Finance chief warns about rising recurrent spending in budget speech

The city may be hit with a deficit again in 2019 due to new expenses and a slower economy, according to

projections in the budget package.

Accordingly, Financial Secretary John Tsang Chun-wah raised the red flag again on recurrent spending in his budget speech - but he assured Hong Kong people that public finances would remain healthy in the near future.

In 2014, a group of officials and auditors issued a warning that Hong Kong will run into a structural deficit in 2030 even without new items of regular expenses. As the city braces for an economic downturn, a long-term budget projection released on Wednesday painted a gloomy picture.

Taxpayers would sit on fiscal reserves of HK$948.8 billion in March 2020 based on last year's budget plan. The latest update saw that estimate fall to HK$832.7 billion as officials foresaw two consecutive years of deficits beginning from 2018 - eroding about HK$50 billion of reserves.

Two promises made by the current administration in 2015 contributed the most to the reduction in the forecast from surplus to deficit. Officials are expecting to spend HK$30 billion on healthcare insurance incentives from 2016 to 2019 and HK$50 billion on retirement protection from 2017 to 2020.

Estimates for government revenues over the next five years also slipped based on a less optimistic forecast of economic growth. Nominal GDP growth for the next five years was set at 5 percent in the 2015-16 Budget. This figure dropped to 4.5 percent in the 2016-17 Budget.

Hong Kong has not seen a deficit since the fiscal year ending March 2004. The government, however, did predict a HK$36.4 billion deficit for 2009-10. That year wrapped with a surplus of HK$25.9 billion.

Tsang has never hidden his concerns over spending increases and his ninth Budget was no exception. From the speech before lawmakers in the morning to a televised forum in the evening, Tsang repeatedly drew attention to how welfare spending has doubled since a decade ago.

In a summary provided to the press, the government also highlighted how far the current administration has gone to meet recurring expenses. Expenditure on welfare, healthcare and education in 2016-17, respectively, would be 64 percent, 38 percent and 35 percent higher than in 2011-12.

Despite the woeful outlook, a second source said a recalculation showed that the anticipated structural deficit would not arrive sooner than 2030. Tsang also clarified in the TV forum that public finances would remain healthy in the near future and there was no immediate pressure to introduce new taxes.

Yet the second source also pointed out that the 2014 report had assumed expenditure to grow annually by 5.3 percent on average. The latest budget report estimates expenditure for 2016-17 will expand faster, at 6.7 percent.

Chief Executive Leung Chun-ying, in a statement, praised the Budget for fulfilling the administration's pledge to alleviate poverty, care for the elderly and support the disadvantaged. Executive Council Convener Lam Woon-kwong also played down fears of extravagant welfare spending.

"I don't see, at least under the current-term government, that we will make other major moves. So we should be able to cope with that increase," Lam said. The current term will end in about 16 months.

One of the big-four accounting firms, Ernst & Young, joined the rallying cry. The deficit projected for 2019 was "no cause for alarm", the firm said in a statement. This was because Hong Kong's fiscal reserves "may not fall" if the city manages to diversify its economy under Tsang's vision for a new economic order.

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Residents watch the live broadcast of the 2016-17 Budget in Sham Shui Po on Wednesday. Parker Zheng / China Daily

(HK Edition 02/25/2016 page4)

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