End Business Welfare
Next Magazine (Second opinion A002, 2013.10.03)
Hong Kong risks being transformed. With the 2013-14 budget, total government spending has become entrenched at over 21% of GDP. Forward estimates from the government have spending peaking in 2015-16 at 21.6% when a special provision is made for health care reform. However, with more realistic growth estimates, this could be closer to 23% of GDP. These estimates from the government assume that they do not cave in on the major demands for further spending.
This is a high proportion of government spending in an economy that does not need to provide for its own defense and international interests. For example, the Australian Federal government spends slightly more at 24.5% of GDP on its myriad functions. More importantly in the 1990’s Hong Kong’s government spending averaged less than 15% of GDP.There is rightly a concern that this transformation is taking Hong Kong down the path of creating a welfare state. The world over we can see welfare systems that make unsustainable promises to their people for the provision of retirement and health benefits under severe pressure. These systems reduce incentives for people to provide for themselves. Higher taxes diminish incentives for younger generations to work. Mutual support amongst families breaks down and communities weaken as interests fight over dividing a tax base that can be squeezed no further.Look at recurrent spending in Hong Kong over the three years including 2013-14 and social welfare spending compound average growth of 13% is the fastest growing part of the budget. The total of health, education, housing and social welfare spending represent a hefty 58% of recurrent public spending although that proportion has not increased over the past six years.Yet dig a little deeper into the budget and we find that this is not the only concern that we should have. If we broaden our horizon to total public spending, including capital spending, the areas of most rapid growth in total spending are probably better characterized as business welfare than social welfare. Combined spending on “economic” functions and investments by government and infrastructure has shown compound average growth of 19% per annum over the past 6 years. This is well in excess of economic growth and is one of the major reasons for the growing government share of our economy.What is this spending? Part of it is investments in infrastructure, not all of it as controversial as the high-speed train and Macao bridge projects. However, an increasing component is also subsidies to small business, for “emerging” industries and a range of support for or regulation of economic activity. The acceleration of spending on infrastructure and “economic” activities began with the financial crisis in 2008 and has never stopped.
Arguments for counter cyclical sending are very weak, but Hong Kong is continuing this spending well past any sensible argument that it helps the economy. We are now increasingly in a position where unsustainable growth in government spending risks crowding out private economic activity. More importantly, it risks changing the culture of the city from one dominated by free enterprise, to one where business activity is determined more by favors from the big government budget. This is not so much an issue about the old tycoon families. It is not obvious that they are the main beneficiaries of the massive increase in government spending on business and economic activity. However, when commenting on public policy, it is important that those who are better off recognize that it is not just welfare spending that threatens the integrity of our budget and economic system.As we get closer to a forced slowdown of public spending to no more than match trend economic growth of 5.5%, we need to recognize that spending priorities will become increasingly contentious. Those of us business people who rightly warn about the risks from welfare spending must also stand up and at the same time tell the government that they will forego the business welfare programs and economic spending that has dominated budget growth and done precious little to help productivity or economic growth.
Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.We are now on Facebook http://www.facebook.com/Next2ndOpinion