Sunday February 27 2011

No escape from the post-budget blues

Philip Bowring

Despair. That is my sense after Hong Kong's top two financial officials, Financial Secretary John Tsang Chun-wah and Monetary Authority boss Norman Chan Tak-lam, revealed recently just how incapable they are of transparency and consistency, let alone able to devise changes to failed or outdated policies. The budget speech was devoid of discussion of substantive fiscal issues and nauseatingly self-congratulatory.

Two of the three main handouts - the electricity subsidy and rate waiver - are designed to make the headline inflation numbers look better than reality. They make nonsense of broader government objectives. The power concession contradicts all government claims to energy saving. Power should be taxed and other taxes dropped or reduced. The rates waiver is contrary to the goal of reducing reliance on erratic revenue sources in favour of ones that are both stable and rise with inflation. It may even be a small boost to property prices.

The increase in tobacco duty, made in the name of good health, will mostly hurt lower-income groups among whom smoking is more prevalent. The health claims are nonsense anyway, given almost no additional money to clean the air by eliminating high-emitting vehicles and ships. Meanwhile, Tsang doles out billions for construction industry projects such as the high-speed train boondoggle.

The idea that the government can do much about inflation other than by increasing land supply is a delusion. However, Tsang is clearly keen to earn brownie points in Beijing, with several references to US quantitative easing being to blame for inflation but no mention of China's credit binge spilling over to Hong Kong. That must be worth another Bauhinia medal. The plan to issue inflation-linked bonds is another public relations gesture. The proposed issue size is so small as to be meaningless.

The government also manipulates the inflation data. It claims a 6.5 per cent increase in real terms in operating spending for the coming year but by using an inflation rate of just 1.4 per cent compared with its consumer price index forecast of 4.5 per cent. It also compares the coming year with actual spending for the current year rather than the underspent allocation. Meanwhile, the GDP deflator - forecast to be 2.5 per cent for 2011 - bears scant relationship to other inflation measures.

The injection of HK$24 billion into MPF accounts is acceptable in principle but further cuts in charges by the provider oligopoly are essential. Anyway, the transfer needs to be 10 times that amount, which could easily be achieved without reducing the fiscal reserves by distributing some of the HK$600 billion in retained earnings of the Monetary Authority. It should also be age-weighted to reflect the efforts of those working and contributing to reserves growth for 40 years or more who now face retirement hardship. This would also allow old people greater dignity than having to rely on handouts.

Tsang even used government pension obligations with a present value of HK$469 billion as part of the justification for excessive fiscal reserves. Bringing such future contingencies into a cash-based budget without also mentioning the likes of the airport and MTR Corporation, not included among its assets, is simply dishonest.

The HK$1.2 trillion in combined fiscal and HKMA reserves had earlier been the subject of a justification in the Post by Chan. Space does not permit analysis here but, if he believed half of what he wrote, Hong Kong's well-earned billions appear to be in the hands of people more concerned with bureaucratic politics and Beijing than with Hong Kong interests. Chan has now been awarded two new ways for the bureaucracy to invade private-sector space - a financing facility for small and medium-sized enterprises and micro-finance project for Hong Kong's version of Fannie Mae, the Mortgage Corporation.








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