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Mike Rowse

Hongkongers have been warned by Financial Secretary Paul Chan Mo-po to expect a much bigger budget deficit for the current financial year than previously forecast. Following comments he made last month, newspaper reports said the shortfall “could be nearly twice that of earlier estimates and exceed HK$100 billion”.
In fact, the underlying situation is even more challenging than reported and I would not be surprised by a real deficit closer to HK$200 billion (US$25.6 billion).
The final deficit for 2022-23 was HK$205.8 billion, though the cashflow position was helped by bond sales of HK$66 billion, leaving a net shortfall of HK$139.8 billion.
In his budget speech early this year, Chan said that taking into account the proceeds from the issuance of government bonds of about HK$65 billion, he was forecasting a deficit of HK$54.4 billion for 2023-24. This means the shortfall before the bond issuance was estimated at around HK$119 billion.
At the halfway point in this financial year, the government reported cumulative revenue of HK$131.3 billion and expenditure of HK$355.6 billion, leaving a deficit of HK$224.3 billion. Bond sales of HK$46.6 billion reduced the shortfall to HK$177.7 billion. It would be too simplistic to just double those numbers to derive a full-year forecast as much revenue from profits and salaries taxes comes in the second half.
Nonetheless, we already know from public comment and reporting that revenue from companies and individuals is soft, and both the property and stock markets are weak, which reduces stamp duty. A prominent residential site in Tung Chung has just been pulled from the market, so expected land revenue is also suffering.




Bond sales are useful to bolster cash flow and reassure the public that the government still has money in the bank. But the downside of presenting the deficit figures on a net basis is that it can create a false impression among ordinary Hongkongers – and perhaps some ministers – that there is plenty of money to fund new and improved services without raising more revenue.
The real world doesn’t work like this. As I have pointed out before, the proceeds of bond sales are not revenue in the conventional sense. Rather, they are loans that have to be repaid.
Fewer budget handouts are a blessing in disguise for Hong Kong
Some may think that by putting a negative spin on the numbers, I am suddenly talking Hong Kong down after a lifetime of talking it up. The truth is, we are an international financial centre with thousands of top financial analysts looking at the same numbers and drawing their own conclusions.
We would be fooling ourselves if we thought these experts would not be able to see what was really happening. It is surely more effective to tell ourselves the truth, so that sound decisions can be made about revenue and expenditure.
Chief Executive John Lee Ka-chiu’s policy address last month contained many worthy new proposals, in particular those for improving assistance for the elderly and the disabled. The challenge now is for Chan to show in the 2024 budget how they can all be funded.
Hong Kong has an excellent reputation for fiscal prudence, built up over decades of careful budgeting. That is how we have been able to amass extensive reserves, unlike many other economies which have outstanding debts equal to or even greater than GDP.




When the pandemic struck, our administration was able to help residents ride out the storm by drawing on those reserves without having to go into debt. Now that normal times have returned, it’s also time for normal budget practices to resume. A good reputation takes a long time to build up but can disappear quickly.
We need to be particularly wary of the rising cost of borrowing. Our recent bond sales have been pitched at an interest rate of about 5 per cent. That is probably as much as we really want to pay. After all, government debt should be regarded in the market as virtually risk-free. Coincidentally that is the same rate as on 10-year US Treasury paper.
Traditionally, Hong Kong has divided both revenue and expenditure into two separate streams: recurrent for money the government expects to receive and pay out every year, such as income from taxes on salaries and profits, and spending on welfare payments and civil service salaries; and capital, where revenue and spending tend to be lumpy, such as land premiums and expenditure on major works projects.
When revenue on capital account is weak, as it is at the moment, then alternatives have to be considered. One simple option would be for the government to cover any shortfall by running a surplus on the recurrent side, but that would impose a severe squeeze on spending.
How Northern Metropolis land plan can address price and rezoning pitfalls
Allowing the private sector a bigger role is another possibility and seems likely to apply to the development of the Northern Metropolis where there are many private landowners who might be interested in participating. This option would not of course apply to the proposed Kau Yi Chau artificial islands because they do not yet exist.
Many governments fund capital works by issuing bonds, which is reasonable, as the assets thus secured have a lifespan of many years so it is fair to spread the cost in this way. But then the cost of annual interest payments and bond redemptions has to be recouped somehow, usually (elsewhere) by user charges.
Whichever way you look at it, Chan has a real challenge ahead in preparing his next budget.
Mike Rowse is the CEO of Treloar Enterprises


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Opinion

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Hong Kong

Economy

When the government presents budget deficit figures on a net basis, it can create a false impression of abundance
At a time when revenue is soft, it’s surely more effective to tell the truth, so that sound decisions can be made about revenue and expenditure


When the government presents budget deficit figures on a net basis, it can create a false impression of abundance. At a time when revenue is soft, it’s surely more effective to tell the truth, so that sound decisions can be made about revenue and expenditure.


Paul Chan

Hong Kong property

Hong Kong budget 2023-24

John Lee policy address 2023

Hong Kong housing

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)
