First of all, as this is the last Budget of our Financial Secretary Mr Donald Tsang, I would like to express my sincere gratitude to him for his hard work over the years. In particular, I would like to thank Mr Tsang for incorporating into his previous Budgets the accountants' suggestions concerning the development of the tax regime and the management of government accounts.
No shining accomplishment, no brilliant achievement
In his work "Encouraging Learning", Xunzi the philosopher said, " if there is no dark and dogged will, there will be no shining accomplishment; if there is no dull and determined effort, there will be no brilliant achievement." The political leadership that Hong Kong people need should be earnest and devoted with a dogged will and a sensitive understanding of the affairs of the world. This leadership should adhere to the principle of "Honing our Strengths" in the service of the public rather than for personal fame and glory.
I have openly said that the present Budget appears more like a "fiscal policy audit" than a budget aiming at fiscal balance. This is not meant to be derogatory. On the eve of the Budget address, I wrote some articles, asking the Financial Secretary to refrain from "making any big moves" and to take a cautious and step-by-step approach. Not until the recommendations of the tax review taskforce are published should we make any long-term and fundamental taxation restructuring. "To rule a country" does not mean we have to come up with frequent and fancy moves every year. The great wisdom of governance is "to take action after careful planning".
Government to steer us through uncertainty ahead
The economic circumstances in the early 21st Century are full of uncertainties, because of rapid globalization and the fact that a small group of professional fund managers and executives of multi-national enterprises now control a huge amount of international capital. These professional magnates react quickly and resolutely to market information, while powerful and advanced investment tools continue to develop. Consequently on the international financial market, the "contingency time lapse" from the first sign of change, to resulting actions, to a re-positioning in the market becomes shorter and shorter, making it more and more difficult to achieve accuracy in medium range and long term forecasts.
A Budget should look ahead
In responding to the 2000 Budget, I pointed out that what we wanted was "a government with a good sense of direction, clear vision and a wide international perspective, a government that can help bolster our competitive power," so that the business sector as well as the public could prepare their own plans well in advance.
This year in the fiscal blueprint the Financial Secretary has made an effort to analyze the economic landscape, yet the conclusion is still full of uncertainties and it reads like "an auditor's report with grave reservations". This may be the case, yet the Government should accept liability for its forecasts, and should not shirk its responsibility once the estimates turn out to be inaccurate. Lack of technical skills cannot be used as the only explanation.
The more positive solutions may be: (1) to enhance as much as possible the transparency of the forecast procedures and the information involved, so that the public would find the figures easier to understand; (2) to introduce a suitable accounting system for a comparison of previous estimates and actual figures; and (3) to give detailed explanations of the assumptions in the estimates, so that the public will understand all the criteria and be able to make their own judgment. When discrepancies occur between estimates and actual figures, the Administration should inform the public of the reasons for those discrepancies, and quantify the impact brought by different factors. Through such arrangements the Government will learn important lessons for improvement to better serve the public and restore their confidence in the Budget.
Take the tax review as an example. The Government has all along been avoiding the question of structural deficits, saying that it needs more information before any conclusion can be drawn. However by the time the Government has obtained sufficient information, the structural deficit problem would probably have become a fact. When the fact is there for all of us to see, what need do we have for the government to make a "projection"?
The fiscal blueprint should, as its name suggests, make projections. The "structural deficit problem" is an important and fundamental issue which is likely to emerge, and we should guard against the problem well in advance. It is not practical for us to refer to all our records, and "lock the stable after the horses are stolen" after the problem has become a reality. Thus I hope the recommendations of the tax review taskforce in late November will be useful in addressing the structural deficit problem.
Systematic disclosure procedures
The Budget has not triggered off much response, except for some minor arguments. This was quite a contrast to the animated pre-budget speculations with the unexpected ebb and flow of feelings and moods as the rumours of "deficits" and "tax increase or tax concessions" buzzed round.
The Government had in fact on many occasions released bits and pieces of figures and information, including the investment return on the Exchange Fund, land sales premia, and proceeds from the listing of MTR. Yet the media and the financial analysts still failed to make an accurate projection, and some of them were even convinced that there would be a surplus, though the Budget day was just around the corner.
In my opinion, this phenomenon reflects the following problems: (1) ordinary people do not understand the make-up of the Budget, and this explains why there are so many ungrounded speculations; (2) the Budget is prepared on a cash accounting basis, resulting in discrepancies in monthly balances, in particular when huge revenue such as the investment return and funding for capital works in February and March is yet to be entered on the balance sheet. For those who are not familiar with these accounting procedures, it is inevitable that there will be misunderstandings leading to miscalculations; (3) the Government's information dissemination and disclosure procedures are far from comprehensive and systematic, and this may result in careless and misleading conclusions.
