The biggest controversy of this year’s budget, besides the handing out of spending coupons instead of cash, is the growing financial deficit burden. What is troubling and frustrating is that what is happening is not just a structural deficit in the economy, but also in politics, making it even more difficult to patch up the loopholes.

Under the new norm of the national security law in Hong Kong, even if you are only concerned about the economy and people’s livelihood, you would still be worried after seeing the budget. Let us first understand the core of the problem from a broader perspective. Now that Hong Kong no longer has democratic participation to win the support of the public, only resources are left to solve the conflicts and problems in society.

In the opinion of the government, money can solve many problems, but on the flip side, the lack of money has become a huge problem. The current record-breaking deficit of more than HK$250 billion (US$32 billion) is a potential concern. Even by 2022-2023, the deficit will still exceed HK$100 billion (US$13 billion), based on the government’s consistently overly optimistic estimates. With less than HK$1 trillion (US$1.2 billion) in fiscal reserves left, the government will run out of money in less than a few years given its current rate of splurging. By then, it will have to rely on substantial tax increases, spending cuts, and debts to keep the wolf from the door.

In public finance, a cyclical deficit is a normal phenomenon in which government revenue declines when the economy contracts and increases when the economy rises. As long as the fiscal reserve is in place so that money can be saved for a rainy day, government spending and services will remain unaffected even in times of economic downturn, and people can continue to live as usual.

Therefore, what we really need to prevent and avoid is not the periodic cyclical deficit, but the structural deficit. However, the structural deficits in Hong Kong in the past were all structural deficits in the economy. This means that the government’s revenue system and economic structure were out of balance, so that despite the economic upturn, the government was still unable to make ends meet and run a deficit.

In this regard, Hong Kong’s most criticized structural problem is an excessively narrow tax base. It is remarkable that more than half of the government’s long-term revenue relies on the bubble economy, which is detached from the actual economy and is closely related to the hot money from speculation, i.e. revenue from land sales, stamp duty from stock trading, and investments. In the event that the bubble bursts, the government’s finances will collapse and people’s lives will become miserable. The above situation had occurred in Hong Kong during the 1997 Asian financial crisis and the SARS epidemic in 2003.

Unfortunately, until now, there has been no comprehensive public finance reform in Hong Kong to address the structural deficit of the economy. As the saying goes, misfortunes never come singly and one thing leads to another. Because of the rapid changes in the political situation, Hong Kong has experienced a structural deficit in politics in recent years, creating a dual structural deficit problem.

A structural deficit in politics means that the political system creates incentives for the public or the government to increase government spending as much as possible to serve their own interests. From this perspective, Hong Kong’s tax system is relatively generous to the general public. Many people do not need to pay direct taxes such as salaries tax and profits tax, but can nevertheless enjoy public services. This has given rise to various motivations to exert political pressure on the government to increase welfare spending.

In view of this, as the original intent of the Basic Law was that Hong Kong would move towards democratization after the handover, with elections of the Chief Executive and the Legislative Council by universal suffrage as the ultimate goal, and in fear that this would further increase the enticement of political figures to increase government spending to curry favor with voters, Article 107 was specifically added to the Basic Law when it was formulated. The “straitjacket” imposed by Article 107 of the Basic Law, which stipulates that “the Hong Kong Special Administrative Region shall follow the principle of keeping the expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product,” prevents the Chief Executive and others from abusing public funds and depleting the reserves.

However, after the full takeover of Hong Kong by the Central Government, the constitutional authority and status of the Basic Law ceased to exist in name only and the binding force of Article 107 became non-existent. The structural deficit in politics has also taken a drastic turn for the worse overnight. The only remedy is to establish a constitutional order that effectively checks and balances those in power and re-establishes the legitimacy of the Basic Law. However, this is not likely to happen in the foreseeable future. The fiscal deficit, like many things that are happening in Hong Kong, will continue to spiral for the worse, so everyone should be prepared psychologically and financially.

(Wilson Wong Wai-ho is an Associate Professor of the Department of Government and Public Administration at the Chinese University of Hong Kong)

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