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One policy error away from fiscal disaster

(Next Magazine, 2017/7/13, A002, Second Opinion, Bill Stacey)

One policy error away from fiscal disaster

In the west, country after country, government budgets have spiraled out of control, creating persistent deficits and leading to rapidly rising debt. The United States is not known internationally for its extensive welfare state, although that is a misnomer, but government debt that was 30% of GDP in 1980 had risen to 60% by 2005 and now sits at 104%. By similar measures, China’s general government debt rose from 20% in 2000 to 46% in 2016.

Despite the natural prudence and caution of Hong Kong people, because the government has no net debt, we can be complacent about our capacity to increase government spending. To avoid the spiral, we need to understand what causes debt to get out of control and have a good understanding of where we are starting from.

Although Hong Kong is not a large issuer of debt, the government does have substantial liabilities. The largest of these is government pensions, which are not funded at all by a separate pool of investments to meet those obligations. Financial liabilities of the government are now 43% of GDP, up from 30% a decade ago. In the five years that Leung Chun-ying was Chief Executive, government pension liabilities grew at a compound average rate of 9.9%. Those liabilities are valued using a defensible 4% discount rate, but with 10-year US government bonds yielding just 2.4%, those liabilities could prove to be much higher. Indeed pension liabilities have been revised higher in 11 of the past 13 years.

We have become accustomed to thinking of the HKMA-managed investments in the exchange fund as a surplus just waiting for a rainy day or to be spent. Look at our government’s balance sheet, and you will find that the exchange fund investments of HK$853bn are not even enough to cover the HK$875bn value of the pension liabilities. There is no pot of gold at the end of the rainbow.

Former Financial Secretary John Tsang was often criticized for parsimony, but the accrual accounts of the government paint a different picture. During the five years to March 2016, operating expenses grew rapidly at a compound rate of 7.7% per year, more than the 7.1% growth in revenues and far more than the 5.7% growth in nominal GDP.

Where did the money go? Health spending grew at a compound average rate of 11.8% each year over five years and social welfare spending 9.4%. Those growth rates are under current policies. How much room for new policies is there when demographics are pushing those costs ever higher? With these costs rising and expenditure growth higher than revenue growth, we are already on a path that without changes will lead to budget deficits. We are just one policy error (say a universal pension commitment) away from a spiral toward real fiscal problems.

Policymakers inevitably confront the law of the golden goose. Operating revenue growth has been higher than GDP growth over the last 13 years. Non-operating revenues like land premiums and investment returns have also grown rapidly. Under our current low-rate tax system, revenues have grown faster than the economy. Raising tax rates to boost revenue is likely to kill the goose that lays that golden egg.

One of the key reasons that revenue grows faster than the economy, is that we attract businesses managing activities from other countries and increasingly those from China. Nothing can turn Hong Kong into “just another Chinese city” more forcefully than removing our taxation and rule-of-law edge over the mainland.

Surpluses from past fiscal prudence have been absorbed by rising civil servant pension liabilities. Contravening Article 107 of the Basic Law, spending is increasing faster than revenues or GDP. Public clamor and politicians’ promises are accelerating this trend. Though not known for keeping his policy pledges, the former Chief Executive did – to our detriment – deliver on his promise to increase the role of government and public spending. Time to check our spiral-down towards fiscal disaster.

Bill Stacey

Director

The Lion Rock Institute

 

一個政策錯誤遠離財政災難

(Next Magazine, 2017/7/13, A002, Second Opinion, Bill Stacey)

在西方,各國接二連三發生財政旋渦式失控,負債因財務赤字而迅速上升。美國俗稱為福利社會,雖然不是因為這樣而聞名世界,但其政府負債由1980年佔國民生產總值30%升到2005年的104%。以相同的方法計算,中國政府負債則由2000年的20%升到2016年的46%。

儘管因為香港人謹慎的習慣令政府沒有負債,我們也不應對政府的開支擴張掉以輕心。我們應該要了解負債的成因,並且去避免這種旋渦式失控的發生。

雖然香港不是一個很大的債務發行者,但政府仍有大量負債。其中最大的負債便是公務員的退休金,他並非由一個獨立的資金池負責。政府的財務負債佔國民生產總值(GDP)的比例,已從過去一世紀的30%升到現時的的43%。於前特首梁震英在任的五年期間,公務員退休金這個負債以複式年率9.9%速度增長。這些負債是以十年美國債券的2.4%來維持4%的折舊率,即肯定未來這個負債只會更高。而事實上,過去十三年來的退休金負擔,有十一年都作出了上升的修訂。

我們習慣了認為金管局所管理的投資基金是以備不時之需。但當你翻查政府的資產負債表,你就會發現基金的8530億港元是不足以應付8750億的退休金總額。原來彩虹的盡頭並沒有金堆的。

前任財政司司長曾俊華經常被評為過份保守,但從政府的應付賬來看則會有不同見解。在2016年3月份的前五年,政府營運開支年增長率為7.7%,高於收入的7.1%年增長,及遠高於GDP的5.7%年增長。

那錢去了那裡?過去五年,衛生開支以11.8%及福利開支以9.4%增長。這些增長都是以現時政策計算。在人口統計預測這些成本會更高下,新的政策還會有多少空間?在成本及支出的增幅高於收入增幅的情況下,我們已經踏入一個預算赤字的路上。我們只是差一個錯誤(例如:全民養老金計劃)就已足夠令我們步向真正的財政問題。

政策制定者無可避免會面對金蛋鵝的問題。營運開支在過去十三年的增長比GDP的增長為高。非營運收入,如:賣地及投資收益也同時有很快的增幅。在我們現時這個低稅率的系統內,收入增長比經濟更快。提升稅率以增加收入就有如把生金蛋的鵝殺死一樣。

收入增長比經濟增幅較快的原因,是我們有能力吸引外國及增大中國大陸的商業管理活動。如果把我們的稅制及法規這些特色移除,香港就只能被推向成為 “只是中國的一個城市”。

過往謹慎理財的盈餘都被公務員的退休債務所吸收了。支出比收入或GDP增速為高更違反基本法的第107條。公眾的聲音及政客的承諾都正在加速這個趨勢。雖然不知道政府會否兌現,但前特首的確是承諾了增加政府及公共開支的政策。所以我們是時候檢查一下我們是否正步向財政旋渦了。

作者:Bill Stacey
Director

翻譯: Joe Chan

The Lion Rock Institute