If we scrutinize the government accounts closely, we will discover that certain unstable revenue items are the main culprits of the discrepancies over the past few years. These items include the investment return, land sales premia, and proceeds from the listing of government assets. On the expenditure side, the Government always underestimates the figures (with a discrepancy rate normally around 5%). What the Government should do is to tighten the management of information dissemination and improve the disclosure procedures whenever important items are involved, and public confidence will then be greatly enhanced. For instance, the Administration can systematically draw up a schedule of information dissemination. In the latter part of my speech, I will put forward a new concept of "equalisation fund".
Introducing a suitable accounting system as a management tool
Spinning off so as to lighten the Government's financial burden
Listing government assets on the stock market is one of my concerns. The shares of MTR, after its privatization, have been doing well, notwithstanding an adverse market. It shows that the market welcomes the listing of government assets. The Financial Secretary pledges in his Budget speech that the Administration will complete examination of the case for privatizing government tunnels within this year.
I further propose that the Government could consider listing the KCRC, the Airport Authority, as well as the Hongkong Post on the stock market. Of course I understand that the financial position of these corporations is not very satisfactory due to huge financial liabilities resulting from new construction projects. Yet it is important to note that in Hong Kong, we have the experience of assisting mainland state-owned enterprises to spin off. For example the profitable East Rail and the newly developed West Rail, both currently under the management of KCRC, can spin off and go public separately. Thus future investments can be financed, and the financial burden of the Government will be lightened. In addition, these promising shares with stable return can serve as an ideal refuge in an adverse market for investment funds like the Mandatory Provident Funds. As a result, the financial pressure on the Government can be temporarily alleviated, giving the officials more time to examine and solve the structural deficit problem.
Fiscal reserves not highlighted; Equalisaiton fund proposed
As early as 1997 I raised the question about our fiscal reserves, and the Financial Secretary gave me a detailed reply in 1998. Though this Budget only touches on the issue briefly, I have already predicted that it will still be a controversial area. Upon the announcement of the Budget, my prediction came true, many legislators queried whether our fiscal reserves were maintained at too high a level.
The sudden increase in our fiscal reserves could be traced back to 1997 when the land prices soared. On the day of the handover, the Central Government agreed to transfer the $220 billion Land Fund to the HKSAR Government. The purpose of establishing the Land Fund was to help the SAR Government lay a foundation and herald a new chapter in its history. It was hoped that Hong Kong could co-operate and establish economic partnership with the Mainland, and capture the opportunities in the international market.
At that time, no one would expect that the SAR Government would hoard this huge sum of money on deposit to subsidize our tax return. Whether we should accumulate the interest, or use it to subsidize our tax return, it is for the public to discuss. But it seems better to use the reserves in a purposeful way than just to earn interest at a low yield rate.
I propose that the Government could use part of the Land Fund, i.e. $100 billion at most, to set up an Equalisation Fund for capital expenditure. The estimates should be divided into two categories, namely the expenditure under the recurrent revenue account, and the expenditure under the capital revenue account, so that the public will know whether we are running a structural deficit under the recurrent revenue account. If the recurrent account is in deficit, recurrent taxes should be levied in order to achieve fiscal balance. As regards capital expenditure, the category includes one-off spending on capital works like the Airport, railway construction, the Disneyland, and the Cyberport; as well as ad hoc funds like the Quality Education Fund, and the Loan Fund for small and medium enterprises (SMEs). Such expenditure should be paid by our investment return, revenue from listed corporations, as well as part of the land sales premia (e.g. excess premia over and above $30 billion).
If the capital revenue account is in surplus, the sum can be transferred to an equalisation fund for future use. If fiscal balance cannot be achieved, money can be transferred as advances from the equalisation fund. Since advances are not regarded as expenditure, there is no violation of Article 107 of the Basic Law. When the economy fully recovers, repayments can be made. With such an arrangement, the management of tax policy is clearer, and capital investment projects can be arranged flexibly, depending on the non-recurrent revenue. It will be a more predictable and practical way of managing the public accounts, in accordance with Article 106 of the Basic Law.
In traditional China Han Feizi was a philosopher with a vision of how to manage public finance, he said, " the sage does not try to practice the ways of antiquity or to abide by a fixed standard, but examines the affairs of the age and takes what precautions are necessary." Bearing in mind Han's teaching, we should be able to grasp the present situation, and, at the forefront of the new financial era, manage public finances in a flexible and innovative manner.