It is sometimes claimed that governments overspend due to pressure from the public. That may or may not be true, but in Hong Kong the reverse seems to be happening. As it becomes less democratic, spending is rising:
Hong Kong’s renowned fiscal reserves are at risk after the city’s opposition-free legislature approved record public expenditure over the past year, analysts have warned. . . .
Following Beijing’s overhaul of the electoral system that barred “unpatriotic” candidates from running, opposition politicians are unlikely to make a return to the legislature.
“Without proper checks and balances, the pressure on [fiscal reserves] will increase,” said Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets.
Andy Kwan, a director at ACE Centre for Business and Economic Research, agreed, saying the government could “easily no longer have fiscal discipline . . . especially when it comes to huge expenditures for upcoming large-scale projects”.
Of all the European governments, Switzerland’s is the most directly accountable to voters. Switzerland also has the lowest level of public spending in Western Europe (as a share of GDP.)
I wonder. Is it pressure from “the public”, or is it pressure from special interest groups?
READER COMMENTS
rsm
Nov 8 2021 at 2:28pm
Whenever you use GDP in an argument, shouldn’t you acknowledge that it is a political statistic that is half made-up? If the government statisticians who conjure up the GDP estimate were intellectually honest, would they report the standard error? If they did wouldn’t the resulting confidence intervals be so wide, you could say “Switzerland has the highest public spending (as a share of GDP)” and be equally supported by the data?
Scott Sumner
Nov 8 2021 at 2:30pm
“If they did wouldn’t the resulting confidence intervals be so wide, you could say “Switzerland has the highest public spending (as a share of GDP)” and be equally supported by the data?”
No.
Alan Goldhammer
Nov 8 2021 at 4:19pm
The latter. Look how much money was spent on farmers because of the trade war against China. Why should I as an urban tax payer support bailing out soybean farmers because of a stupid policy. Of course the real answer is related to electoral politics. If Trump did not bail the farmers out, he loses several Midwest states.
TGGP
Nov 8 2021 at 4:22pm
Hong Kong was laissez-faire for a long time because Cowperthwaite didn’t even want government statistics.
Rajat
Nov 8 2021 at 8:07pm
Haha, I’m not sure if that was the prime reason but that was a great discussion on Econtalk about Cowperthwaite: https://www.econtalk.org/neil-monnery-on-hong-kong-and-the-architect-of-prosperity/
Sven
Nov 10 2021 at 6:31am
Hong Kong was in some sense not laisse faire. Accumulating too much reserves is not laisse faire. A trade policy based on surplus is not laisse faire.
bb
Nov 9 2021 at 9:56am
Scott,
Good post. I think it’s often argued that taxes and democracy are linked, specifically in regards to the natural resources curse. High spending is often correlated to corruption I imagine, and corruption is negatively correlated with democracy. But there are plenty of high spending democracies, so I ultimately don’t buy it. I do buy the argument that bad governance is linked to low democracy, and fiscal irresponsibility is a form of bad governance. I just don’t think spending in itself is an indicator of level of democracy.
California is the arguably the most directly accountable to voters of US states, right?
Scott Sumner
Nov 9 2021 at 2:19pm
My problem with California is that it’s way too big. I’d say Vermont or New Hampshire are more accountable to voters. Town boards set school policy, not giant Los Angeles bureaucracies.
Mark Brophy
Nov 9 2021 at 5:33pm
General Electric (GE) moved their headquarters from CT to MA in 2016. If GE had been in a big state like CA or TX, that would’ve been much harder. Alaska never created counties and MA abolished 8 of 14 counties between 1997 and 2000. It’s hard for me to imagine a big state abolishing counties. MA was one of the first states to create charter schools, a major blow to teachers’ unions, a special interest group with great power in CA.
HKer
Nov 9 2021 at 8:02pm
Scott, appreciate years of your effort educating us on monetary policies. Learn a lot from you.
I agree in spirit without checks and balances, the HK’s fiscal spendings will go out of wrack. There is, however, some very subtle technical ways to mask the huge amount of fiscal reserve in HK. There are many pools of special funds created throughout the years and they kept earning interests that don’t all go into the calculation of the fiscal inflows of any particular years. One obvious one is the exchange fund used for backing up the currency board(hard peg with the USD) that consistently generate huge interest. It doesn’t get reflected at the income statement.
A conspiracy theory among HKers is that the huge fiscal reserve must be very tempting to CCP. So implicitly or explicitly, the CCP would siphon it in various ways. Expecting this will more likely happen due to the loss of checks and balances, a sensible strategy for HKers is to spend it as quickly as we can before the CCP’s hands can get on it.
The dynamics and the mistrust make things really complicated.
Scott Sumner
Nov 10 2021 at 12:18pm
Good point. But why wouldn’t a democratic HK government have done this?
HKer
Nov 11 2021 at 1:38am
Before 2019, most, including myself, have never questioned whether the fiscal side of HK was clearly separated from China. But if the legal firewall could be poked, why wouldn’t the fiscal side? The extradition bill was a wake up call
Sven
Nov 10 2021 at 7:19am
Switzerland is a special case. It is a unique country with its history and culture. And it is one of the richest country for a long long time. So, not comparable to any other country.
When it comes to democracy and spending;
Actually not the public but markets maintain fiscal discipline. When the amount of savings relatively low, an increase in government spending crowds out private investment. Therefore, public cannot pressure government to increase spending to high levels.
However, capitalist system is inherently deflationary. Therefore, over time interest rates go down gradually. And at some point it falls to zero. Marginal government spending that can cause crowding out gradually diminish. And it reaches zero when interest rate hit the zero lower bound. This is kind of MMT period. (For the record, I think MMT is a stupid idea)
Since government spending and subsequently debt do not affect daily lives of the public people become insensitive to fiscal discipline.
Japan is very good example in that sense for a long time. And other rich countries even not very rich ones due to capital flows since 2008 are a clear reflection of current paradigm.
P.S. as the deflationary trend intensifies, income inequality grows. Therefore, people whose income do not grow in parallel with productivity growth demand more things from government.
Scott Sumner
Nov 10 2021 at 12:20pm
“Switzerland is a special case. It is a unique country with its history and culture.”
I agree; it’s more democratic than other countries. That makes it worth studying.
Sven
Nov 10 2021 at 3:37pm
It is interesting that you did not write anything about rest of my comment. In my judgement, it is much more important. I think it is because of your economic ideology.
When it comes to Switzerland, yes, it is very democratic but also unique. A country which is neutral for a long time. No threat from outside. No foreign policy. Switzerland has not even a prime minister. Have you ever heard the name of a Swiss politician? I have not.
I met many people from Switzerland, some of the weirdest people I met in my life were from Switzerland. I think because it is a boring country. There is no issue that can bother people.
Yes, it is unique but its fiscal discipline not due to its democracy. It is about its culture.
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