Help the workers
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 land banks.
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 quality-of-life issues.
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 services.
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.
Philip Bowring is a Hong Kong-based journalist and commentator