Hong Kong 2013-14 Budget Insights

How budget surpluses may help Hong Kong address its deep-seated problems

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The message was clear; the government will help the public to improve themselves, but outright cash handouts will not be forthcoming.

However, after surveying what might be regarded as an abundance of riches, Tsang noted that he was not oblivious to the pain felt by the middle class and lower income groups who still face considerable economic uncertainties and inflationary pressures.

While Tsang proceeded to detail “one-off” sweeteners aimed at pacifying the public and sharing part of the fiscal surplus, it was perhaps noticeable that the extent of the measures announced were less than in prior budgets. This show of restraint most likely reflects an acceptance that such sweeteners do little to address the deep-seated social issues facing Hong Kong, such as the widening gap between rich and poor, and how to adequately fund care for the elderly and those in need.

Nonetheless, we welcome the Financial Secretary’s injection of HK$15 billion into the Community Care Fund as an attempt to make a difference to the lives of the working poor who might not benefit from sweeteners such as salaries tax relief and supplementary payments of Comprehensive Social Security Assistance.

The injection of HK$15 billion into the Employees Retraining Board should also have a positive impact and enables the government to demonstrate its commitment to self-help as opposed to “welfarism”. Also welcome was Tsang’s estimate that recurrent expenditure on social welfare will reach HK$56 billion, an increase of 31 per cent over the prior year.

Taken together, these measures demonstrate that the government has sought to distribute the accumulated fiscal surplus. Furthermore, the measures have contributed to an increase in budgeted public expenditure as a percentage of 2013-14 GDP from 20.2% (budgeted for the year when Tsang made his mid-range forecast in his last budget) to the figure of 21.7% released on 27 February 2013.

Less clear is the assertion by Tsang that government revenues at 20 per cent of GDP provide little room for increasing public expenditure further without damaging Hong Kong’s low tax regime. With an annual surplus averaging close to HK$50 billion for each of the last 5 years, some commentators may perceive that there is scope to increase expenditure without raising taxes.

With regards to Hong Kong’s longer-term fiscal problems, we welcome Tsang’s announcement that he will set up a working group led by the Treasury Branch which will invite scholars and experts to explore ways to address a more comprehensive approach to planning Hong Kong’s public finances. This should assist Hong Kong to evaluate ways of coping with its ageing population and to address the government’s other long-term commitments.

Overall, the budget may be seen as at least partially addressing the immediate concerns of both the middle class and lower income groups while providing a platform to seek answers to the longer-term fiscal challenges facing Hong Kong.