How HK could fall into a $1.5t trap

How HK could fall into a $1.5t trap
Eddie Luk
Tuesday, March 04, 2014
Government expenditures by 2041 would reach HK$2.9 trillion – more than twice revenues of HK$1.4 trillion – in a worst-case scenario projected by a government working group.

And even in the best-case scenario, spending would still hit HK$1.7 trillion in that year, exceeding by HK$300 billion the predicted revenues, according to the Working Group on Long-Term Fiscal Planning.

It was on the basis of the group’s estimates that Financial Secretary John Tsang Chun-wah warned during his budget speech that structural deficits could occur within seven years.

The group projected that from the end of March 2022, the government would need to start utilizing fiscal reserves of HK$943 billion to finance spending.

It projected that the reserves would be totally depleted by 2028-29. From then on, Hong Kong would need to borrow to finance its spending.

University of Science and Technology economist Francis Lui Ting- ming, a group member, said: “These findings are not aimed at scaring people. But it is inevitable for Hong Kong to see structural deficits and to even borrow money to finance spending if nothing is done.”

The group said an aging population and a shrinking labor force would drag down the city’s productivity and economic growth.

Permanent Secretary for Financial Services and the Treasury Elizabeth Tse Man-yee, the group chairwoman, said the number of people aged 65 or older would grow 161 percent from 980,000 in 2012 to 2.56 million in 2041. The number of those age

d 80 and above would grow 235 percent from 286,000 in 2012 to 957,000 in 2041.

Due to this, the size of the labor force would decline, “posing a threat on – if not dragging down – economic growth and putting pressure on government revenue.”

The labor force is expected to peak at 3.713 million in 2018 before gradually declining, reaching 3.522 million in 2041.

“In the long run, given an aging population when the pressure on spending will further increase, and as our economy turns into a mature economy, the fiscal pressure will mount,” Tse said.

The group said it has not even taken into account the financial implications of some government policies such as construction of additional public housing.

“What we think is that the government should control public spending first,” Tse said.

The group assumed that as Hong Kong’s economy matured, gross domestic product growth would stay at the current 3.5 percent per year until 2021, then gradually decelerate to 3 percent a year between 2022 and 2025 and further to 2.5 percent between 2026 and 2041.

The group suggested that a “future fund” be established and that public expenditure be kept at or around 20 percent of GDP.

It suggested that the existing Land Fund of HK$220 billion can be transformed into the future fund, which together with a portion of future surpluses would “provide a buffer” against pressure on public finance.

Tse said: “According to the projections there are still fiscal surpluses in the coming few years. We hope there will be thorough discussions on whether we should save a portion of the surpluses.”

Tsang said the group is not pessimistic on the future “but the economy needs to be developed to ensure that “the growth in expenditure is commensurate with that of the economy and government revenues.”