How does Article 107 of the Basic Law of Hong Kong Work? (2)
The second requirement of Article 107 is that the “budget” should “commensurate” with the growth rate of gross domestic productivity (“GDP”). Neither Chinese nor the English version makes it very clear whether the government income or expenditure growth should “commensurate with GDP growth rate”, but it is more reasonable to assume that government expenditure matters more under this circumstance, as higher income should not be a problem.
Growth of GDP, Government Income and Expenditure
The chart below shows the accumulated growth rate of Hong Kong’s GDP, government revenue and expenditure since 1997. As in 2015, the accumulated growth of government income was 60%, slightly lower than 74.7% of the accumulated growth of GDP. However, it is undisputable that the accumulated growth of government expenditure started deviating from the GDP growth in 2008, and now substantially outpacing the latter. In 2015, the accumulated growth rate of government expenditure was 124% higher than that in 1997.
If Article 107 must be strictly complied, it appears that the fast growing government expenditure may not “commensurate” with the GDP growth since 2008. In order to ensure full compliance of the Basic Law, the government should reduce government expenditure growth in the coming years. For instance, if the annual GDP growth rate is 5% in the coming decade, the annual government expenditure growth rate should only be around 2.2 to 2.6% in these years, in order to ensuring that the accumulated government expenditure growth aligns with the accumulated GDP growth by 2025.
Problems of Article 107
The above suggestion that in the long run, government expenditure growth should not exceed that of GDP growth was only a less stringent interpretation of Article 107. Still it will create many unresolvable problems for a government pursuing good goverance.
For instance, if the government were to comply with Article 107 by 2025, the government expenditure would not be able to even beat inflation. This means that not only new expenditures would not be available, the existing expenditure may need to reduce too.
Moreover, if there are economic downturn, the requirement could only be complied with in the expense of worsen quality of living of citizens. To elaborate, during economic downturn, GDP decreases. There may even be negative growth. If Article 107 were to be complied with, government expenditure has to be reduced as well. However, during economic downturn, more citizens need assistance due to unemployment or losses in business operation. This is the reasons for many governments to have counter-cyclic budget, which means that during economic downturn, governments spend more due to greater needs of welfare assistance, and the government collects less due to higher unemployment rate, lower property prices, etc. If the government’s expenditure growth were to be reduced in the midst of economic downturn, it is not difficult to imagine that the government would not be able to provide any relieves. This would certainly bad for goverance.
A more structural problem of Hong Kong making it quite not possible to comply with Article 107 is that, its economic growth is likely to be in a decreasing trend, but its government expenditure is likely to increase. Hong Kong is a mature economy. Similar to other mature economies, it is likely that the economic growth will slow down in the future. From 1990 to 1997, all but one year had nominal GDP growth over 10%. Since 1997, none reached 10%. In the coming decades, Hong Kong’s GDP may largely reamain at around 5% or even lower. In OECD countries, many do not have nomimal GDP growth higher than 5%. However, with ageing population and higher life expectancy, the government expenditure will only increase, unless it substantially tighten the eligibility criteria for accessing the welfares. In brief, unless there is a miracle that Hong Kong’s economic growth will have a substantial growth for a relatively long period of time such that government expenditure growth could maintain at around the same level as the GDP growth, otherwise, it is not possible for the government to comply with Article 107 without reducing social welfare.
Given the above analysis, it appears that Article 107 is just irrelevant, and should be removed for good.
