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The conservative Heritage Foundation of the United States has warned that Hong Kong could lose its top position on its list of world's freest economies if Chief Executive Leung Chun-ying continued to pursue "big government" policies.

Wednesday's Policy Address marked the first time many Hong Kong people have heard that their leaders have listened to people's complaints and taken bold steps to abandon the traditional social and economic policies of minimal intervention. Thanks to the Heritage Foundation, we now learn that our government has come around to the view that many old policies are no longer valid in this era.

But die-hard defenders of capitalism in its most basic form practiced in Hong Kong and praised by fundamentalists around the world need not despair. A big government in Hong Kong is severely constrained by the discipline of the balanced budget and adherence to the low tax regime that are enshrined in the Basic Law.

As such, the government can neither raise taxes or borrow money to finance its recurrent expenditures. In the past, some capital projects, notably the Mass Transit Railway, were financed, at least in the initial stages, by syndicated bank loans and the issue of a mix of long- and short-term fixed interest debt instruments guaranteed by the government. The government also issues short-term notes to cover occasional month-to-month budgetary shortfalls. Despite all that, the government has remained effectively debt-free, while maintaining a sizable fiscal reserve that can cover more than 12 months of expenditure.

Some economists hold the view that such a large fiscal reserve is not necessarily a good thing. They suggest that the government should spend part of the funds held in reserve to improve social and medical services. Unsurprisingly, such a radical idea is gaining little traction inside and outside the government, which would rather return part of the fiscal surplus to the people through tax rebates or cash handouts.

So, where is this "big" government? Nothing that Chief Executive Leung has done so far signals a sharp departure from the established economic policy. He has introduced a few measures seeking to dampen the overheated property market. More important, perhaps, is that under his direction, the government is studying ways to help diversify the economy from its over dependence on finance and property.

Such thinking truly represents a drastic departure from the government's traditional policy of never favoring any particular industry, believing that the private sector should be a better judge of which sector will have a better chance of success. The government prefers to be the facilitator rather than the initiator.

But more and more economists are urging the government to become more involved in setting the direction for future economic development, because private businesses are either unable or unwilling to make long-term investment in developing new industries while they can make short-term gains in investing in properties or various financial assets.

The resulting imbalance of economic growth has widened the wealth gap to levels that are deemed to be a glaring social injustice. What's more, the dominance of these capital-intensive activities in the Hong Kong economy has greatly inhibited social mobility by denying a chance for people in the lower- to middle-class to move up the social ladder.

The problem is exacerbated by escalating property prices that deny more and more people the opportunity of owning their own apartment. As tenants, they find that their quality of life is deteriorating as they are being forced by rapidly rising rents to move to lower-quality housing farther away from the city center.

Hong Kong may be seen to be drifting away from the free-market principle as defined by such conservative think-tanks as the Heritage Foundation. But it will be the choice of the majority of Hong Kong people because they are not getting much benefits from the free market.

The author is a current affairs commentator.

(HK Edition 01/18/2013 page3)