong Kong would have been good for its stock market.

In addition, the listing of hi-tech mainland companies such as Xiaomi would result in the realization of more potential.

A leading government economist called Professor Liu Pak-wai, defended this study. He was involved in long-term fiscal planning by the government.

He said it is not easy to make accurate land revenue forecasts. In addition, property cooling measures promoted stamp duty income.

He believes that fiscal studies should be reviewed every 5 years.

A spokesman from the government acknowledged the working group report’s recommendations but mentioned that there will not be any constraints in government spending. That is determined only with reference to Hong Kong’s needs for social and economic developments and its fiscal strength.