Hong Kong Govt Hides Its Incomes and Reserves from the Public’s Knowledge of Its Hugeness
Hong Kong government is rich. While it is a common problem for other governments to find ways to meet their ends, Hong Kong government is so rich that it needs to hide the actual size of its income and reserve from the general public who deserves better public services.
How Rich Hong Kong Government Is?
Except a brief period during early 2000s, the government has been recording annual fiscal surpluses since financial year (FY) 2004/2005. In March 2017, the surpluses have accumulated to a recording breaking fiscal reserve of HK$ 954 billion, sufficient to sustain the government’s operation for two years without any income. However, this amount is only one of the government’s most visible coffers.
The “Hidden” Coffers
Apart from the fiscal reserve, the government has “hidden” money in other coffers. The government has established many “independent” statutory bodies and funds for the provision of housing, medical services, and other social services. Examples include the Housing Authority and Hospital Authority. While some of these services are ultimately substantially subsidised by the government, incomes collected and reserves accumulated by these statutory bodies are not properly reflected in the government accounts, making it difficult for the public to gauge the actual size of the government income and fiscal reserve. The amount of reserves of these statutory bodies is at least HK$ 300 billion (Note 1).
Still, the government never admitted an even bigger source of potential source of reserve, which is the “accumulated surplus” of the Exchange Fund. The existence of such “accumulated surplus” is as a result of the adoption of currency board mechanism in Hong Kong. Hong Kong Dollar is linked to US Dollar at a fixed exchange rate of HK$ 7.8 to US$ 1 through a currency board mechanism, such that the monetary base (to make it simple, you may consider them as coins and paper money) is fully backed by foreign reserves and any change in the monetary base is fully matched by a corresponding change in foreign reserves. The Hong Kong Monetary Authority (HKMA), the de facto central bank in Hong Kong, is responsible for operating the currency board mechanism, and has been using the foreign reserves (i.e. the Exchange Fund) for investment for years. HKMA is good at investment. Over the years it has earned a substantial amount from the financial market and the earnings accumulated to become an item called “accumulated surplus” on its balance sheet.
Since Hong Kong Dollar has already been fully backed by the Exchange Fund, this accumulated surplus serves no particular function, except for further investment to accumulate more surplus of no particular function. As in December 2016, this “useless” fund has already reached HK$607 billion (Note 2).
The government does not want to admit that the accumulated surplus is part of the fiscal reserves and could be used, though it is clearly set out in law that the government could transfer funds out of the Exchange Fund (Note 3).
The Peculiar “Housing Reserve”
The fourth smaller coffer was recently set up through a peculiar arrangement. In December 2014, the financial secretary announced the establishment of the Housing Reserve for the purpose of providing financial resources for the government’s ten-year public housing supply targets. However, the operation of the Housing Reserve was different from other government’s dedicated funds, such as Capital Reserve Fund or Innovation and Technology Fund. While the latter are part of the government’s accounts that their balances are considered as part of the fiscal reserve, and any investment incomes earned by these funds are treated as part of the government income, the Housing Reserve appears to be completely separated from the government’s account.
When setting up the Housing Reserve, the government transferred a part of investment income of the fiscal reserve, a total of HK$73 billion in FY 2014/15 and FY 2015/16, to the Housing Reserve. It is legitimate for the government to use the investment income to set up any fund. The proper procedures should be first collecting the investment income as government income in the respective FYs, and then credited the required amount to the Housing Reserve. However, such a legitimate procedures were not adopted. The government chose not to collect the investment income from HKMA, which also helped government’s investment, but asked HKMA to transfer the amount internally as the Housing Reservice. As a result, the HK$ 73 billion in total had not been considered as government income in the respective budgets (Note 4). Moreover, the Housing Reserve is just an item shown on HKMA’s balance sheet, but not part of the government’s balance sheet, too (Note 5).
The above arrangement means that (1) the government had under-reported its income for an amount of HK$ 73 billion during FYs 2014/15 and 2015/16; (2) the amount of fiscal reserve would be at least HK$ 73 billion less in the coming years; and (3) the government’s income will be underreported too, as investment income from the Housing Reserve will no longer be government income. According to the government’s report, the Housing Reserve now had HK$ 77 billion, meaning that that the government has under-reported such an amount of government income over the last few years. In short, an amount of HK$73 billion and all of its future income have disappeared from the public scrutiny, and exist only as an one-line item on HKMA’s balance sheet.
It feels odd for the government to establish the Housing Reserve in the first place. The Housing Authority, the statutory body responsible for building and managing public housing in Hong Kong, still has around HK$ 180 billion reserve (Note 6) and there is no urgency for injecting new funds for public housing projects. Even if there is a need to earmark dedicated funds for public housing, the fund could be set up similar to other funds and be included as part of the government accounts. For instance, the government has set up a “Civil Servant Pension Reserve Fund” within the government account for preparing the spending in fulfilling its obligation in paying pension for retired civil servants. The peculiar way for setting up the Housing Reserve outside government accounts makes me feel that it serves the purpose of hidding government income and reserves, and thus the fact that how rich the government is, from the public’s full understanding, so it would be easier to justify its measures not to spend more on education, housing, medical services and social services.
In summary, the fiscal reserve of the government is far higher than HK$ 945 billion as reported in its official statements. There are far more resources under the government’s control than the public could even imagine. If we take into account the above “hidden” resources, the government in fact has control on reserves close to HK$ 2000 billion (HK$ 2,000,000,000,000).
As a taxpayer, what I want to say is that I want my money back!
Note:
(1) This is a very conservative estimate by referring to the amount of reserves these statutory bodies placed in the Exchange Fund for investment. Some of them may have reserves not placing in the Exchange Fund at all. The amount of HK$ 300 billion can be found at Note 24 of audit report of HKMA’s annual report 2016.
(2) Please refer to the balance sheet on p. 151 of HKMA’s annual report 2016.
(3) Section 8 of the Exchange Fund Ordinance provides that,
“Where the Financial Secretary is satisfied that such transfer is not likely to affect adversely his ability to fulfill any purpose for which the Exchange Fund is required to be or may be used under section 3(1) or (1A), he may, after consulting the Exchange Fund Advisory Committee, and with the prior approval of the Chief Executive in Council, transfer from the Fund to the general revenue or to such other fund or funds of the Government as may be authorized by the Chief Executive in Council any sum or part of any sum in excess of the amount required to maintain the assets of the Fund at 105% of the total obligations of the Fund for the time being outstanding and may for the purpose of any such transfer realize any of the assets of the Fund.”
(4) When reporting government’s revenue in FY2014/15 and FY 2015/16, the Census and Statistics Department provides that
“The investment income on the fiscal reserves for 2014–15 and 2015–16 have been set aside and retained within the Exchange Fund as provision for the Housing Reserve, and was not received on 31 December 2014 and 31 December 2015 .”
(5) The government’s estimates do not include the item of Housing Reserve. In HKMA’s balance sheet, the Housing Reserve is shown as one of the “Other Liabilities”. Please refer to Note 28 of the audit report of HKMA’s annual report 2016
(6) The balance of its accumulated surplus, housing capital works fund and development fund was around HK$ 185 billion in March 2016, and it has annual fiscal surplus too. (Please refer to p. 6 of the Financial Statement FY2015/16 of the Housing Authority)
