Whatever he tries, Tsang won't win the inflation battle

PUBLISHED : Thursday, 24 February, 2011, 12:00am
UPDATED : Thursday, 24 February, 2011, 12:00am

John Tsang was never going to please everyone when he stood up yesterday to deliver his fourth annual budget speech.

Given the clamour for government handouts coming from all quarters of the economy, that would have been impossible.

But in refusing tax giveaways to the middle classes while simultaneously launching the government's most expansionary budget in years, the financial secretary both drew condemnation for being miserly and risked failure in what he described as the government's major task for 2011: fighting inflation.

With the government expecting to turn in a consolidated surplus of HK$71.3 billion for the current fiscal year - in stark contrast to Tsang's original forecast of a HK$25.2 billion deficit - the financial secretary faced strident demands to hand cash back to Hong Kong's middle class by extending last year's salary tax rebate.

Yet with the inflation rate running at a two-and-a-half-year high of 3.6 per cent in January and sure to climb further over the coming months thanks to the lagged impact of rent increases, Tsang rejected calls for a large-scale tax handout as dangerously inflationary. Instead, he gave away HK$24 billion by injecting HK$6,000 into each and every Mandatory Provident Fund account, where the beneficiaries can't get their hands on the money.

Yet although Tsang's MPF injection artfully avoided fuelling price pressures, his other inflation-fighting measures are likely to be ineffective at best, and at worst could end up exacerbating price rises.

Action to assist the poorest sections of society - a HK$1.9 billion, two-month rent holiday for public housing tenants and an extra HK$1.9 billion in social security payments - are welcome. Inflation is running at 3.9 per cent for the least well off but only at 3.4 per cent for the rich.

But Tsang's other relief measures are questionable. His HK$9.9 billion waiver of private property rates will both fuel demand and help to drive housing prices higher, which will add to inflation by pushing up rents.

Meanwhile, handing out HK$4.7 billion in subsidies for household electricity bills is only likely to encourage waste, making a nonsense of Tsang's claim that 'we have been making good progress in promoting energy saving and improving energy efficiency'.

And his promise to protect savings by issuing up to HK$10 billion in inflation-protected government bonds is laughable. HK$10 billion is less than 0.8 per cent of the funds in Hong Kong dollar time deposits.

Still, government officials were insisting yesterday that Tsang's measures would be effective, knocking 1.4 percentage points off the average rate of inflation this year.

Their claims look optimistic. The small print in the budget statement's appendices forecasts the headline inflation rate for 2011 will average 4.5 per cent, and that the underlying rate - stripping out the government's relief measures - will also be 4.5 per cent. In other words, Tsang's inflation-fighting initiatives will not reduce consumer price rises this year.

Meanwhile, with government revenues projected to be flat over the next fiscal year, overall public spending is set to rise by HK$69.6 billion thanks partly to the government's ambitious programme of infrastructure projects.

That will push public spending up from 18.5 to 21 per cent of Hong Kong's gross domestic product, making Tsang's latest budget the city's most expansionary in years.

And that will only add to inflation.

High and rising

The government's claim it is containing inflation look optimistic

Its forecasts for headline and underlying inflation are the same: 4.5%