Last week, Financial Secretary John Tsang said in public that Hong Kong will use up its financial reserves within 20 years. Currently Hong Kong has more than HK$700 billion in reserves. Add this with financial investments held by the Hong Kong Monetary Authority, and the government has more than HK$1,000 billion in reserves. Hong Kong is also one of the few economies free from debt. On the surface, Hong Kong is rich and the thought of it depleting its financial reserves and going into debt is hard to accept.

However, the Financial Secretary's warning is not without foundation. Hong Kong now has a rapidly growing aging population. Aging can cause an economy to lose creativity and more importantly, the ability to absorb economic shocks and generate growth. Aging also implies greater government spending on medical and social facilities. This will put further pressure on society.

From an economic point of view, we are concerned with how the aging population affects our financial position. The impact will be two-fold. The first is on the expenditure side. As mentioned earlier, an aging population will lead to higher medical and social spending. This is because elderly people tend to have a greater need for medical support. A true but sad statistic is that, on average, a person will spend 80 percent of all medical expenses during his life in his last two years. With medical expenses rising because of higher longevity, medical expenses will go up. As Hong Kong people, previously, did not have a strong commitment to retirement planning, many elderly people do not have sufficient reserves for their retirement. At the end of the day, they will ask the government for support. Statistics show Hong Kong has been spending more on social welfare in recent years, and the growth in welfare spending is higher than rises in economic growth. This clearly shows the aging population is putting more pressure on government expenditure. This is a point of no return.

Another important side to these financial considerations are incomes. Again, the statistics do not paint a rosy picture. According to the government estimates, the number of working people will decrease in the year 2018. This is in direct contrast to the longevity of people. With people expected to live longer but the number of those working dropping, the average burden of supporting an old person will increase. Because Hong Kong has a simple and low tax regime, the government is expected to receive less tax revenue when the size of the working population falls. The calculations are simple. More people need government support and the number of people who can support the rest of society declines. The per capita costs will definitively go up.

Another alarming fact is that the growth in government revenue is, in general, on a par with that of economic growth. On one hand, we have an income flow which grows together with the general economy. However, on the other hand, our expenditure grows faster than economic growth. You don't need to be a rocket scientist to see that this system cannot go on. Sooner or later, the expenditure will exceed income and the deficit will have to be financed by our reserves. When we start to spend the reserves, then one day they will, indeed, all be used up. The Financial Secretary is not wrong in his prediction. The only question is when. John Tsang predicted we will spend all our reserves in 20 years. Some economists predict the same thing, but say it will take 30 years. The number does not really matter. The outcome will still be the same.

If one is to argue with Tsang's prediction, the debate rests on assumptions about the patterns of revenue and expenditure. The above gloomy picture comes from the fact that expenditure grows faster than income. If we now plan ahead to build up sufficient reserves to face future growth in spending, we may be able to prevent the reserves being used up. The key here is whether we have the collective wisdom and the determination to sow the seeds for future prosperity. An unpleasant outcome can definitively be avoided if we plan ahead, now.

The author is dean of the School of Business at Hang Seng Management College

(HK Edition 01/16/2014 page1)