Hong Kong budget: city must continue to resist magic money temptation

Say goodbye to cash handouts and expect fees and charges to be raised wherever possible. Hong Kong is still in a prudent position but things are getting tighter

Mike Rowse

Published: 8:15am, 11 Sep 2023

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Although Hong Kong’s 2024 budget is many months away, a great deal of preparation has been completed. The first half of each financial year is spent inviting ministers to offer proposals for spending on new and improved services. The treasury section of Financial Services and the Treasury Bureau advises how much room there is within trend growth rates to increase recurrent public expenditure.

A committee chaired by the chief secretary then conducts the resource allocation exercise and puts forward proposals to the chief executive. A similar exercise takes place for capital projects.

Based on feedback from public consultations, which John Lee Ka-chiu is conducting, and his own views, the final package emerges and forms the basis of his policy address next month.

Between then and the budget announcement, usually in late February or early March, the financial secretary considers revenue ideas – such as whether to cut taxes.

I don’t have a fly on the wall in the corridors of power but I think it is possible to outline some of the likely main outcomes. On spending, there is going to be very little room for manoeuvre. We can say goodbye to cash handouts.

A lot of money will have to be committed to funding the (unwise) decision by Lee’s predecessor to expand the concessionary HK$2 (25 US cents) public transport fare to those aged 60 and above, unless that can somehow be reversed. Most of the rest is likely to go towards improving elderly care, whether providing more places in dedicated facilities or vouchers to spend on such services.

On the revenue side, I don’t think there is going to be scope for big reductions. There is more likely to be a hard look at raising fees and charges wherever possible. Postal charges look a prime target as the trading fund looks to still be in deficit, and the subsidy on water charges could be trimmed, with firm application of the “user pays” principle everywhere else.

Hong Kong has been clocking up significant deficits in recent years. For example, the government expects a deficit of nearly HK$120 billion in the current financial year, or as Financial Secretary Paul Chan Mo-po put it in his budget speech: “Taking into account the proceeds from issuance of government bonds of about HK$65 billion in 2023-24, I forecast a deficit of HK$54.4 billion.”

For April to July, the first four months of the current financial year, the government reported expenditure of HK$243.4 billion against revenues of HK$99.7 billion. The HK$143.7 billion deficit is reduced in cash flow terms by proceeds of HK$46.6 billion from green bond sales.

There is nothing nefarious or sinister about spelling out bond proceeds. Accountants and other professionals will have no difficulty understanding the situation. But the public needs to understand that the proceeds of bond sales are not really income – they are loans to be repaid.

As of July 31, these debts totalled HK$168.2 billion, but were more than covered by fiscal reserves of HK$834.8 billion. Hong Kong has been very prudent over the years and has net assets, unlike most other governments, such as the United States, which has accumulated a national debt in excess of US$31 trillion.

But there is no room for complacency as it is easy for municipal-level debts to spiral out of control. Birmingham has just become the seventh city council in the UK since 2020 to effectively declare bankruptcy. And many local administrations on the Chinese mainland are believed to be under water. Moreover, there are two dark clouds on the horizon: rising interest rates and falling property prices.

The first is a global phenomenon that has affected Hong Kong. The city’s recent silver bond offering promised a 5 per cent return. It was oversubscribed, which enabled the tranche to be increased to HK$55 billion. The current green bond sale of HK$15 billion offers a minimum return of 4.75 per cent.

While it is encouraging that there is still enthusiasm in the market for government paper, we have just about reached the safe limit of the interest rate we should be prepared to pay. Much higher and a government would be in third-world territory.

Chan right to remain cautious on Hong Kong property

Only one of the 18 land parcels slated for sale in the current financial year has been sold, and that was in Kennedy Town at a price well below market expectations. In recent years, other sites had been withdrawn from sale when the minimum reserve price went unmet. Developers have been offering deep discounts to unload stocks of completed units.

It seems inevitable that proceeds from land sales will be sharply lower than forecast, yet traditionally these have been funding sources for our capital works projects. There are major ones ahead – Northern Metropolis and the Kau Yi Chau Artificial Islands, to name but two – and the idea has been floated of meeting the costs by issuing more bonds.

For example, Liu Pak-wai, an economics professor at the Chinese University of Hong Kong, has proposed issuing infrastructure bonds. These would cover the cash flow until, say, the reclaimed land can be sold. This is an attractive idea in principle but it assumes land prices will recover and does not cover the many other capital costs.

Investors will require a plausible repayment plan, within a reasonable time frame, for the funds borrowed. After all, as the public well knows, but excitable politicians sometimes forget, there is no magic money tree that can be shaken to produce extra resources.

Mike Rowse is the CEO of Treloar Enterprises

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