The Working Group on Long-Term Fiscal Planning suggested that the government set up the fund as soon as possible and contribute a fixed percentage of its surplus for at least 10 years, according to its report released yesterday.

The group is urging Financial Secretary John Tsang to take measures to start saving for future generations, expand the revenue base, curtail spending and improve management of assets. Hong Kong’s aging population will help drive a 5.3 percent annual government expenditure increase through 2041, outstripping the 4.4 percent nominal economic growth, according to the report.

“In view of the anticipated future spending pressure for Hong Kong, the working group recommends that the government should start saving for the future,” it said in the report.

A Land Fund Trust was set up in August 1986 to manage revenue from land sales between the Sino-British agreement in May 1985 to return the city to Chinese rule and the handover in July 1997, according to information posted on the website of the Hong Kong Monetary Authority. Money from the trust was transfered into the existing Land Fund in 1997.

Future Fund

The Future Fund, which is what the working group called the proposed fund, should be set up with the HK$220 billion in the Land Fund. With the government contributing one-third of its future budget surpluses, and a projected 5 percent annual investment return, the fund could swell to about HK$510 billion in 10 years if it’s set up in the 2015 fiscal year.

That would represent about 15 percent of the city’s nominal economy, the group said. It also recommended that the fund not be drawn down for a number of years.

The Land Fund has served as a de-facto standby facility for the government since the 1998 fiscal year, and has no designated expenditure, the group said. It has investment returns, the group said, without giving details.

The government made two withdrawals from the fund worth HK$160 billion in the 2004 and 2005 fiscal years to cover budget deficits, the report said. The city’s financial secretary needs the approval of legislators to draw down the money.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

http://www.bloomberg.com/news/2014-03-04/hong-kong-study-group-suggests-creating-28-billion-savings-fund.html

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