Hong Kong's Government Has a Strange Problem — Too Much Money

Hong Kong's Government Has a Strange Problem — Too Much Money
Credit: AP / Vincent Yu

What you need to know

Hong Kong brought in a lot of money this year, but will they spend it wisely?

On Oct. 31, Hong Kong’s treasury published the government’s monthly financial position and the results were record-breaking — the government recorded a fiscal surplus in the first half of the financial year (FY) 17/18.

This is the first such surplus since 1999, when the government started publishing monthly financial positions.

The early glut of cash appears to foretell a huge fiscal surplus for the full year, making the already gigantic fiscal reserve even bigger. However, the government has not been spending the public money on public services but has been very generous in funding Beijing’s pet projects, which do not carry much benefit for ordinary citizens.

It is time for Hong Kong people to call for tax reduction. I believe that the most efficient single measure would be abolishing the salaries tax, a form of income tax.

Record-breaking surplus to come

According to the Treasury, the government had a surplus of HK$12.4 billion (US$1.6 billion) as of the end of September. While the amount does not look huge, a surplus in the first half of the year by itself is already extraordinary. Over the past 19 years, the second-best record was a deficit of HK$ 5.4 billion in FY11/12.

Another point to note is that the Financial Secretary only expected a full-year surplus of HK$16.3 billion, meaning that the government has achieved three-quarters of its target surplus in only 6 months.

Major revenue has not yet been received. For instance, profit tax, accounting for 27 percent of government income, is mainly collected during the second half. Around three-quarters of the salaries tax would is collected every January. Investment income of the fiscal reserves is usually recorded in December. Given this cash flow pattern, it would not be unreasonable to predict an enormous, and possibly record-breaking, surplus for the full year. I would not be surprised if the final surplus exceeds HK$100 billion, equivalent to 20.4 percent of the budgeted expenditure, over 4 percent of Hong Kong’s gross domestic product (GDP).

Having a full-year fiscal surplus is normal in Hong Kong. Over the last two decades, Hong Kong has seen deficits in only 4 financial years during the economic downturn in early 2000. The fiscal surpluses have already been accumulated to a gigantic fiscal reserve of HK$ 960 billion, or 39 percent of the GDP in 2016, which is equivalent to the government’s expenditure for 23 months.

Besides this official fiscal reserve, the government has hidden money in other coffers, such as those in the accumulated surpluses of the Exchange Fund and statutory bodies. With the forthcoming huge surplus, the biggest financial problem of Hong Kong government is that it has too much money but too few measures and projects to spend on.

Insufficient resources

Ironically, more resources are badly needed for many public services despite the huge fiscal reserve.

Instead of spending more on education, the government used the low birth rate to close subsidized schools instead of reducing class sizes. Schools are required to admit a certain number of students in order to receive subsidies for operation. They are thus competing fiercely for students by pressing students to get good academic results. The amount of difficult homework is ridiculous and students are committing suicide due to high pressure.

The government also talks about the ageing problem, and saved up more money for, allegedly, preparing for the forthcoming financial needs of the elderly. However, it has not taken the essential steps in actually addressing the problem, such as building more elderly homes, improving the medical services, or enhancing the social welfare system for poor elderly citizens.

Bosses in Beijing

While being mean to the poor and the needy, it is often said that the government is extremely generous in other areas, especially those which please Beijing. The high-speed railway connecting Hong Kong to Guangzhou is the most prominent example among these Beijing’s pet projects. The 27-kilometer railway cost HK$ 86.42 billion (US$11.08 billion) to build, yet it the original claim that it would save time has not proven true, making it completely pointless. An even worse problem is that the railway may not be able to recoup its operational cost, such that Hong Kong needs to subsidize its operation as well.

Besides the high-speed railway, more inefficient spending is on the way. The government intends to spend more on all kinds of “One Belt One Road” projects. Small but questionable projects are also seen in the first policy address of Chief Executive Carrie Lam. For instance, she proposed an expansion of the air mail center in order to “enhance its capacity and operating efficiency to cater for the future growth in air mail volume,” when according to the post office, there were a substantial reduction of 40 percent of air mail over the last five years.

Lowering taxes

It is indisputable that there is a need for the government to collect taxes in order to provide public services which could not be provided efficiently in the market.

The amount of tax collected should be sufficient but not excessive. When the government is provided with excess funds, it is unavoidable for bureaucrats to take actions benefiting themselves instead of society at large. While these benefits may not necessarily mean putting money in their own pockets, they may spend money on inefficient projects which give no benefit to society but help bureaucrats keep their jobs, be promoted, or earn better reputations.

What we can see now is that the government has too much money and needs to think of something to spend it on, resulting in many useless projects.

I therefore opine that citizens in Hong Kong should act in calling for a tax reduction. For the time being, the best single measure that would help is asking the government to abolish the salaries tax. By doing so, more than 1 million tax payers would immediately see benefits, while the government would not be hurt by occasional small deficits, given the gigantic and increasing fiscal reserve.