Hong Kong's reserves should be used to stimulate the economy now, without risking future fiscal health, writes Philip Bowring
It is difficult to make sense of the stream of leaked policy possibilities and incomplete budget numbers emanating from the government. The tendency to play hide and seek with income and expenditure estimates by shifting money between different funds, rather than actually spending it, has long been part of the budget process. Without a better idea of this year's final outcome, and the impact of recession on 2009-10 revenues, it is hard to attach specific figures to policy recommendations. However, there are some general principles that must be applied to achieve the twin goals of stimulating the economy in the immediate term without undermining Hong Kong's longer-term fiscal health.
First, though, it is worth commenting on the 'let them eat cake' attitudes of the senior officials - Chief Executive Donald Tsang Yam-kuen, Chief Secretary Henry Tang Ying-yen and Financial Secretary John Tsang Chun-wah. Hong Kong people are being urged by them to go out and spend more money to ward off recession. It is the height of arrogance by officials who either inherited billions or have the luxury of inflation-proof civil service pensions linked to their final salary. Few in the private sector enjoy such benefits. It apparently means nothing to these officials that the mass of Hong Kong savers, who must take care of their own old age, have seen a steep fall in the value of their pensions and/or face near-zero interest on their bank deposits - or that perhaps 5 per cent of the population will lose their livelihoods as unemployment spikes.
The first principle of the budget should be to set a target for a deficit in cash outlays. A figure of 5 per cent of gross domestic product, or around HK$80 billion, would not be unreasonable, given the size of the reserves and the depth of the global problem. In other words, the sum should exclude allocations to funds such as the Capital Works Reserve Fund, which will not actually be spent this fiscal year, and one-off payments to the Mandatory Provident Fund and health funds.
If the government thinks such a deficit is too large a proportion of fiscal reserves, now about HK$500 billion, it should order the Monetary Authority to transfer to the government HK$100 billion of its accumulated surplus of nearly HK$600 billion. (It is astonishing that legislators seem never to recognise that these reserves are owned by the public and are vastly in excess of anything needed for the conduct of monetary policy). It could also issue bonds at a time of very low interest rates.
There is scant case for further tax rate cuts after last year's giveaways to middle- and upper-income earners. However, to relieve the immediate burden of tax payments, particularly by companies which may no longer be profitable, there is a strong case for delaying or easing payments of provisional tax in a way that helps businesses' cash flow but does not, in the long run, cost the government more than a small amount of interest.
One of the worst ideas now being circulated is to extend to 15 years the period of tax deductibility of mortgage interest. This would have very little immediate impact but would undermine long-term fiscal health. For decades, Hong Kong was tax neutral towards mortgages. Then, in a surrender to the interests of the property developers anxious to stop prices falling to market-clearing levels, Donald Tsang, then the financial secretary, allowed limited deductibility of mortgage interest for seven years, later raised to 10.
Quite apart from fiscal losses, favoured tax treatment for mortgage interest has in many countries - Britain, for example - caused a misallocation of capital away from wealth-creating industries to the escalation of home prices. Why the Democratic Alliance for the Betterment and Progress of Hong Kong apparently supports an extension, I do not know. Instead, it should be pushing to ensure that the real value of incomes of the unemployed and elderly, who mostly spend all their income, is maintained.
Another useful measure would be an extension of the partial rates holiday on residential premises. The idea of a voucher scheme to spur consumption is a bit of a gimmick, with a transitory effect - though it does return money to the people.
Longer term, the aim must be to narrow the gap between public and private housing, and between geographical areas. The way to do this is to stop rigging land prices, letting them fall to levels at which new private construction, at its lowest-ever level, will be boosted. Official stupidity is throttling private development - yet the government is set to spend billions on roads and bridges of little economic benefit other than to contractors.
Finally, the budget should promise root-and-branch reform of the MPF. Despite small improvements, this is still a high-cost machine that hands massive profits to a favoured few financial intermediaries, regardless of competence. Compulsory saving is essential - but so are competition and low costs.
Philip Bowring is a Hong Kong-based journalist and commentator