Spare us the auction on stolen goods

(Next Magazine, 2016/12/30, A002, Second Opinion, Bill Stacey)

As our next Chief Executive “horse race” starts, we should heed the American critic HL Mencken’s warning that “every election is a sort of advanced auction on stolen goods”,  and remain vigilant against unrealistic promises from candidates that reach into our pockets or the pockets of our children.

Superficially there is no disagreement that we should keep our taxes low. Yet political promises are rarely consistent with that consensus. More importantly the principles behind political promises need to preserve the unique culture that has helped keep us more independent and less reliant on the government.

Put simply, an extensive welfare system with universal government pensions, government-funded healthcare for an aging population, “free” education, and very extensive public housing is not compatible with current low tax levels.

As Financial Secretary, John Tsang did a great service by commissioning a study to make these trade-offs clear. The Working Group on Long-Term Fiscal Planning found that even without “service enhancement”, a structural deficit would emerge by 2029-30. There are enormous pressures on government expenditure from demographic drivers that will impact healthcare spending, committed pension payouts, and social welfare spending.

The answer to these pressures is a relentless focus on efficient delivery of services, careful design of incentives, targeting of what benefits are paid and, most importantly, ensuring higher economic and productivity growth. It is economic growth that will support existing revenues and allow people to support themselves and their families through saving and investment.

Former London Mayor (now Foreign Secretary) Boris Johnson famously quipped that “my policy on cake is pro having it and pro eating it.” That implausible temptation can only work if the stock of “cake” is limitless. The obligation on political candidates is to explain how their policies allow the private sector to generate growth as well as their detailed plans to spend money. This is particularly important, because we can be certain that higher taxes will inhibit growth and make future deficit larger.

The challenge for the next Chief Executive is not distribution, but enabling creation, of public funds. The current surplus leads to complacency that is not justified by the fiscal outlook. Although our cash-based budget shows a surplus from the operations of the government, the surplus is just 7 percent of revenues. Reserves seem high today, but cover just 2.3 years of spending, and are not enough to cover the value of future pension liabilities.

For the year that ended March 2016, the more economically appropriate accrual accounting of the government’s position, which allows for changes in pension liabilities, actually showed a small deficit. There is simply no scope to ramp up government spending without an impact on either debt or taxes.

Those accounts make clear that, even as interest rates bounce back to positive territory, we cannot assume that the value of the exchange fund and reserves will continually grow. Furthermore, our large reserves are solely managed by the Monetary Authority creating a concentration risk that threatens the longer term sustainability of the government’s financial position. If individuals, rather than government reserves, are the main source of saving for the future, then these risks are more diversified and lower.

We are protected, in theory, from financial predations by the government and ever rising taxation as the Basic law in Article 107 mandates the principle of keeping spending below revenue, striving for a balanced budget, and budget growth that is less than GDP growth. This Article has however neither been honored nor tested in the courts; it could nevertheless be a powerful defense against excessive promises from Chief Executive candidates.

And happily, in addition to the fact that our culture has always required financial prudence and supported self reliance, our financial secretaries, as exemplified by Sir John Cowperthwaite,  have been strong characters capable of resisting excesses and allowing the light of transparency to help keep spending discipline. We will need every one of these protections as the Chief Executive candidates launch their auction on stolen goods.

Bill Stacey

The Lion Rock Institute

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