Joseph Yam’s Confusing Interpretation of Article 107 of the Basic Law

On 3 August, Mr. Joseph Yam, a member of the Executive Council in Hong Kong and the ex-Chief Executive of Hong Kong Monetary Authority (HKMA), Hong Kong’s de facto central bank, published an article discussing the fiscal policy in Hong Kong as well as requirements set out in Article 107 of the Basic Law, the mini-constitution in Hong Kong, in managing the coffer. It is such a coincident that I have just published two short articles on the same topic (Note 1) in late July, raising queries on what does Article 107 actually requires the government to do, and whether those requirements were complied with in reality. Yam’s article did not answer my questions but made me more confused on what Article 107 actually means.

Article 107 provides that “[t]he 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.

One of my queries was the actual meaning of requirement in Article 107 that the government needs to “avoid deficits”. Yam explained that this requirement was not intended to require the government to achieve balanced budgets year after year. He opined that this concerned a balance “over an economic cycle”. Moreover, the requirement was supposed to be an ex ante requirement, meaning that the estimates, that is the budget the financial secretary prepared, instead of the final outcome should be balanced. He also opined that Article 107 was conceptual in nature instead of prescriptive.

Balanced Budget over an Economic Cycle

As an ex-central banker, Yam’s knowledge on economic cycle should not be doubted. However, his interpretation of Article 107 that the government only needs to achieve a balanced budget over an economic cycle raises more questions. I agreed with Yam’s statement that there was no definite length of duration of an economic cycle. For instance, in Japan, the economic growth dropped from 2.2% in 1994 to -6% in 2009. Its economic situation only slightly improved in recent years and no one knows whether it has already started its recovery. Similarly, in Hong Kong, we experienced the worst economic downturn in early 2000s, and yet, it appears that now in 2017, the economy has not yet at its peak. Pursuant to Yam’s interpretation about the requirement of avoiding deficit, does it mean that the government would be considered as in full compliance of Article 107, if the budget is balanced by, say, 2047 if the economic cycle is of 50 years? But wait, it appears that Yam’s interpretation does not reconcile with the government’s past policy. I recall that in early 2000s when the government experienced the worst ever deficits, it rushed to announce that Hong Kong was suffered from “structural deficit” problem and in order to resolve the problem, the government suggested to introduce goods and services tax (GST). It bothers me that, if Yam’s interpretation prevails, there was in fact no need to rush but wait and see whether government’s income would bounce back when the economy recovers. Did he now mean that the government’s actions then were completely wrong? Did he strive to advise the financial secretaries not to rush then when he was the central banker?

The Avoid Deficit Requirement only Applies to “Estimates”

My another question on Article 107 was whether the requirement of avoiding deficit was about the estimates prepared by the financial secretary prior to the start of a financial year, or the outcomes. Yam’s article gave an unambiguous interpretation that it should be the estimates that matter. He justified his interpretation as “many unexpected developments that affect the public finance during a financial year”.

If his interpretation prevails, the government should have been in contravention of Article 107 most of the period over the past two decades. Well, I am not kidding. Since FY 1997/98, thirteen estimates out of a total of 21 were deficit estimates, including the seven estimates for FYs 1999/00 to 2005/06, and the six estimates for FYs 2008/09 to 2013/14. Did Yam admit that the government had not been in compliance of Article 107 for such a long period of time, including those years when he had been assisting FSs to prepare their estimates?

Furthermore, if the above two interpretations are combined, it would mean that Article 107 merely requires the government to avoid deficits in the “estimates” “over an economic cycle”. Let’s consider an extreme case according to Yam’s interpretation. Is it correct that if an economic cycle lasts for 50 years, even the first 49 estimates are deficit estimates and have accumulated debts up to thousands of billions dollars, Article 107 would still be fully complied with when the government announced in the 50th estimate that it would have a huge rainfall income from nowhere which would be sufficient to pay back all the debts, even if the estimated rainfall income does not materialise? Mr. Yam, you are kidding, right?

Article 107 was conceptual in nature instead of prescriptive

Yam further elaborated that the requirements set out in Article 107 were “conceptual” instead of “prescriptive” requirements. He therefore opined that it did not prohibit the existence of budget deficit. I understand that it is reasonable for constitutions to set out high level concepts. However, concepts are not without boundary, and it is perfectly possible that some actions would fall outside the conceptual requirements setting out in a constitution.

Even if Article 107 is about some high level concepts, some of them are still unambiguous concepts. While estimates are subject to manipulations that the government has full power to define what are “income”, “expenditure”, “surplus”, “deficit” and “fiscal reserve”, it is undisputable that 13 out of 21 estimates were deficit estimates. And when nearly two-third of the estimates were deficit estimates, should we still considered that the government had already “strived” to “avoid” deficit estimates? If Yam’s answer is affirmative despite the above facts, would the “concepts” set out in the Basic Law be a bit too fluid for any reasonable person to understand?

The Budget Should “Commensurate” with the growth rate of GDP

Yam praised the use of the word “commensurate” in Article 107 concerning the relationship between the government budget and GDP growth as a wise choice. I believe I am too stupid to see the wisdom. He opined that the word chosen indicated that “it [recognized] the need for the use of fiscal policy in macroeconomic management” and that “budgets should be characterised by more spending and less tax to the extent of running deficits when the growth rate of the economy [was] too slow and the opposite when the growth rate of the economy [was] too fast.

Nevertheless, I opined that the original Chinese phrase chosen (相適應) refers to the concept of “proportionate” instead of “commensurate”. I found an article on Chinacourt.org, the site of “The Supreme People’s Court of the People’s Republic of China”, explaining section 5 of the Criminal Law of 1997 of [China] and that would shed some light on the meaning of the present question. Section 5 of the Criminal Law provides that “the level of punishment should be proportionate with the crime breached and the respective criminal obligation.” The article went on to explain that “[t]his requirement reflects concretely the essence of the proportionate principle. The basic meaning is that, light punishment is applied to small crime, while heavy punishment is applied to heavy crime. The crime and the punishment matches with each other” (Note: Translated by the Sam Lee). If the above text reflects what “proportionate” means under China’s law, it is doubtful why Yam understood that as permitting government spending and economic growth to run in opposite directions. Even if the English translation, commensurate, is used, the Oxford Dictionary merely means “matching sth in size, importance, quality, etc.” without indicating any meaning of opposition.

No matter whether the original text means “proportionate” or “commensurate”, it is more logical to consider that the government spending and the economy should at least be in the same direction. Only under such interpretation that Article 107 makes any sense at all.

Whether the Financial Secretary has already been sacked?

The most interesting thing about Yam’s article is that, the responsibility for defending the government’s fiscal policy should be the Financial Secretary. However, now an advisor of the Chief Executive played such role instead. Does Yam’s article hinted that he but not the Financial Secretary is controlling the fiscal as well as the economic policy of Hong Kong in the coming five years?

Note 1:

How does Article 107 of the Basic Law of Hong Kong Work? (1)

How does Article 107 of the Basic Law of Hong Kong Work? (2)

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