Financial secretary only looking at one side of handout equation
For every dollar of rent subsidy granted to public housing tenants, other people had a dollar less to spend
Financial Secretary John Tsang Chun-wah has made the case for the need to hand out sweeteners in his coming budget, saying the 1 per cent of yearly GDP growth spurred by past relief measures should not be underestimated.
SCMP, February 22
Let’s also agree that it should not be overestimated, which Mr Tsang has certainly done. Handouts did not push economic growth up by 1 per cent in recent years. If anything their effect was to depress growth.
The mistake he made, a common one in government, was to look at only one side of the equation. What he saw was how money that public housing tenants were excused from paying in rents was instead used by these tenants to buy goods and services they might not otherwise have bought.
And this does indeed push up gross domestic product. Every time people spend money they contribute to the total size of GDP. Spend more and you get a bigger, faster-growing economy.
But Mr Tsang did not pull his largesse out of thin air. He got it from taxes, land sales and all the other sources of government revenue. This means that, for every dollar of rent subsidy he granted public housing tenants, other people had a dollar less to spend. They gave it to him.
And the rule that you make the economy grow if you spend more works just as well in reverse. Spend less and you make the economy contract. Thus here is some simple arithmetic for our financial secretary. One minus one equals zero. Subsidies do not inherently make an economy grow.
In fact they mostly have a negative growth effect. Economies grow best when they are devoted to giving the greatest possible number of people the goods and services they most want at the lowest possible prices they need pay.
You do this for yourself when you decide whether to buy a fancier smartphone, go on a longer holiday or save the money for retirement. It is not done anywhere near as well when a financial secretary makes these decisions on your behalf for political reasons that may have little to do with your welfare.
And it won’t do for Mr Tsang to say that he took the money for his handouts from fiscal savings rather than from raising taxes. He could have reduced taxes instead, which always boosts economic growth magnificently.
Alternatively, he could have had more government savings to invest and investing can do as much as spending to boost growth. Sometimes it is better to spend, sometimes to invest, and financial markets, on the whole, do a better job than any career bureaucrat of signalling which and when.
The big problem here is one of perception. It is easy to see the joy of any single public housing tenant spared a HK$2,000 monthly rent bill. It is difficult to see the HK$2,000 sum total of all the slight economies to which a thousand other people have gone to give him that joy.
Mr Tsang extols the one and ignores the other but they have an equal and opposite effect on economic growth.
Likewise, he looks at things too simply when he says that we need domestic consumption to drive economic growth,
It is already by far the biggest driver of economic growth and always has been. It accounts for 68 per cent of GDP at present, 77 per cent if you include government consumption.
I can think of a good way, however, of pushing it even higher very quickly. Abolish the Mandatory Provident Fund and we can have an immediate boost of about 2 per cent to growth as people spend the net contributions they are otherwise forced to put into their MPF funds.
This assumes, of course, that they would rather spend the money than invest it if they had the choice. But it is an assumption that underlies the MPF. There is no need for an MPF if people will provide as much for their retirement on their own as they do through the MPF.
It also ignores that investment is as much a driver of economic growth as consumption is but, if Mr Tsang ignores this, why can’t I?
Here’s a suggestion for your budget speech tomorrow, Johnny. Keep it short.