HK Budget:Unfair advantage

SCMP Feb 29 2008

John Tsang's first budget was a public relations exercise that most benefits those least in need, writes Philip Bowring

The first budget of the new Tsang administration was politically astute but, in reality, stunningly mean. It also displayed those two ever-present characteristics of the bureaucracy - prevarication and surrender to elite interest groups. The mostly effusive media coverage is testimony to its political merits, as journalists were swept up in the public relations spin that everyone in Hong Kong was getting goodies from a generous financial secretary determined to give back this year's surplus to the people.

Much attention was paid to the volume of words in the speech on small schemes to help the underprivileged and to the overall size of the handouts via rates cuts and a power subsidy, and the one-off payment into Mandatory Provident Fund accounts. It was even given the gloss of helping lower-income earners and addressing Hong Kong's ever-growing income divide.

But do the sums and you will find that the catchphrase 'Leaving Wealth with the People' amounts to further increasing the income divide when inflation is hurting the lower-income groups more than others. Of the measures, only the power subsidy and public housing rent concessions significantly address this issue. Most of the rest of the budget 'generosity' goes to those least in need.

The biggest giveaway by far is to salaries- and personal-tax payers. Add together the tax waivers (HK$12.4 billion), wider tax bands (HK$1 billion), increased allowances (HK$1.3 billion) and a lower standard rate (HK$960 million), and the total comes to over HK$15.6 billion. Yet, the roughly half of income earners who are at the median level will receive none of this. By far, most of the concessions will go to the 400,000 or so in the HK$300,000 to HK$600,000 annual income brackets.

Contrast this generosity to the top 20 per cent of earners with the penny pinching towards the old, sick and lower-50-per-cent income groups. The sum total of increased (mostly one-off) payments will be around HK$5.7 billion. These consist of one month extra payments to social security and old-age allowance recipients (HK$2.7 billion), housing rent relief (HK$1 billion) and roughly half the HK$4 billion being given to all households as an electricity subsidy.

The generosity to the upper income earners came on top of rates concessions totalling HK$11 billion, a benefit unevenly spread across households and businesses.

As bad as the figures are, even worse was the attitude displayed by Financial Secretary John Tsang Chun-wah, who implicitly warned that the old-age allowance, and other benefits, would have to be cut back in future. Note this extraordinary paragraph: 'If the existing social security system were to remain unchanged it is expected that expenditure relating to the CSSA ... would increase from the present HK$13.1 billion to HK$31.8 billion in 2033.'

In other words, as the population ages, Mr Tsang wants to cut back on help for the old who built Hong Kong through the harsh times of the 1960s and 1970s - all the old except, of course, for civil servants.

While expressing shock at the possible HK$18 billion additional cost of old-age allowances in 25 years, Mr Tsang was happy to dole out more than that to his favoured few today. These include not just the higher-income earners but, as usual, the construction lobby. Thus, capital spending - mostly on roads - is to rise from HK$30 billion this year to HK$56 billion in the coming year and to HK$62 billion in 2009-10.

A government determined to spend huge amounts on concrete infrastructure, much of it of dubious economic justification, is unwilling to spend on cleaning up a Hong Kong environment that is widely acknowledged to be a deterrent to international business. Just HK$1.6 billion is allocated to encourage the use of cleaner diesel. If the government were serious about investing in our future health, as well as the needs of a sophisticated service economy, it would put excess capital to work on this issue rather than helping its many friends in the construction industry.

A government willing to help all sectors equally would have cut betting tax as well as the wine tax - another sop to higher income earners and an elite that now collects wines instead of watches.

Even Mr Tsang's good ideas have mostly been timidly executed. The one-off payment to MPF schemes is a pittance. It should have been HK$80 billion, not HK$8 billion, if it were to be meaningful and reflect the slogan of returning wealth to the people. The HK$50 billion capital to be injected into health care reform could prove beneficial but, equally, may become an excuse for cutting back health spending.

At every turn, the administration seems determined not to spend money other than on itself (Tamar) and unnecessary infrastructure (the Stonecutters Bridge). Thus, Mr Tsang did not bother to explain why this year's operating budget will be underspent by HK$8 billion, or why it is desirable for public spending to fall as a percentage of gross domestic product even while capital spending is booming. Nor did he care to mention that, in addition to the fiscal surplus this year of an estimated HK$115 billion, the Exchange Fund had a surplus - after paying HK$27 billion to the government - of HK$109 billion. The accumulated Exchange Fund surplus is now HK$617 billion. That money belongs to the community but it is treated by the bureaucrats as a slush fund to be used as they wish - as with the purchase of shares in Hong Kong Exchanges and Clearing - and without public accountability.




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