VALUE FOR MONEY The Hong l(ong Budgetary Process Alvin Rabushka $9.95 Value for Money ALVIN RABUSHKA A clear and graphic examination of the men who govern Hong Kong takes the reader from a historical perspective to the colony's present unique standing as a financially successful industrial society in a world of inflation and recession. More than four million people live in this British colony, most of them m thirteen square miles of which half is residential and a tenth industrial. Yet the crowded community has the industrial world's lowest-taxed, least-regulated economy, and its administrators operate on a policy of fiscal responsibility, despite a lack of natural resources. The colony is com­ pletely autonomous, and operates with a philosophy of law and order, noninter­ vention in the private sector, and a balanced budget, resulting in an environ­ ment conducive to profitable investment with minimum interference in private affairs and full freedom for economic enterprise. Little protection and few subsidies are provided to industry and the few direct government services function on a com­ mercial basis. The private seetor and the market mechanism are responsible for public utilities and transport; official inter­ vention or regulation are occasioned only by Hong Kong's peculiar political and economic geography. Its free money market attracts funds to help finance in­ dustrial development. The budget po1icy is original; sustained or systematic deficits are avoided, and accumulated reserves permit government expenditure over a long recession without serious cutbacks and earn interest to meet recurrent expenses. This study of policy-making and budget­ ing belies the allegation that the Hong Kong government discourages scholarly research into its activities. Sources of information are published and unpublished papers and statistics on budgetary allocations. Most important are the first interviews ever completed with a cross-section of Hong Kong's entire administrative leadership. Value for Money VALUE FOR MONEY The Hong Kong Budgetary Process Alvin Rabushka HOOVER INSTITUTION PRESS STANFORD UNIVERSITY STANFORD, CALIFORNIA 1976 The Hoover Institution on War, Revolution and Peace, founded at Stanford University in 1919 by the late President Herbert Hoover, is a center for advanced study and research on public and international affairs in the twentieth century. The views expressed in its publications are entirely those of the authors and do not necessarily reflect the views of the staff, officers, or Board of Overseers of the Hoover Institution. Hoover Institution Publication 152 International Standard Book Number 0-8179-6521-1 Library of Congress Card Number 75-27028 Printed in the United States of America © 1976 by the Board of Trustees of the Leland Stanford Junior University All rights reserved For Louisa The Financial Secretary, Philip Haddon-Cave, reads the annual Budget Address as the Governor, Sir Murray MacLehose, watches. (Reprinted with permission of the Government Information Services.) The Financial Secretary, Philip Haddon-Cave, presents the annual budget to the Hong Kong Legislative Council. (Reprinted with permission of the Government Information Services.) Contents List of Tables IX Preface and Acknowledgments XI l. A Portrait of Responsibility 1 Colonial Government in Hong Kong 1 An Overview of Public Finance 3 The International Environment 4 The Colony and I ts People 5 Economic Realities 7 The Chinese Connection 7 The Mother Country 9 2. The Development of Financial Procedure 12 Colonial Regulations 14 1843 Regulations 15 1951 Regulations 17 Financial Reports 22 Financial Autonomy 33 Regulations of the Hong Kong Government 34 3. Constitutional and Administrative Framework 38 His Excellency, the Governor 39 The Legislative Council 43 The Finance Committee 46 Public Works Subcommittee 47 Establishment Subcommittee 49 The Colonial Secretariat 52 The Colonial Secretary 54 The Financial Secretary 56 The "Policy" Branches 58 The Economic Branch 61 The Finance Branch 64 VII The Departments 67 Personnel 71 The Administrative Class 71 Executive Officers 80 Professional Officers 81 4. Economic and Budgetary Policy 83 Economic Policy 84 Capital Movements 84 Subsidies 85 Government Economic Services 91 Budgetary Policy 99 Government Reserves 103 Taxation 113 5. The Budget 117 Preparation of the Budget 117 The Budgetary Process 122 The Financial Secretary 122 Finance Branch 127 The Spending Departments 134 Overinflated Estimating and Underspending 138 6. The Reorganization of Government 146 Purpose of Reorganization 147 Mechanics of Reorganization 148 Strengthening Existing Machinery 149 Introducing New Machinery 150 Improving Personnel Management 151 Changing the Organization of Central Government 152 