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INSIDE LEGCO                                                    November 2003 Issue


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Delays in Balancing the Budget
Raises Concerns

The government needs to grab the budget deficit problem by the horns, and do so quickly, before it gets completely out of control, writes the Chamber's Legco Rep, The Hon JAMES TIEN

When Henry Tang took up the post of Financial Secretary in August, the community waited in great anticipation for him to reveal how he plans to manage public finances and ax the deficit. Last month, Mr Tang unveiled his blueprint for restoring Hong Kong's fiscal health. He also revealed that the goal of balancing the budget target will be pushed back two years to 2008-09, a move which many, including myself, are concerned about.

To achieve this new target, the government must eliminate its operating account deficit in the next five years. It plans to do this by cutting its recurrent expenditure from HK$218 billion for 2003-04 to HK$200 billion by 2008-09, and raise recurrent revenues from HK$155 billion to HK$200 billion.

Sharp fall in fiscal reserves

Such a plan, however, runs the risk of seriously depleting our fiscal reserves. Under it, the accumulated operating account deficit will balloon to almost HK$200 billion over the next five years. As a result, our fiscal reserves will plunge from today's HK$310 billion to just over HK$100 billion enough to support the government for just five months.

Low fiscal reserves will put the Third Term SAR Government in a difficult situation when it comes into office in five years' time. Moreover, the deficit will force international rating agencies to lower Hong Kong's credit rating, which will adversely impact the investment market. Aggressive overseas speculators are also waiting to pounce on the chance to make a quick profit when confidence in the Hong Kong dollar weakens. In a nutshell, we cannot ignore the potentially huge risks and adverse business environment that the deficit threatens to create.

Mr Tang says the administration should save for a rainy day and leave a prudent level of fiscal reserves for the next SAR Government. But what is a reasonable level? Many scholars and I believe that our fiscal reserves should be equivalent to at least 12 months of government spending -- around HK$200 billion. Unfortunately, when the next SAR Government is formed in 2007, the budget deficit will most likely still be on the back burner eating away at our shrinking fiscal reserves. This whole situation is very worrying.

Regarding the suggestion of issuing bonds to raise revenue, I think it is a sound idea for funding infrastructure projects that provide economic benefits, but not to cover recurrent spending. If the government issues bonds to finance its excessive recurrent expenditure, that would be like spending with a credit card that snowballs the deficit.

I understand that the government has postponed balancing its fiscal target because it wants to give the community and the economy more time to recover from the SARS outbreak. Nevertheless, as mentioned above, doing so may have serious repercussions that the government needs to study and adjust again.

Speed up spending cuts

Given the current predicament, the government cannot, of course, increase taxes without the risk of slowing the momentum of the economic recovery. It can, however, step up efforts to cut unnecessary expenditure.

Current public spending accounts for 23 percent of Hong Kong's GDP, which is already too high by world standards -- especially when you consider that Hong Kong does not have to pay for national defence or foreign diplomacy. Compared with only about 16 percent of GDP in the 1980s and '90s, the government structure clearly has grown too fat and needs to slim down as soon as possible.

Mr Tang has proposed reducing government operating expenditure by 11 percent over five years, but -- even though I think the proposed reduction is not enough -- and I am worried that the government will also fall short of this target.

Since all principal officials and the Chief Executive will leave office in 2007, any proposed cuts may be postponed until 2008-09. Furthermore, Mr Tang made no mention of retrenchment or restructuring of the civil service in his announcement, and we all know that if the government is not determined in getting rid of redundant staff, it simply cannot effectively reduce its expenditure.

I, together with other Legco members representing the Liberal Party, have expressed the above concerns during a meeting with the Chief Executive. And when I meet with the Financial Secretary later to give my views on the 2004-05 Budget, I will stress to the government the importance of not just cutting expenditure, but doing so quickly.

If you have any comments or proposals on my views, please send them to me directly at, Legislative Council Building, 8 Jackson Road, Central, Hong Kong.
Or email me at tpc@jamestien.com. Tel. 2500 1013, Fax 2368 5292.


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