Here's how to help the workers
SCMP November 18 2008
The government must concentrate spending where it is most effective
as we head into a lean 2009, writes Philip Bowring
What should the government do? It is now almost certain that 2009
will be the worst year for the Hong Kong economy since the severe acute
respiratory syndrome crisis. It is likely that this recession, being
a global event, will be longer if not deeper.
Let us not kid ourselves into believing that the government can do
a great deal to alleviate the hardships. But there is not much use
in waiting for the budget, still more than three months away, to use
whatever fiscal tools are available.
Indeed, the quicker the remedial measures taken by this government,
the more likely that the collapse of confidence - which is spreading
outwards from the financial sector to the rest of the private sector
- can be reversed.
Beijing has set a good example. Its announced package of spending
may be overstated, but at least it demonstrates a sense of the gravity
of the situation.
First, the Hong Kong government must assume that, under the circumstances,
a deficit of at least HK$50 billion next year is tolerable.
That is only 3 per cent of gross domestic product, rather modest by
the standards that most governments will be experiencing next year.
Indeed, anything up to 5 per cent of GDP should be acceptable for
one year. That could easily be met by a drawdown of reserves, which
now stand at HK$1 trillion if one includes (as one should) the Monetary
Authority's accumulated surplus which, even after some losses this
year, is likely to be about HK$600 billion.
The government could also use the current period of low interest rates,
lack of private-sector issuance and plentiful supply of local currency
to cover some of the expected deficit now. How about immediately issuing
HK$15 billion each of five-year and 10-year bonds?
The major source of fiscal deficit will not be a rise in expenditure
but a fall in revenue - lower profits and income tax, lower stamp duty,
lower land sales and lower earnings from the accumulated surplus. Those
will come on top of the various tax cuts, mostly benefiting upper-
and middle-income earners, in the last budget.
There is limited scope or point in cutting public spending during
a recession. Some spending, notably to help the unemployed, is inevitable.
Beyond that, here is a check list of items:
Continue the rates waiver introduced last year for another year.
Cut the electricity subsidy by 50 per cent, or abolish it altogether
now that energy prices have fallen.
Eliminate provisional tax for small and medium-sized enterprises.
This will simply delay tax payments and stop businesses having to pay
tax on profits they may never earn. The cost in terms of interest foregone
would be small. The measure would be a huge help to cash-short businesses
and save large numbers of jobs.
Freeze all public-sector salaries above the median wage level. The
sector already enjoys superior benefits to most in the private sector
and has job security - the most valuable of all assets during a recession.
Ensure that payments to the old, sick and unemployed are maintained
in real terms.
Continue land sales. Lower land prices encourage private-sector development
even if they hurt the profits of the developer oligarchy sitting on
Avoid spending on capital-intensive schemes such as the Hong-Kong-Macau-Zhuhai
bridge and other Pearl River Delta infrastructure without proven high
rates of return to Hong Kong. Much of such spending goes to non-Hong-Kong
workers and imported equipment. Spend, instead, on smaller, local and
Do not take on responsibility for helping Hong-Kong-owned businesses
in the delta. Leave that where it belongs.
In principle, it would also be desirable to reverse the salaries and
profits tax cuts last year, which cost HK$20 billion. However, the
government doubtless lacks the nerve to do this, particularly as it
would hurt the overpaid senior bureaucrats.
The object of any government measures must be, in the first instance,
to sustain the employment and cash flows of middle- and lower-income
earners who spend most of their income on locally generated goods and
The biggest losers in this shakeout are going to be those owning or
working for the small businesses which support, in countless ways,
China trade activity, and the big financial firms now in distress.
The laid-off investment bankers may be able to live for a while on
their previous big bonuses - but that will not be so for the small
businesses supplying services to them.
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