CY's policies will exacerbate city's coming down-cycle

While his efforts to help the poor are laudable, the chief executive's revenue-raising and home-building plans are going to store up trouble

PUBLISHED : Thursday, 16 January, 2014, 2:36am
UPDATED : Thursday, 16 January, 2014, 5:00am

CY Leung's policy address yesterday contained lots of small things to welcome, and a couple of big ones to worry about.

CY's good intentions of helping Hong Kong's poor, and especially the elderly poor, are highly commendable.

More generous kindergarten vouchers, and free school lunches and fatter textbook grants for the children of poor families are both good ideas.

So is doubling the amount of healthcare vouchers given to old folk, although at HK$2,000 each, the value is still nugatory.

But whether CY's HK$3 billion low-income working family allowance scheme is such a smart proposal is debatable, however. A cynic would say it is merely a HK$3 billion subsidy for employers to allow them to keep wages low.

Still, when it comes to redistributing a little of Hong Kong's wealth to the city's least well-off, the chief executive is clearly thinking along the right sort of lines.

It's in two other areas that his address was more troubling: fiscal policy and housing. In both CY appears to display a worryingly poor understanding of Hong Kong's economic cycle.

First consider his comment on the government's financial position, tucked away right at the end of yesterday's speech.

CY acknowledged the existence of the government's repeated budget surpluses and plentiful reserves. But then he warned: "Tackling the root of persistent problems will lead to a continuous increase in expenditure. The government has the responsibility to keep expenditure within the limits of revenue. It requires us not only to control expenses, but also to increase revenue."

When politicians talk about increasing revenue, they generally mean raising taxes.

That's unnecessary. The Basic Law requires Hong Kong's government to "strive to achieve a fiscal balance".

Most analysts interpret that to mean a fiscal balance over the economic cycle. In other words, the government should run surpluses during boom years in order to fund counter-cyclical deficit spending when the inevitable downturn comes.

It has certainly run surpluses. As the first chart shows, over the last 10 years the government has run an accumulated surplus of HK$480 billion. As a result, the government's reserves, including the Exchange Fund's excess surplus, have swollen to a monstrous HK$1.5 trillion.

That gives the government more than enough leeway to indulge in a spot of deficit spending if necessary. There is absolutely no need for CY to try "to increase revenue", which would only dampen economic activity in the private sector.

Equally worrying, at least for property owners, is CY's determination to embark on a home-building binge. Yesterday he promised to increase housing density across much of the territory and to develop something called the "East Lantau Metropolis" as part of his plan to build 470,000 new homes over the next 10 years.

CY's target is not as ambitious as that of former chief executive Tung Chee-hwa, but it could well have the same devastating impact on Hong Kong's property market.

If followed through, CY's proposals are likely to see a glut of new housing reaching the market just as the United States is raising short-term interest rates, pushing Hong Kong mortgage rates higher.

That combination of an increased supply of housing together with more expensive home loans will inflict a double blow on the city's property market, potentially driving a deep correction in prices.

The warning signs are already there. As the second chart shows, over the last six months long-term interest rates have climbed 1.5 percentage points. According to John Greenwood, the economist who designed Hong Kong's currency peg, over the next three years they are likely to rise by as much again, propelling a double-digit fall in Hong Kong home prices.

CY's good intentions will only exacerbate that drop.