Scope for government to counter recession
Hong Kong is known for championing the concept of small government, big market even during hard times. But officials are, understandably, facing growing pressure to take a more active role in the economy to tackle the fallout from the global financial crisis. This resonates with the responses of western governments. Intervention in free markets that would have seemed unthinkable earlier has been accepted as necessary to save the capitalist system. Governments are now expected to continue to play a leading role for some time.
Thankfully, Hong Kong's financial system remains sound and in no need of dramatic rescues. However, our economy will not escape the impact of the financial turmoil. Those who have called on the government to be more proactive than in the past in combating an expected recession have a point. It is good that an official close to the administration's thinking says it is considering a more active role.
So far we have largely been spectators as the crisis has spread from Wall Street. But it will touch us all personally if, as expected, it develops into a global recession. Evidence of that is already emerging. News this week of hundreds of job cuts by Hong Kong financial and property companies was followed yesterday by DBS Bank's announcement it is laying off 900 staff in Hong Kong and Singapore. Business activity in these sectors has contracted. There seems little doubt everyone will have to tighten their belts eventually.
The government, too, will have to contend with falling revenue from taxes and charges as economic activity slows. Past experience suggests it would not be expected to take a leading role in using public money to spend its way out of economic gloom. During the downturn following the 1997 Asian financial crisis, for example, the government introduced a series of tax increases and budget cuts. Indeed, the Basic Law requires the government to keep expenditure within the limits of revenues, avoid deficits and keep the budget commensurate with growth. This week, however, a government advisory body and voices from across the political spectrum have called on the administration to maintain - or even increase - public spending and to consider tax relief rather than tax increases. The head of the Central Policy Unit, Lau Siu-kai, said this was the clear consensus of the advisory Commission on Strategic Development.
Such an approach would represent a fundamental shift in thinking, without necessarily departing from the financial principles laid down in the Basic Law. Thanks to the city's financial regime, it has no debt to speak of and strong cash reserves. The government therefore has room for flexibility within a reasonable time frame. A more proactive approach would acknowledge its social responsibility to maintain a favourable climate for employment. When economic conditions are depressed there is good reason for the government to do what it can to sustain adequate consumption and investment. It can afford to think outside the box about sound, worthy projects that will generate employment and help sustain economic activity.
Professor Lau says, rightly, that the government should do nothing that would affect the functioning of the markets or international confidence in Hong Kong. Our city owes its success to free markets, personal enterprise and innovation. On those same strengths hangs its future competitiveness and prosperity. They would not be fostered were the government to play an overly active, or an inappropriate, role in the economy. But some flexibility is needed as we strive to soften the impact of the financial meltdown.
