The financial chief we need

PUBLISHED : Sunday, 17 June, 2012, 12:00am
UPDATED : Sunday, 17 June, 2012, 12:00am


Former monetary chief Joseph Yam Chi-kwong has done a service by igniting discussion of the dollar peg. His motive may be questionable but at a time when the attentions of the chief executive-elect seem focused on rearranging the desks at Tamar to reflect bureaucratic power shifts, Yam has raised a fundamental issue and reminded us of the key roles of the financial secretary and the Monetary Authority in the governance of the city.

Any discussion of housing, the environment, the income gap, the role of monopolies, pension issues and so on must start with the policies coming out of the office of the financial secretary. This minister also has direct control of the HKMA - though Yam at least ran it more like an independent fiefdom.

So it is with some alarm that one must view reports that John Tsang Chun-wah may remain in this job to provide so-called 'continuity'. So are we to get continuity of budgets that present no ideas for addressing income gap issues, or the ever- increasing reliance by the government on the least stable revenue sources? Are we to get another few years of Tsang's avoidance of the principles of Hong Kong's taxation system? Another few years of doing nothing but tinkering with tax rebates and welfare payments to appease this or that interest group? Are we to get more years of the HKMA's empire-building, using its privileged position to offer indirectly subsidised loans and insurance cover, which should properly be provided by the private sector?

I used to be in favour of a peg to a basket of currencies, not just the US dollar. But there is little point in changing it now. However, Yam has inadvertently drawn attention to the fact that the HKMA's reserves (in effect its retained profits) of about HK$570billion are largely irrelevant to the operation of the peg. So Leung Chun-ying's first task should be to investigate how much of this sum, which belongs to the community, should be put to use for the benefit of the community.

The HKMA's accumulation of these assets has been partly at the expense of the savers of Hong Kong, who for years have seen interest on their deposits lag far behind inflation, a process which has also benefited property companies and investors at the expense of those unable to get on the first rung of the property ladder, or were unfortunate enough to buy during one of the bubbles.

A large part of this HKMA surplus needs to be hived off into a trust fund, which will provide income and health-care support for the rapidly ageing population, those who worked hardest in the 1960s and 1970s to build Hong Kong but whose savings have been eroded by inflation. For the longer term, the Mandatory Provident Fund needs reform and an increase in contributions, but the problems of those who will retire soon must be faced in other ways.

Leung should next demand of his financial secretary that he come up with a clear plan for increasing recurrent revenue and reducing reliance on land sales and stamp duties. A lower expectation of land sales revenue would have the additional advantage of reducing the amount available for capital investment in unnecessary prestige projects. Reduced land revenue does not imply reduced land sales - merely that a predictable land supply policy will result initially in lower prices and later in more stable ones.

Increases in recurrent revenue can readily be achieved in ways that are socially beneficial - by taxing pollution and charging for waste disposal, for example - and limiting the tax breaks that favour high-income earners. A tax on power usage would fall very evenly and be a simple and fairer version of the now-abandoned proposal for a goods and services tax.

On the spending side, direct payments, such as for children and the old, are a far better way of addressing issues such as the very low birth rate, and the level of poverty among the elderly, than playing with tax exemptions and creating new welfare schemes that are costly to administer. Indeed, there is a strong case for broadening the tax base which has been eroded by successive Tsang budgets.

Some increase in public housing is justified, but the main focus of a housing policy should be to increase output and affordability in the private sector, forcing developers to make money from volume rather than outrageous profit margins.

These, then, are the issues that start with the financial secretary. No amount of tinkering with the minutiae of housing policy, or education or the environment can work if the fundamental principles of tax and spending are ignored. Likewise, a new chief executive who wants the private sector to show more initiative should order the financial secretary to get the government out of businesses where it overlaps or competes with the private sector - a myriad of quasi-government institutions, including the stock exchange - and abolish monopolies such as that of the Jockey Club.

Leung would do well to be worrying about these key issues and who will run this key portfolio rather than allow Fanny Law Fan Chiu-fun to throw her weight around and spend his political capital before he even becomes chief executive. He will be judged by the quality of his leadership and the quality of his appointees. Change in policy, not bureaucratic structures, is what is needed.

Put the horse before the cart, Mr Leung. And appoint a strong-willed and imaginative horse as your financial secretary.

Philip Bowring is a Hong Kong-based journalist and commentator