Article 107 of the Basic Law stipulates that the government shall keep expenditure within the limits of revenue in drawing up its budget, and strive to achieve a fiscal balance. Thus, public finance management has additional limitations because major sources of revenue, like profits tax and land revenue, are highly vulnerable to economic fluctuations.
All declared candidates are well aware of the ever-growing demands for public housing, education, health care and retirement protection, and have proposed various sets of policies in response.
However, no one seems to have addressed the corresponding public finance issues: how much funding do we need? Where will the money come from? Should the government open up revenue streams? Should it cut expenditure in other policy areas? Should the government continue giving away one-off sweeteners? How should it allocate resources fairly?
Without answers to these questions, the chances are that campaign promises will prove to be empty pledges.
Therefore, aside from presenting his or her vision for Hong Kong, the ideal next chief executive should also be able to illustrate and deliver a comprehensive set of public finance principles and policies.
Hong Kong has been running successive years of budget surplus since 2004. Our current fiscal reserves level is 35 per cent of GDP, or 21 months’ government expenditure, which is considered excessive: the fiscal reserves of the US and major European countries such as the UK, Germany and France are below 2.5 per cent of GDP; while that of some developed Asian countries, such as Japan and South Korea, are below 20 per cent.
The next government should consider adjusting the fiscal reserves level down to an amount equivalent to 12 months’ expenditure, considered to be sufficient in meeting operating and contingency requirements by the then financial secretary back in 2002, when Hong Kong was recovering from the Asian financial crisis.
Such adjustment would release some HK$370 billion to implement various one-off projects, including development of technology infrastructure and reform of the Mandatory Provident Fund scheme, as well as long-term commitments to public housing, education, health care and retirement protection.
Adjusting fiscal reserve levels could arguably be a short-term solution for the increasing demand for public services. Also worthy of consideration would be introducing a strategic long-term plan to broaden revenue sources and reduce expenditure.
Widening the tax base, by adopting a progressive tax or introducing a goods and services tax, for example, has drawn fierce public debate in the past but the next chief executive should reconsider this option.
On the other hand, priorities for resource allocation should be guided by clear public finance principles to achieve a fair and reasonable outcome.
Undoubtedly, a candidate needs more than a sound public finance policy to be a good leader for Hong Kong. In the eyes of Election Committee members and the public, details such as “how are we going to do it?” may not be as appealing and impressive as some bold slogans.
However, a comprehensive and pragmatic set of public finance strategies is not only a prerequisite for implementing policies that can improve people’s livelihood, it would also be a testament to a candidate’s commitment in different policy areas.
If our next chief executive wants to mend fences and increase political power to restore social stability through successful policy implementation, he or she should focus on diligent public finance management.
Raymond Mak is a a governor of the Path of Democracy