Safety in numbers? Lip service budget

SCMP March 17 2005

At the macro level, Financial Secretary Henry Tang Ying-yen's second budget makes pleasant enough reading. The devil, however, is in some of the details, raising concerns about where Hong Kong's society and economy are being led. As for any vision of the future, of how the budget can be used as a bold instrument to address fundamental problems, forget it. It is a plodder's charter.

The gross domestic product growth figure of 8.1 per cent for last year also continues to look curious, inflated as it is by the bizarre 2.8 per cent fall in the GDP deflator, a rate applied to remove the effect of inflation. In current dollars, the economy grew just 5.1 per cent.

The good news starts with the fact that the operating deficit, the most serious part of the government's fiscal problem, is down to $14.1 billion from the $46.5 billion originally projected for the financial year. Mr Tang is looking for a small rise in the coming year, but is confident that an operating balance can be achieved by the original target date of 2008-09.

A year ago, that seemed wishful thinking. It may yet be, but Mr Tang has been successful in holding down spending, as well as enjoying the good fortune of buoyant revenues as the economy, in particular stock and property trading, and corporate profits, have risen dramatically. The new level should be sustainable in the medium term.

At $201 billion, operating expenditure is $11 billion below the original estimate, showing that, at last, it has been brought under strict control. At the overall level, the consolidated deficit has been brought down to $13 billion, largely as a result of capital revenue - mostly land sales - more than doubling the original estimate, to $39 billion. A small increase is forecast for the coming year but, after that, improvements are set to be achieved by lowering capital spending and increasing asset sales.

So far, fair enough. But look a little deeper and some questions need to be asked. The biggest saving on operating expenditure has come from education, so long touted as of overriding importance. Spending is down almost 10 per cent on the original forecast. Justified or not, that is a deliberate trashing of the sector.

Not that reducing recurrent spending should be viewed as an end in itself, anyway. With a rapidly ageing population, which deserves the support of a younger generation enjoying the fruits of prosperity, Hong Kong should be looking to accept increased spending in health and welfare, even if the smaller school population justifies lower education spending.

Nor are cuts in government spending desirable if they lead to outsourcing to the sleazier elements of the private sector, which pay miniscule wages and provide abysmal service. As for revenues, Mr Tang's proposals benefit the richer sections of the population and give nothing to the poorer ones. Hence, this budget will further increase income differentials and relative poverty. The abolition of estate duty is justified if only because it is largely avoided and brings in little revenue. It will discourage capital from moving offshore and help the fund-management industry.

But it only benefits the relatively well off, as does the increased salaries tax allowances for young and old dependents. Thus, tax cuts all fall to the minority, while everyone will pay for the increase in rates, which will rise $1.1 billion, to $13.7 billion, as a result of an average 6 per cent increase in rateable values.

Mr Tang seems oblivious to the fact that any salaries tax allowances only benefit the minority who fall within the direct tax bracket. They have been given multiple concessions over the years, including on mortgage payments. Now, he is considering extending such giveaways to medical insurance.

He has, however, at least not yet fallen into that other regressive tax trap - the goods and services tax - despite the urging of the International Monetary Fund, the fount of template economics. Again putting off a decision, he is to hold yet more consultations on a GST. The operating budget picture has certainly given him a reasonable excuse for delay. But he does not suggest that there is an alternative to raise revenue.

In fact, a judicious combination of narrower salaries tax bands, increases in property rates, and a tax on (environmentally damaging) energy and water use would be fairer, economically neutral and achieve the same result at a lower cost. And these would not damage services exports. Lip service is paid to the income gap. "Helping the poor is one of our priorities," Mr Tang said, noting the establishment of the Community Investment and Inclusion Fund and the Partnership Fund for the Disadvantaged. These may sound good to bureaucrats, but how about some discussion of tax policy, ageing, wage rates and competition policy - or on why median incomes in Hong Kong belie the wealth claimed by the fanciful GDP statistics?

Mr Tang also paid lip service to green issues, but a possible tax on plastic bags and a "responsibility system for waste tyres" are just the kind of token proposals to come from this government.

It recognises the utility of tax measures but remains so much in the pocket of vested interests that it fails to use taxes to cut carbon and other emissions, increase LPG use or promote recycling.

The budget is pouring even more public money into the pampered tourism industry while largely ignoring the environmental issues which are a threat not just to tourism but to Hong Kong as a regional centre. Likewise, Mr Tang continues to pay lip service to "fair competition". Instead of tackling the issue head on, he is appointing an "independent committee" to advise the Competition Policy Advisory Group - more hot air to avoid any challenge to the government's friends in the property-utilities oligarchy.

He does acknowledge that Hong Kong is now facing competition from the rapid growth of transport and logistic services across the border. But there is scant evidence of new policies.

A decision on Container Terminal 10 remains distant, and the awkward matter of air traffic rights gets no mention, although it must surely be a crucial issue for tourism and logistics, and for the proposed airport privatisation.

Interestingly, too, there is no mention of a factor which is likely to reduce Hong Kong's domestic exports this year - the end of textile quotas. While the city as a whole should benefit via its role in China's booming textiles, those who long enjoyed the rents from Hong Kong quota ownership will lose. Such is competition.

Otherwise, for the year ahead, Mr Tang sees smooth-enough sailing, with GDP growth of 4.5-5.5 per cent, or 3.7-4.7 per cent in real terms. But that is contingent on a 1 per cent fall in the GDP deflator being recorded, even while consumer, import and property prices rise.

The government still seems optimistic about the continuing recovery of land sales revenue. If it is wrong, there will be a hole in the capital budget; if it is right, Hong Kong's high cost base will continue to be a deterrent to small- and medium-sized enterprises - and to consumption.

No one doubts that the economy is growing. Employment was up 2 per cent last year, and it is still growing at a healthy pace. But the mass of the salary-earning population has yet to see GDP figures in their real incomes and unless they do so, the income gap - already the highest in the developed world - will grow.





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