(Prof. Richard Wong, the newly appointed Director of the School,
was featured on the Feb 17, 1998 issue of the South China Morning Post.) Below is an unabridged copy of his article:
Financial secretary should resist following Tung Chee-hwa's bold pre-crisis pledges to the letter : Budget puts a price tag on promises
An early glimpse of the first SAR Government Budget was made available last week when spending targets were unveiled. There were few surprises. The main areas of expenditure growth were housing, social welfare, education and infrastructure. These were the areas emphasised in the chief executive's policy address on October 8 last year. By increasing public expenditure by about 11.3 per cent and permitting public expenditure to rise to 19.2 per cent of projected gross domestic product, the Government has apparently made good on Tung Chee-hwa's pledges.
Between his earlier policy address and the Budget speech on February 18, an unforeseen financial crisis has swept through most Asia-Pacific economies. The prospect for high economic growth in the region for this year has dimmed. By allowing public expenditure to rise by so much, as the economy moves into tough times, has the Government compromised its hard-earned reputation of fiscal conservatism?
Hard economic times were well known to Hong Kong in the post-war era. In the early 1950s, the United Nation's imposed a trade embargo against the mainland after the outbreak of hostilities on the Korean peninsula. The effect devastated Hong Kong's entrepot trade, with exports from the territory only recovering to their former levels a decade later. Former financial secretary Sir John Cowperthwaite had to manage the worst property market asset bubble Hong Kong has experienced in the early 1960s, along with the confidence crisis in the late 1960s due to civil unrest, in the territory. Sir Philip Haddon-Cave had to steer the economy through two oil crises during his stint as financial secretary, during which the unemployment rate reached almost 10 per cent in the early 1970s.
Sir John Bremridge had to wrestle with United States President Ronald Reagan's interest rate rises and the collapse of the Hong Kong dollar in the early 1980s, when he was in control of Hong Kong's economic future.
In the past, financial secretaries responded to similar crises by raising taxes and cutting expenditures to balance the Budget. In better times, they work hard against popular pressure to build up fiscal reserves through surplus budgets to cushion against bad years. This is fiscal conservatism at its best and it has served Hong Kong well.
As a consequence, the economy has remained resilient in the face of adversity and has rebounded quickly as overall conditions improve. Sir Donald Tsang Yam-kuen's Budget has two big challenges. The first is to balance the Budget and resist popular demand for tax relief in the face of dwindling revenues due to slower economic growth. His task is no different from those faced by his predecessors and his performance will certainly be measured against theirs. The second challenge is how to keep Mr Tung's pledges alive. If he succeeds in meeting both challenges, Sir Donald will have upstaged his predecessors by squaring the circle. On the surface, he stands a good chance. The proposed Budget is unlikely to include tax cuts and will still record a surplus. This will be achieved by assuming GDP will continue to grow at 5 per cent next year - an estimate some would consider optimistic.
Furthermore, land premiums are forecast to go down by only 30 per cent - assumption which is crystalball gazing at this point. Would it not have been more prudent for Sir Donald to roll back some of Mr Tung's commitments by delaying them? Previous financial secretaries have taken such decisions in the face of economic adversity. Sir John Cowperthwaite reduced the proposed 10-year public housing programme to house 200,000 people each year by half. He even argued eloquently against the proposed mass transit railway scheme and expressed doubt about its ultimate profitability. Sir Philip similarly halved former governor Sir Murray MacLehose's even more ambitious 10-year public housing programme to build sufficient units to house 1.5 million people. And Sir John Bremridge stopped the proposed new airport. Sir Donald is not expected to recommend any such drastic measures in the Budget. On the contrary, the Government will probably parade additional public spending as a demonstration of its wisdom and resolve to steer the SAR towards its future destiny. Some in Government suggest this will create jobs and provide the necessary fiscal stimulus.
Others acknowledge the effects of fiscal expansion will hardly be felt in the near future, but Hong Kong's economic prospects will be better off as a consequence of the investments made today. Who can fault an investment made on our behalf and for our future?
Nevertheless, taxpayers have a legitimate right to know if the rates of return promised are really all that attractive. Given the level of fiscal reserves, the issue at stake is not affordability but a question of the yield. One of the first lessons of the Asian financial turmoil is that government-driven or willed investments are the root cause of the sad predicaments many nations now find themselves in. The effects have been worsened by lax fiscal and monetary restraints. It is unfortunate ambitious public plans often fail spectacularly - and they almost always do eventually. One would at least hope the Government would still deem it prudent to try to obtain private-sector participation in these new initiatives as they have done so in the past, so sound commercial principles will have a better chance of being respected. Unless this occurs, sensible observers and the public at large will not be assured that this is money well spent, regardless of the vision that is being bravely marketed.It is worth recalling the mixed of achievement merits of public housing programmes in Hong Kong. It provides an excellent illustration of the limits of public intervention.
In Hong Kong's post-war colonial history, there have been many attempts to resolve the problem of housing in the territory. The first, more modest plan was the only one to succeed; the subsequent, more ambitious attempts have failed by wide margins. In 1954-64, the main housing objective was to resettle squatters to clear land for redevelopment. The target was to relocate 50,000 people each year. The programme achieved its goal, and between 1954 and 1965 the resettlement estates housed 607,673 people.
In 1965-73, a building programme that would house an average of 220,000 people each year was announced. In the end, the programme fell short of its initial target by more than 50 per cent. In 1973-83, a new 10 year building programme was initiated with the aim of building enough units to house more than 1.53 million people. The programme also fell short of its production target by 50 per cent. Both of these latter attempts failed because of the overpowering effect of unforeseen adverse economic conditions.
The period since the mid-1980s has been one of policy neglect in the housing area. Mr Tung has tried to redress the problem since assuming office. His housing strategy is to stabilise property prices by increasing supply and to achieve a 70 per cent home-ownership rate. These are undoubtedly laudable goals and would achieve a battery of desirable economic, political and social objectives in the long run. The Government's housing, and home-ownership targets were unfortunately conceived before Asia succumbed to the financial crisis. To his credit, he has prudently taken steps to concede that private-sector annual targets could be rescheduled, to avoid a property market meltdown that would have broader financial and economic implications.
However, the public-sector targets remain and the Housing Authority is expected to deliver them as planned. The issue is not whether the Government can and should keep its pledge, but whether it should stick to it religiously. Governments everywhere who defy market forces do so at their own peril and those who attempt to harness them have time and again been proven to be inadequate to the task. The Government in an open economy like Hong Kong has even fewer options. It is better for it to focus on what it has always done best - hold expenditures down and balance the budget. Sir Donald's Budget will be scrutinised to see if the Government is marching us off to a brave new world or if it is still business as usual.
