What should have been in the Budget
Mr Stephen Brown, Research Director of Kim Eng Securities and Director of Civic Exchange, was the Foundation's guest speaker on 26 March 2003. This is a summary of his remarks.
The starting point for his analysis, Mr Brown said, was Hong Kong's trade surplus. This was running at an annual rate of HK$150 billion or some 12% of GDP, an outstandingly good performance. GDP growth had been 5% in the last quarter. Employment was at near-record levels.
But there was a major disconnect between this external performance and the internal performance of the economy. The growth rate was made up of 7% in the external sector and –2% in the internal sector. Hong Kong was exporting capital. Hong Kong had had high monetary growth prior to the crisis, and was now paying off debt. This was healthy from many perspectives, but did nothing to help low end unemployment.
Hong Kong's external prosperity derived from China's exports. These were in fact the exports of Hong Kong- and Taiwanese-owned enterprises. China just contributed the land and labour; it was only the overseas Chinese who made it productive. With its very low tax rate, Hong Kong was suited to its offshore processing role. Accordingly, service sector exports had grown to a very large scale. At GBP30 billion-equivalent, Hong Kong's service exports were not so far behind the GBP70 billion of the much larger UK economy.
So the overall economy was very good, and expanding internationally. Even retail sales had been picking up prior to the Iraq war. The reluctance of Hong Kong's businesses to reinvest in the territory should not be seen as a proxy for the overall performance of the economy.
Turning to the Budget itself, Mr Brown noted that essentially, expenditure had increased steadily, while revenues had dropped back to the levels of 1996/97, or even lower. The government budget excluded expenditure by the MTR, KCR and the Housing Authority. The huge housing push was costing HK$50 billion in construction expenditure alone. Surpluses in 1995/96 and 1996/97 became balanced budgets in 1998/99 and 1999/2000. Then came the deficits of increasing magnitude over the last three years. In 2002/03, after crediting investment income, the real gap between recurrent income and recurrent expenditure was HK$49 billion.
The crux of the matter was that there was no process – since there was no democracy – to determine whether government spending was appropriate. Health, education, welfare – all were good to have, but did Hong Kong people want to spend as much of their money on them as the Government was spending? And even if they did, were they getting value for their money? Taking education, it appeared that 75% of schools were not meeting their standards. The dollars were not being well spent.
Mr Brown was not worried about the cessation of land sales. These would resume in due course and land-related revenues would come in again, eventually reflecting the value of the land. The most important thing was that expenditure was not being cut. The so-called cut of HK$20 billion was only a reduction from what might have been spent. Today's recurrent expenditure of HK$201 billion would in six years time be HK$202 billion.
The majority of government expenditure related to civil service salaries, and this compensation cost had risen while the total number of employees in the civil service had actually decreased. The pay cut itself was not really a cut, just a reduction in the top band. There was a tendency for people to keep getting promoted and getting more pay anyway.
In broad-brush terms, expenditure was HK$200 billion, revenue HK$150 billion. Antony Leung hoped to bridge the gap with his HK$20 billion "cut" together with some asset sales – booked in the general revenue account rather than the Capital Works account - and a bit of economic growth. Three per cent VAT might help bridge the gap subsequently if this was introduced in 2007/08. But the scheme in the budget to balance the books by 2006/07 was just a show to appear to conform with the Basic Law requirement for balanced budgets.
Value for money
It was not just the amount of the deficit that was important, it was what was being received for the money. Value was just not being obtained. For example, new public housing estates were covering just 40% of their operating costs from rents. The UN guideline was to set public housing rents at 27% of average income; in Hong Kong, the level of rents was 10%. This was ridiculous. Public benefits like housing should be means-tested, and there should also be user fees. Too many people in Hong Kong were getting a free ride when they could afford to pay more. Means-testing was a better solution than wholesale cutting of allowances. User fees, combined with cash payments to those really not able to pay, would together make a more effective cash-based social security system.
And civil service salaries needed to be cut. Many Hong Kong employees were overpaid prior to 1997, including he himself, Mr Brown admitted. But in the private sector people, again including himself, had adjusted to reality. The public sector had not adjusted, and now public sector pay stood out far above the level of the general workforce. In a way, Hong Kong was now bearing the brunt of the pact the British made with the civil service, paying them off to keep them quiet during the handover. Antony Leung had exacerbated the situation by closing the pay deal with the civil service in advance of the pay level survey. It was a disgrace.
It was not merely that civil service pay needed to be cut. Much that was currently in government needed to be privatised, so that the civil service would be made much smaller. The Post Office, water, printing – all of these should be in the private sector as they were in many other countries. In Britain public sector pay was no longer a political issue because the sector had been made smaller and much of it converted into more autonomous agencies. It was not that HK$200 billion was an inappropriate amount to spend on essential services but rather that we should be getting three times as much value for the money. In the UK, you had to pay your own hospital fees until your assets reduced to GBP17,000. In Hong Kong hospital services were not even means-tested.