Donald Tsang

Inflated fears

PUBLISHED : Wednesday, 02 March, 2011, 12:00am
UPDATED : Wednesday, 02 March, 2011, 12:00am

Financial Secretary John Tsang Chun-wah's budget came under heavy attack from virtually all quarters almost as soon as it was unveiled. This is understandable since it contains no long-term plan to cope with Hong Kong's multiple problems and no vision of the future.

Tsang's budget, like many previous budgets, confirms the government's inability to make accurate forecasts. This time, the deficit of HK$25 billion forecast by the financial secretary was transformed into a surplus of HK$71 billion. The year before that, a predicted HK$40 billion deficit turned into a HK$26 billion surplus. It may be a virtue for financial secretaries to err on the side of caution, but these errors are so flagrant that they render the assumptions behind the budget suspect.

This year, Tsang's budget contained no tax rebates, despite the huge surplus, on the grounds that they would spur inflation. But there is little evidence that a tax rebate will be inflationary.

In fact, tax rebates in the past did not result in serious inflation and academics have estimated that the inflationary impact would be minimal. So, why has Tsang been so against such a rebate?

Furthermore, again because of the fear of inflation, Tsang announced that an injection of HK$6,000 would be made into each Mandatory Provident Fund account so that the account holders could only access these funds once they retire. But working people need help today - and this is not being given to them.

It would be much better if Hong Kong were to adopt the Macau approach and simply give HK$6,000 to each identity card holder, regardless of whether the person has an MPF account. That would make matters much simpler and reduce red tape.

The MPF proposal conspicuously ignores the welfare of those aged 65 and over, who no longer have MPF accounts but who in many cases are still working in an attempt to make ends meet. What rationale is there for neglecting this sector of society, which accounts for over a million people?

The budget also does little to deal with one of the pressing problems in Hong Kong, which is an inadequate supply of housing. Widespread calls for the resumption of the Home Ownership Scheme, discontinued since 2003, were rejected by Tsang with no reason given.

Not surprisingly, this is seen as the government again defending the interests of property developers and, by pushing the middle class into buying homes from developers, it will strengthen suspicions of collusion between business and government.

Perhaps worst of all, the budget is silent on the call from virtually all quarters for a universal pension plan.

Instead of taking advantage of this huge surplus to make a down payment for such a plan, such as by opening a savings account for each person in Hong Kong, the budget simply fritters away money with a band-aid approach on one-off projects, and then puts the rest of the surplus into the government's fiscal reserves.

While expressing concern about inflation, Tsang does not tackle one of the main causes of inflation in Hong Kong, which is the linked exchange rate system. As the US dollar weakens, it drags the local currency down while the renminbi strengthens.

Since the mainland accounts for much of Hong Kong's food imports, the appreciation of the Chinese currency inevitably means inflation in Hong Kong, which will hit the poor more than anyone else.

If inflation is so serious that there can be no tax rebate despite the huge surplus, Tsang should explain why the link, which was put in place in 1983 at a time of panic over the future of the then British colony, still needs to be maintained.

More than 27 years later, Hong Kong's reversion to Chinese sovereignty is a fact and there is no panic. Why can't the Hong Kong dollar be linked differently, say, or be allowed to float, as it did from 1974 to 1983?

Frank Ching is a Hong Kong-based writer and commentator. Follow him on Twitter: @FrankChing1