COMMUNITY SUPPORT NEEDED TO RESTORE HONG KONG'S FISCAL HEALTH

The financial discipline followed in the private sector needs to be instilled into the public sector to restore fiscal balance in Hong Kong in the next five years, according to the latest issue of the Hang Seng Economic Monthly.

The fundamental problem of Hong Kong's public finances is the rigidity of expenditure despite the susceptibility of revenue to the economic cycles. The major challenge in restoring fiscal balance is to tackle both expenditure and revenue in parallel. Restoring fiscal health requires support from the whole community. The civil service should recognise that the way the government spent money in the past is not sustainable over the long term, in terms of both civil service pay and establishment. Controlling expenditure growth as stated in the 2002/03 Budget must be the priority and carried through. The introduction of new taxes or higher tax rates, apart from the announced Boundary Facilities Improvement Tax, should only be used as a last resort to restore fiscal health. An emphasis on efficiency could allow the government to meet the demand for new services with existing or even reduced resources, the report states. Productivity enhancement, outsourcing and privatisation of commercially-viable operations and services are means to an inevitable transformation in the philosophy of fiscal management. The objective of capping expenditure growth at 1% per annum in money terms from 2003/04 to 2006/07 against a projected real GDP growth of 3% in the medium range forecast is no small task, the report states. The assumption of a 4.75% salary cut for the civil service partly addresses the wage rigidity issue. However, this could only save about HKD6 billion a year and is unlikely to be enough by itself to limit expenditure growth to the targeted 1% per annum in money terms. To balance the books, operating revenue including investment income would need to rise by two percentage points to 14.9% of GDP by fiscal 2006/07. This could be difficult to achieve given the structural changes in the economy which are likely to result in leakage of government revenue. With the relocation of supporting services and outsourcing of services to the Mainland, the resultant loss of jobs in Hong Kong would weaken the basis for salaries tax. Operations in the Mainland, even those managed by Hong Kong residents, are not subject to local profits tax. The public needs to realise that without the previous windfall revenue from the property sector, sustaining the level of public services to meet the increasing needs of society will require new sources of funding. The required funds could come from consumers of public services through charging a reasonable fee. While the underprivileged should be assured of access to affordable public services such as medical services and education, those who can afford it might be required to pay for their consumption. If the economy returns to a faster growth trend with higher inflation in the near term, achieving fiscal balance could be an easier task. An inflationary growth could raise tax revenue in money terms, and lighten the burden on social welfare. However, while growth can cure many problems, it is necessary to prepare for the likelihood of unfavourable developments. The report concludes that the decision to balance the budget in five years is a challenging task, but it is not a mission impossible.