Commentary: Hong Kong: Why Tung Should Trim the Fat

By Mark L. Clifford and Frederik Balfour

In mid-February, Tung Chee-hwa declared victory in his quest for a second five-year term as Hong Kong's chief executive. Following his gallop home in the one-horse race, he announced plans for $77 billion in infrastructure projects that would transform the city's waterfront--and much more. The 15-year scheme includes 1,600 projects ranging from a cruise-ship terminal to new railroads, new towns, and yet more landfill for Hong Kong's shrinking harbor.

There's just one problem: Who's going to pay for it? "Sufficient resources will be available," Tung insists. But finding the cash won't be easy. Hong Kong, whose fiscal strength was once the envy of Asia, is about to chalk up an unprecedented fourth consecutive year of operating-budget deficits. Reacting to Tung's planned largesse, Christine Loh, who runs the think tank Civic Exchange, says: "Show me the numbers. After all, it's our money." Financial Secretary Anthony Leung will show the numbers when he delivers this year's budget on Mar. 6. They won't be pretty. The government expects to run a deficit of $5.89 billion for fiscal 2002, and Leung will almost certainly have to raise taxes.

If Hong Kong is to recover its historic verve, it needs to do more than increase pork barrel spending. Here's an idea: Slash the size of government. Currently, 1 in 10--or some 350,000--Hong Kong workers toil for the state. Speeding up privatization of bloated government agencies would go a long way toward balancing the books. The Tung administration made a halfhearted start with the 2000 sale of 20% of the city's subway system, MTR Corp. It should sell more MTR shares and move on to privatizing Kowloon Canton Railway Corp., perhaps by merging it into the better-run MTR. The post office and waterworks should also be sold off. Bureaucrats will scream, but such moves would trim civil service payrolls, raise cash, and perhaps improve services.

Tung has said civil service reform is a priority: Now he must act. Reforming the hospital and housing authorities should be a priority. Medical care is heavily subsidized, even for well-off patients, and nearly half of all Hong Kong citizens live in publicly funded housing. Moreover, civil service salaries, which have increased amid three years of deflation, should be cut.

If Leung doesn't return Hong Kong to balanced budgets soon, Tung's spending binge could damage Hong Kong's image as a low-tax, small-government enclave. Already, government spending has jumped from 16% of gross domestic product to 22% in the past decade, despite vows to keep budget increases in line with economic growth. Looking at Tung's plans and Hong Kong's eroding fiscal situation, says a prominent Hong Kong financier, "any 10-year-old can see the numbers don't add up." Yet Tung is forging ahead with such projects as a $2.8 billion highway that largely duplicates an existing road.

When times were good, Hong Kong's biggest problem was how to spend surpluses. But since the '97 financial crisis, revenue from government land auctions and development levies has dropped from $8.2 billion to $1.1 billion this year. Those items accounted for 23% of government revenue in 1997; for the fiscal year ending Mar. 31, they added up to just 4%. Intake from corporate and personal taxes has also fallen.

Just one day after Tung described his big vision, Hong Kong officials warned that spending at current levels could drain its $47 billion in fiscal reserves in seven years--unless the economy improves dramatically. Tung's spending plans will worsen the crisis. The dwindling reserves, in turn, could erode confidence in the Hong Kong dollar, threatening its peg to the greenback.

To be sure, Tung was blindsided by the Asian financial crisis and has been trying to stimulate growth via spending. In doing so, however, he has abandoned fiscal discipline. As a result, Hong Kong is at a crossroads. It can abandon its small-government past in favor of a bigger state with higher taxes. Or it can look to its roots and reinvent itself as a world leader in small, effective government. If he takes the right road, Financial Secretary Leung's first budget won't make him many friends. But it will set Hong Kong back on the path to prosperity in the years ahead.

Clifford and Balfour write about business and economics from Hong Kong.

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