Speech at Council Meeting-Members’ Motions: “Reviewing public finance policies”

Members’ Motions: Reviewing Public Finance Policies

Deputy President, the public finance policy of Hong Kong has always been known for being sound and stable.  Having said that, during the three-year epidemic, considerable financial resources were used to support the economy, resulting in deficits in three of the past four financial years.  The deficit for the first three quarters is already close to $180 billion.  As the population continues to age over the next decade, the sustainability of public finance has given cause for concern.  Today, Revd Canon Peter Douglas KOON’s motion and the amendments proposed by the three Members of “G19” enable us to debate once again our views on the future public finance policy.

The formulation of public finance policy should take four points into full consideration.  First, consideration has to be given to the provision in the Basic Law and that is, the principle of keeping expenditure within the limits of revenues under Article 107 of the Basic Law as Members have mentioned.  Of course, the Financial Secretary, Mr Paul CHAN, has repeatedly stressed that there is a certain degree of flexibility in the relevant provision, and that we should not just focus on one or two years but rather, we should look at whether a fiscal balance can be achieved in the economic cycle.  Second, consideration has to be given to the linked exchange rate system because the implementation of the currency board system, which allows the Hong Kong dollar exchange rate to be maintained within the range of HK$7.75 to HK$7.85 per one US dollar, requires the Monetary Base in Hong Kong to be fully backed by US dollar-denominated assets and this will need stable financial backing.

Moreover, consideration has to be given to maintaining public finance in a better position, so that Hong Kong can maintain higher credit ratings and enjoy more favourable costs in borrowing.  Lastly, consideration has to be given to keeping sufficient fiscal buffers.  The series of counter-cyclical measures adopted during the epidemic, such as those for safeguarding jobs, disbursement of consumption coupons and rates concessions, were conducive to mitigating the impact of the epidemic on the community.  But we must have abundant fiscal reserves before there is leeway for the Government to respond to the situation.

As the Under Secretary mentioned in his speech earlier, healthcare and social welfare expenditures have accounted for a very high proportion of our expenditure, and these expenditures are closely related to the demographic structure.  At present, the percentage of Hong Kong people aged above 65 reflects that we are among those places where ageing is most serious in the world.  According to the Hong Kong Population Projections 2020-2069 published by the Census and Statistics Department, population ageing is expected to continue, and the population of elderly persons aged 65 and over is projected to nearly double in the next 25 years, from 1.45 million in 2021 to 2.74 million in 2046.

An increase in the elderly population will lead to a sharp rise in the elderly dependency ratio in the coming decades.  By 2069, the percentage of elderly people aged above 65 will be 38% and two out of every five Hong Kong people will be elderly.  On the other hand, the expensive cost of childbearing and changes in women’s perception of childbearing have caused the fertility rate to consistently remain at a low level.  The combination of population ageing and a declined birth rate will lead to a decrease in the working population, and every 1 000 people in the working population will have to support the living of 712 elderly persons.  This will substantially increase the burden on the working population and pose threats to Hong Kong’s competitiveness and affordability in the long term.

In view of the ageing trend, I suggest that the Government should adopt corresponding measures as early as possible, such as giving consideration to appropriately refining the investment structure of the Mandatory Provident Fund (“MPF”), increasing the rate of return and introducing capital preservation products, including investing MPF in Hong Kong’s infrastructure assets that offer stable long-term returns, so that the working population will have the resources to be self-sufficient after retirement.

Besides, the Government should expand the policy options, such as the pilot scheme for Hong Kong people to retire in the Greater Bay Area, so as to provide the elderly with more retirement choices, thereby reducing the local public expenditure in some other respects.

In addition, the healthcare system is currently treatment-based, with emphasis on inpatient and acute care services.  The development of primary healthcare services has been inadequate, and public hospitals have consistently been overloaded, thus making it difficult for them to cope with the pressure brought about by population ageing in the future.  If things go on like this, the healthcare system will continue to be overburdened and the expenditures will continue to rise.  I suggest that the Government should continue to enhance the healthcare system with focus on preventive care, in order to alleviate the financial woes brought about by population ageing.

Deputy President, the fiscal reserves have dropped from over $1,000 billion in the past few years to the latest level of about $650 billion, which is enough to cover the expenditure for only 9 months and far below the peak level of 28 months shortly after the return of Hong Kong.  Our revenue has been so heavily reliant on profits tax, land premium, stamp duty, salaries tax and investment returns.  These revenues have been affected by the performance of the property market, but our expenditure is mainly made up of such solid spending in areas such as healthcare, welfare, education and infrastructure.  As a result, the cumulative amount of public expenditure has increased by 2.6 times since the return of Hong Kong to the motherland in 1997 while revenues have only increased by 1.2 times.

While this may sound cliché, in order to improve the sustainability of Hong Kong’s finance, it is necessary for the Government to immediately review whether various public expenditures have been properly utilized, and to actively explore measures for increasing revenue, with a view to consolidating public finance and rebuilding fiscal buffers.

Deputy President, I agree with Revd Canon KOON’s motion and the amendments proposed by the three Members.  I so submit.