So why doesn’t Financial Secretary Paul Chan do more to ease the burden? After all, Hong Kong posted a budget surplus of HK$58.7 billion ($7.5 billion) for the 2018-19 fiscal year, more than the HK$46.6 billion Chan forecast in February last year.
The reason is that rich Hong Kong, with HK$1.16 trillion in fiscal reserves, doesn’t really know what it can afford.
Two of the city’s biggest sources of taxation, land premiums and stamp duties, are tied to the health of the property market, and thus highly cyclical. Rival Singapore has the advantage of a 7 percent goods and services tax that keeps collecting money even in an economic downturn. While Singapore will raise its GST rate by 2 percentage points between 2021 and 2025, Hong Kong never warmed to a sales levy, concerned a tax that doesn’t distinguish between the rich and the poor will make already-high income inequality worse.
However, when it comes to expenses, rapid aging makes rising healthcare spending a structural feature. The combination of cyclical revenue and structurally determined expenditure is lethal. A working group on long-term fiscal planning delivered the bad news five years ago when it calculated that Hong Kong would go into a permanent fiscal deficit around 2030.
To avoid such an outcome when the property market is buoyant (but wobbly) and GDP is growing 3 percent annually may compel the government to stop making things better: Hospital corridors may overflow with patients during the annual flu season. That’s because the improvement in public services to which Hong Kongers are accustomed will require GDP growth of 5 percent plus. The city’s workforce peaked last year at 4 million. In the absence of more hands at work, hitting and maintaining 4 percent growth consistently will require faster hands. A boost to labor productivity will require spending on economic infrastructure instead.
Hence, 19 references in Chan’s annual budget speech on Wednesday to the Greater Bay Area, a project to knit together Hong Kong and Macau with nine mainland cities. In addition, there were 11 mentions of China’s Belt-and-Road Initiative.
The trouble, as my colleague Nisha Gopalan noted recently, is that the 11-chapter Greater Bay project blueprint doesn’t seem to play on Hong Kong’s British legacy, since its goal is to create “an international and market-oriented business environment based on rule of law, under the jurisdiction and legal framework of mainland China.” As for belt-and-road, Chinese President Xi Jinping’s $1 trillion dream to fashion a Eurasian economy with China at its center is bogged down in canceled deals and suspicion of Beijing’s motives (although Chan’s idea of promoting Hong Kong as a belt-and-road arbitration hub is excellent; there will be plenty of disputes to keep lawyers busy).
To be sure, Hong Kong isn’t limiting its options. There was plenty of emphasis in Chan’s budget on harnessing information technology and boosting research capabilities in Hong Kong. Ultimately, though, the city’s economic future will be determined by how much farther U.S.-China relations slide. Getting caught in the crossfire of mistrust between two large powers may end up being the biggest constraint on what Hong Kong can afford to do for its citizens.
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
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