Budget 2006 - 22 Feb, 2006

Forecasting large surpluses
… but how then to spend?

Dear Subscribers & Friends

The most interesting aspect of today’s Budget is the large surpluses forecast from now till 2010. So, how will Hong Kong spend all the money?


A. What is the real story?

1. Specifics: The news will focus on things like a 9-months GST consultation; levy on tyres and plastic bags, lowering salaries tax marginal rates, and government to cover Hospital Authority’s deficit etc.

2. Real story: The real story is the government’s Medium Range Forecast.

Between 2006 and 2010-2011, the consolidated surplus forecasts per
year are: HK$5.6, $10.3, $23.2, $19.1 and $32.6 billion.

Accounting experts already say the actual 2006 surplus could be much
higher - somewhere between HK$10-15 billion.

3. FS-speak: With this kind of forecast, the FS still said (para 55):

“We would … have preferred to provide more welfare … parks, piazzas, open space and culture and heritage sites. But where is the money for all these going to come from? … (we will return to this below) … In line with our belief in small government and given our limited resources, we must manage our finances prudently … we cannot compare ourselves with welfare states as our community does not accept their high tax regime”.

B. Capex spending has a life of its own …

1. HK$29 b/yr: However, for the next 5 years, the government will spend HK$29 billion/year on capex on such major things as North Lantau highway connection to the HK-Zhuhai bridge, new government offices at Tamar, Kai Tak development and the Central-Wanchai Bypass.

2. Past years: According to government numbers, from 1998 onwards the government spent the following amounts on capex - HK$27.6 billion, $26.1, $27.7, $26.5, $28.3, $31.4, $31.4 and $27.6 = HK$226.6 billion, or an average of HK$28.3 billion per year.

3. FS-speak: The FS had this to say (para 61):

“… increasing investment in infrastructure will not only promote economic development and bring more job opportunities, but also make our living environment more pleasant and enhance our competitiveness. We have … large infrastructure projects under planning, and we hope to start the works more quickly. Since our fiscal position has improved, we now have the opportunity and the resources available to
proceed …”.

C. Observations - a system that incentifies capex

1. Land revenues: Since 1982, revenues from land (e.g. land sales, land premiums) goes into the Capital Works Reserve Fund which can only be used to pay cash for capex and not recurrent expenditure. From 2005/6 to 2010/11, this fund is forecast to have the following revenue: HK$28.3, $30.6, HK$32.3, $34.2, $36.3 and $38.5. These sums have to be spent on infrastructure and not on operating expenditure, thus they cannot be used for education, welfare, health and environment.

2. Capex vs. Opex: There is plenty of money in fact but it has been restricted in capex usage. It needs to be remembered that public housing capex is NOT in the government accounts but the Housing Authority’s so government capex goes into things like reclamation, highways, bridges etc. Does the system create over-building of infrastructure?

3. More pleasant living environment?: The FS questions whether there is money for open spaces, piazzas, parks and culture, which would certainly make our living environment more pleasant because he says we have a low tax system. The obvious question to ask is: Is it time to review how land revenues can be used?

CHRISTINE LOH
Civic Exchange - HK’s independent think tank
www.civic-exchange.org