Derision and delight over budget U-turn

In an unprecedented U-turn that has caused as much derision as glee, Financial Secretary John Tsang Chun-wah yesterday announced a budget plan to distribute HK$6,000 cash handouts to all Hong Kong's adult permanent residents. Bowing to political pressure and a plunge in popularity, Tsang revised his week-old budget and added two million more people to relief measures that ballooned by HK$16 billion to about HK$40 billion. Just days after insisting that inflation would be fuelled if he were to change his budget proposal in any substantial way, Tsang withdrew his controversial plan to inject HK$6,000 in each of four million Mandatory Provident Fund accounts, a move widely criticised as unhelpful in particular to the middle class. In its place, Tsang announced HK$6,000 cash handouts to about six million adult permanent residents, including housewives, retirees and even overseas emigrants. On top of that, salaried taxpayers will also get up to 75 per cent tax reductions capped at HK$6,000. Asked if he should apologise to the public for the changes, Tsang said: 'I find this suggestion a bit strange. I have said the most important thing now is to forge a consensus.' It will be the first time in Hong Kong's fiscal policy history that direct cash handouts have been given, though similar practices have been adopted in other places, including Singapore and Macau. Political observers and economists warned that the government had not only deviated from its commitment to financial prudence but had also eroded its authority. Raymond So Wai-man, dean of Hang Seng Management College's school of business, likened the government to a company caught up in a dividend row with its shareholders. 'It has now become a company and when the company makes a profit, it has to distribute a dividend,' he said, adding that issuing cash handouts would create a public expectation in future and become a potential source of social unrest. The HK$40 billion in handouts in Tsang's revised package comprise HK$4 billion in tax reductions to 1.4 million taxpayers and HK$36 billion in direct cash giveaways to the six million adult permanent residents. How and when the HK$6,000 handouts will be distributed and the exact criteria for eligibility have yet to be spelled out. To minimise the impact on inflation, there might be an option to save the money. An unspecified sum would also be reserved for those not benefiting from the handouts, said Tsang, who yesterday met a group of pro-establishment lawmakers to resolve the crisis. These lawmakers have now pledged support to the budget, but the pan-Democrats still oppose it, citing the budget's failure to address social and economic issues such as property prices and the pension fund. They say they will hold their scheduled protest against the budget on Sunday. Economists say the handouts will push up inflation slightly, in an economy that comprises over HK$1 trillion in retail spending and a HK$600 billion fiscal reserve. Bank of East Asia economist Tang Sai-on estimated the handouts would lift inflation by 0.2 percentage points to 4.7 per cent this year. 'The cash handouts amount to about one per cent of the gross domestic product. Even if just half of that is spent, it will still push up inflation.' Political observers said that the revised handout plans might spare the budget from being vetoed in the legislature - but they are creating implications for governance greater than those on the economy. Ma Ngok, a political scientist at Chinese University, said: 'The government is expected to remain weak ... and the public now knows their demands will be met if they can mobilise mass support.' The U-turn on handouts came just a week after Tsang's budget speech. Despite a HK$70 billion surplus last year, he said he would recommend no direct cash or tax rebates for fear of stimulating inflation. 'Inflation is a problem for which we should be on alert,' Tsang said yesterday. 'Any similar measures will affect inflation. But all of us have heard clearly the strong demands from society. That's why I made this decision after striking a balance .' The public seemed receptive to the revised package. As Liberal Party vice-chairwoman Selina Chow Liang Shuk-yee put it: 'At least the Financial Secretary has heard the voices from the majority of citizens and political parties.' But the Hong Kong Council of Social Service said the government had failed to spend the surplus wisely, such as by boosting services to the underprivileged and elderly. The politicians who met Tsang this week considered the changes a victory. 'We appreciate the financial secretary's courage in making prompt responses,' said Tam Yiu-chung, chairman of the Democratic Alliance for the Betterment and Progress of Hong Kong.