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The Servicing Economy
LEGCO REPORT
March 2002 Issue   Economic situation should be weighed when
addressing deficit
The report predicts the deficit for 2001-02 will reach HK$66 billion, and warned that Hong Kong has a structural rather than a cyclical budget deficit. Failure to implement effective measures will result in the government's fiscal reserves drying up within seven years, the report said. The government will then be forced to operate on loans, which will amount to HK$2,661 billion by 2021-22. Report too pessimistic Facing such horrifying figures, I believe the Task Force is being too pessimistic and over simplifying issues. It is unreasonable and unjustifiable to base their findings only on negative factors without considering such conducive elements as China's WTO entry and the proposed Mainland-Hong Kong "Closer Economic Partnership Arrangement," or (CEPA). Their forecast about the property and securities markets are similarly too pessimistic, and even overlook variables that may arise in the exchange rate peg, assuming it will be maintained for the next 20 years. The goal of releasing such a pessimistic report was perhaps to persuade both Legco and the general public to accept yet-to-be-announced fiscal measures. However, the "Cry Wolf" story it created could also scare off investors and possibly lower Hong Kong's credit rating. Notwithstanding the problems with the survey, the government's determination to address the budget deficit is clear. The Chief Executive and the Financial Secretary indicated that the government planned to solve the issue within five years. To achieve a balanced Budget, the government needs to increase income or trim expenditure by HK$35 billion annually. In deliberating how to accomplish this, the government, in my view, should take into consideration a number of issues. First of all, Hong Kong's business climate is still weak. Our GDP registered negative growth for the past two consecutive quarters, and unemployment reached a record high of 6.7 per cent. Although the government does need to address the deficit, now is not the right time to introduce any new taxes or increase fees, which would only hamper recovery of the economy. Instead, it should wait until the local economy improves, which will also put it in a better position to discuss and adjust its income policies. More resources to boost the economy For the near future, the government should commit more resources towards improving the business environment and to stimulate the economy. A few months ago, I convened a meeting with eight Legco parties and we put forward seven initiatives to the government to help improve the economy. Our proposed expenditure of HK$25 billion is affordable in view of the current fiscal reserves. The government can have more income only when the economy recovers and the business environment improves. I hope such measures will be considered in the coming Budget as they are short-term plans which are unlikely to put pressure on the government's coffers. In addition to allocating more resources, the government should also drastically cut unnecessary expenditure. As I have said time and again, the government spends too much. The Task Force also admitted in its report that the growth of government expenditure in recent years exceeds that of the economy. Continued deflation has further deepened this gap and exacerbated pressure on its fiscal reserves. Cap public expenditure The share of public expenditure over the past 10 years has ballooned from 14 per cent of GDP in 1998 to the current 23 per cent, contradicting the idea of maintaining a small government. I think the government should immediately address the situation by capping public expenditure at 18 to 20 per cent of GDP. It should set benchmarks to steer clear from overspending like many developed countries have done. The government should also cut expenses in relation to civil service and employees of subsidized organizations, which accounts for 70 per cent of its recurrent expenditure. Apart from cutting civil service payroll and streamlining its structure, the government must outsource more services and push forward its Enhanced Productivity Programme to save costs. I believe the government can ease its financial burden with comprehensive, and rigorous cost-cutting measures. Failure to do so will result in the business community and the public having to carry the burden, which would only drag the economy further down. |
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