Hong Kong Budget 2016-2017

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[pic 2] (Figure 2)

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Public Finances

In the 2016/17 Budget, Financial Secretary John Tsang needs to ensure that public finances are well spent. Recently the community concerns about cost overruns of infrastructure projects. The production cost increases, such as surges in prices of construction materials, wage hikes, may lead to cost overruns.

[pic 3](Figure3)

From the economic aspect, the rise of production cost not only leads to cost overruns but also leads to the decrease in short-run aggregate supply (Figure3). As the short-run aggregate supply decreases, the short-run aggregate supply shifts left from SRAS1 to SRAS2. The economy moves from point A to point B. The price level rises from P1 to P2 and the quantity of output falls from Y1 to Y2.

Cost overrunning means government needs to spend more in infrastructure projects. Since government spending increases, the aggregate demand increases and the aggregate demand curve shifts right from AD1 to AD2. The economy moves to point C. It would prevent the supply shift from reducing output, but the price level would rise to P3.

To prevent the cost overrun and to strengthen cost control of public works, Financial Secretary set up a task force to examine the causes for the rising costs of works projects and formulated improvement measures. Also, he establishes a multi-disciplinary office to control project costs by reducing unnecessary design and contractual requirements.

This can alleviate the increases of production cost and the decreases of short-run aggregate supply. The increase in price level, that implementing the controlling cost policy, will smaller than before the increase before the policy.

[pic 4](Figure4)

Moreover, Financial Secretary also mentioned that he would like to rely on the enhanced Supplementary Labor Scheme to increase labor to alleviate the delays and cost overruns. As the quantity of labor increases, both of short-run and long-run aggregate supply increase (Figure4) and both of short-run and long-run aggregate supply curve shift right. The economy moves from point A to point B, as output rises from Y1 to Y2 and the price level declines from P1 to P2.

On the other hand, the Budget stated that government has made strenuous efforts to remind all government departments to regularly review their fees and charges. Most fees and charges for government services have been set in accordance with the “cost-recovery” and “user pays” principles. Relevant fees and charges have registered an average annual increase of $400 million in the three years since 2012-13.

Also, the Budget stated that Government has recorded successive years of surpluses. It means the tax revenue and the government services revenue are larger than the government spending. It leads to a rise of public saving. Since the public saving increase, the supply of loanable fund market increase (Figure5) and the supply curve shifts right from S1 to S2. The real interest rate decrease from r1 to r2 and the quantity of loanable fun increase from Q1 to Q2.

[pic 5]

(Figure5)

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Internship and Exchange

In the 16/17 Budget, Hong Kong Government planned to foster talents. There are two main proposals that the Government would like to do in the future. Internship and Exchange is one of the aims of the Budget. It contains enriching IT Program in secondary schools to offer internship at technology enterprises, increasing monthly allowances of the internship program under the innovation and technology fund, and increasing internship places in the mainland and the ASEAN (Association of Southeast Asian Nations) countries

According to the Government press release, the Government has identified the six industries for further development. The six industries are cultural and creative industries, medical services, education services, innovation and technology, testing and certification services and environmental industries.

As a policy to develop the innovation and technology industry, offering more internship opportunities can increase Hong Kong human capital. Human capital is defined as the knowledge and skills that workers acquire through education, training, and experience. It is one of the determinants of the productivity. Productivity is the quantity of goods and services produced from each unit of labor input. Increasing Human capital improves Hong Kong’s productivity. Take Singapore as an example, in 2016, it established a program called Internship@ Gov 2016. It is a program for students considering a career with Singapore’s public services, to get first-hand experience at government agencies.

The reason for Singapore’s Government setting up this program is totally the same as Hong Kong Government do, to increase a country’s human capital so as to the productivity. Long-run Aggregate Supply is affected by the supplies of labor, capital, and natural resources, and the available technology. Since human capital is one of the supplies of the capital, offering more internship opportunities will shift the LRAS (Long-run Aggregate Supply Curve) to the right. This will also shift the SRAS to the right. The price level decreases from r0 to r1 and the output level increases from Y0 to Y1. As people can use less money to buy more goods and services, it is good for the citizens.

[pic 6](Figure6)

Another proposal of the Budget is the professional training. Hong Kong Government will set aside $200 million to provide tuition fee subsidy to part-time students of designated professional programs offered by the Vocational Training Council, and strengthen professional training for construction, retail, and financial services industries. This proposal will foster Hong Kong technological knowledge development. Technological knowledge is the society’s understanding of the best ways to produce goods and services. This proposal has the same economic effect as offering internship opportunities did. It also shifts the LRAS and SRAS to the right with the increase in the output level and the decrease in the price level.

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Social Welfare

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