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Steps for HK to avoid structural deficit

Publication Date : 04-03-2014


From extra vetting of expensive public projects to setting up a Future Fund that could invest a third of annual budget surpluses, Hong Kong needs to take "urgent" steps to avoid a structural deficit in as soon as seven years, a group of experts said.

But these experts, who have been tasked with looking at Hong Kong's long-term fiscal health, dismissed the idea of raising taxes on income and profit.

Even if Hong Kong doubled taxes, an "extreme" measure, it will yield just HK$169 billion (US$21 billion) annually - or 8 per cent of Hong Kong's gross domestic product (GDP) last year. It will also hurt the city's competitiveness and drive foreign investors away, they noted.

Instead, they recommend a multi-pronged approach which includes indirect taxation, such as sales taxes, capping annual government spending at 20 per cent of GDP, and reviewing big-scale infrastructure projects.

The most headline-grabbing is the establishment of a "Future Fund" for rainy days.

It is "politically hard" to do given fears of sparking inter-generational wars, said group member Mark Saunders, managing director of consultancy Towers Watson.

But by conceivably taking the form of a sovereign wealth fund such as Singapore's GIC, it will earn Hong Kong higher returns in the long run. It can also invest in companies that benefit the city in areas such as technology, he said.

With an endowment of HK$220 billion of pre-1997 land revenues, together with a third of budget surpluses plus returns, the nest egg could grow to HK$510 billion in a decade, the group estimates.

It released its 252-page report yesterday after being tasked by Financial Secretary John Tsang last year to check on Hong Kong's long-term public finances in view of an ageing population and shrinking workforce. It drew on experiences in other countries such as Singapore and Australia.

Tsang made use of its findings last week when he announced the city's budget, warning that Hong Kong should be mindful of its spending.

Given current healthy reserves of HK$745 billion, it sparked some criticisms that the group was over-pessimistic.

Not so, said its chairman, Elizabeth Tse, who is also Permanent Secretary for Financial Services and the Treasury.

"The figures are not plucked out of thin air, and this is not scare-mongering," she said during a press briefing.

The group of economists and other experts found that since 1997, government-spending growth outpaced revenue increase, at 4.7 per cent a year versus 2.5 per cent.

It then used an econometric model to set out certain scenarios.

If Hong Kong's coverage of education, health care and social welfare - which takes up 60 per cent of recurrent government spending - remains constant, it will suffer a structural deficit in 15 years and deplete its reserves after 12 years.

But if Hong Kong does increase its coverage at the rate of 3 per cent a year - as is the trend since 1997 - a structural deficit will emerge in seven years, and it will be in debt to the tune of HK$11 trillion by 2041.

On whether there is room for Hong Kong to propel its economic growth, forecast to be at 2.8 per cent, economics professor Francis Lui said Hong Kong is a mature economy but can try to "make the best use of the China factor".

This will however have its limits given the shrinking workforce and slowing productivity.

Saunders said that importing labour is an avenue but it faces opposition from unions here.

Tsang yesterday said the group will be invited to submit more comprehensive analyses on some of its recommendations.

*US$1 = HK$7.76


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