Preliminary Efforts at Implementation 154 Pros and Cons of Reorganization 156 Implications 158 Notes 163 Index 171 VIII List of Tables Table Page 1 Revenue 23 2 Expenditure 24 3 Comparative Statement of Recurrent and Capital Income and Expenditure 26 4 Statement of Assets and Liabilities as at March 31, 1969 28 5 Public Debt of the Colony at March 31, 1969 30 6 Royal Observatory 31 7 Activities of Establishment Subcommittee, 1963-64 through 1973-74 50 8 Administrative Class Posts as at 1 December 1972 74 9 Ranks of Administrative Officers as of 1 August 1971 79 10 Revenue and Expenditure of the Hong Kong Government, 1946-*47 through 1973-74 100 11 Actual Surplus/Deficit Compared with Estimated Surplus/Deficit 101 12 Cumulative Government Surplus 105 13 A Budgetary Overview, 1956--57 through 1972-73 139 14 Underspending/Overspending by Department, 1963-64 through 1972-73, by Percentage 143 ix Preface and Acknowledgments This book is about Hong Kong's budgetary process-its politics, as well as the incentives, constraints, and ideological commitments that encourage its unique fiscal and economic responsibility. The first chapter considers certain special features of the colonial gov­ ernment in Hong Kong, the international environment in which Hong Kong flourishes, and previews the peculiarities of Hong Kong's anomalous practice of public finance. Subsequent chapters examine the historical precedents of financial administration in Hong Kong, the constitutional foundations of its practice, the philosophy of balanced budgets and nonintervention, strategic con­ siderations in the preparation of the annual budget and the actual patterns of underspending by department between 1%3 and 1973, and a recent effort to reorganize the structure of government. The book is based, in part, on published and unpublished statistics on budgetary allocations, a range of unpublished government pap­ ers, and official papers published in Hong Kong Hansard (the record of Legislative Council proceedings); in part, on interviews with a cross-section of Hong Kong's administrative leadership, including many heads of departments, most branch heads in the Secretariat, and approximately half of the unofficial members of the colony's Legislative Council. I have tried to reconstruct the style, philosophy, and practice of budgeting back to the mid-1950s, but I concentrate chiefly on the decade of the 1960s and early 1970s. Throughout the book the interviews are reported in unattributable form to the best of my verbatim recall abilities. The whole question of research into government and politics in Hong Kong has been the subject of much critical-indeed, hostile-discussion in Hong Kong but has received little genuine practice. Both the expatriate and resident academic community of the colony promote a wide belief that the Hong Kong government discourages scholarly investigation into its activities. One Chinese XI xii VALUE FOR MONEY student in Hong Kong decided not to attempt any interviews with government officials as part of his research for an advanced degree, on the supposition that his requests would be summarily denied. European scholars hold the same views, though some note a possi­ ble recent change in government's receptivity to scholarly study. But these beliefs have given rise to a self-fulfilling prophecy: the belief that government will not allow itself to be analyzed leads scholars to avoid undertaking political research, which leads in turn to the conclusion that political research is infeasible in Hong Kong. I explored this question in the course of my interviews. Why was it, I asked, that so little social science research is carried out in Hong Kong and why, moreover, the little research completed there almost invariably omits interviews with civil servants? The answer given by almost every one of my respondents was "No one has ever asked to interview me!'' My experience belies these widespread beliefs. Between Sep­ tember and December 1973 I completed approximately fifty inter­ views with leading figures in the Hong Kong government. Only three civil servants refused an interview, but none of these was crucial to the research design; no one, save these three, refused an interview within a few days of my calling. Several, after the inter­ views were completed, expressed gratitude that a scholar had sought their views on the subject of financial administration in Hong Kong. The majority spoke candidly under promise of anonymity, most noting that this was their first interview with a scholar engaged in academic research about Hong Kong. These interviews are, to the best of my knowledge, the first attempt by a social scientist to systematically interview the Hong Kong leadership while researching on Hong Kong. Time alone limited the number of