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Hong Kong Budget 2018-2019

Will Paul Chan dish out the sweeteners now or think long-term in Hong Kong budget?

As Chan gets set to deliver budget on Wednesday, many will be drawing comparisons with his predecessor John Tsang Chun-wah and how he can resist pressures to share out a huge cash surplus, while focusing on long-term investments for the city

PUBLISHED : Tuesday, 27 February, 2018, 7:01pm
UPDATED : Tuesday, 27 February, 2018, 10:19pm

If his predecessor was relaxed and casual in demeanour, Paul Chan Mo-po is the polar opposite. Methodical, quiet and someone known for choosing his words as if they were numbers he was adding and subtracting in his head, Chan is no John Tsang Chun-wah.

As all eyes train on him on Wednesday, comparisons are again being drawn. How generous will he be in dispensing cash handouts and goodies in a year that Hong Kong will harvest a bumper surplus? Will he hoard it like Tsang? Will he do as his boss orders or offer his own vision of being the steward of Hong Kong’s fiscal strategy?

Inevitably, the comparison was also being drawn to how Chan – like Tsang – was not his boss’s preferred choice for the post of financial secretary.

It is against this difficult backdrop that Chan finds himself today as he prepares his first budget under his new superior Chief Executive Carrie Lam Cheng Yuet-ngor, who took office last July.

Chan rolled out his maiden budget in February last year, a month after taking over from Tsang who resigned to contest for the chief executive post – an election he eventually lost.

Chan finds himself battling not just the comparisons, but how to resist the pressure for him to share the bounty through cash handouts while keeping his eye focused on longer-term investments vital for the city’s future. He must also stay keenly alert to economic changes in mainland China so the city can keep step with the bigger driver next door and remain financially stable.

While pan-democrats had in the past asked for cash handouts, this year, two of the administration’s staunchest allies, Wong Kwok-kin from the Federation of Trade Unions and Tommy Cheung Yu-yan of the Liberal Party, were among the first politicians to support the idea.

The Democratic Party, and the pro-government Democratic Alliance for the Betterment and Progress of Hong Kong (DAB) both echoed the pair’s call.

Like everyone else, lawmakers were awed by news that the surplus would be higher than HK$120 billion, nearly eight times the original estimate of HK$16.3 billion.

But the calls are not purely altruistic, analysts said. Chinese University political scientist Ma Ngok believed the Legislative Council’s by-election in March was a key reason for the pro-establishment camp to jump on the bandwagon.

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“Politicians face the risk of being criticised if they do not follow what their rivals propose … This was why the Civic Party and Democratic Party were being criticised recently,” Ma said.

On March 11, less than two weeks after the budget speech in Legco, about 2.1 million Hong Kong voters will go to the polls to elect four legislators. The four winners will fill Legco seats vacated by pro-democracy lawmakers who were disqualified for failing to take their oath of office properly in 2016.

The DAB and FTU, which has candidates in the by-election, want every Hong Kong resident to receive at least HK$6,000 in cash.

Felix Chung Kwok-pan, the leader of the Liberal Party, insisted that unlike the others, his party’s support for cash handouts had nothing to do with the election.

“With a record-breaking surplus, giving out cash would not undermine the government’s ability to give out other sweeteners or to invest in the city’s future,” he said.

Chung pointed out that in 2011, it cost the government only HK$36 billion for then financial chief John Tsang Chun-wah to give out HK$6,000 to 6 million Hong Kong adults.

He suggested that apart from giving out cash, the government could also consider dispensing so-called “sweeteners” such as an extra month’s worth of allowance for social security assistance recipients and reducing salaries tax.

With such pressure, analysts said the budget was proving to be the biggest test yet of Chan’s political wisdom and acumen since the former accountant joined the government in 2012.

While the focus was on immediate redistribution, analysts like Agnes Chan Sui-kuen, Hong Kong and Macau managing partner at accounting firm EY, said the government’s surpluses should be used on long-term projects.

“Even if the HK$160 billion was shared among all residents and everyone got HK$20,000, it could used up within a few months … but HK$160 billion can be used to build hospitals and many elderly homes,” she said.

The senior accountant added that apart from managing the surplus, it was also the financial chief’s responsibility to map out a blueprint for Hong Kong’s economic development in his budget speech.

In Lam’s maiden policy address last year, the city’s leader unveiled a number of initiatives to support technological innovation.

For instance, she proposed introducing a 300 per cent tax deduction for the first HK$2 million invested by companies on research and development (R&D), with the remainder of the investment enjoying a 200 per cent tax deduction. She also proposed setting aside no less than HK$10 billion as university research funding to encourage private companies to increase investment in R&D.

Agnes Chan hoped that the financial secretary can elaborate on Lam’s proposals, as well as propose further measures to support the city’s technological and tourism industries.

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“The government can consider learning from Singapore, which would offer corporations a cash subsidy, instead of just a tax reduction in support of R&D investment,” she said.

Chan noted that while Hong Kong rose three places in September last year to reach sixth in the World Economic Forum’s global competitiveness index, the city only ranked 26th in terms of innovation, one of the 12 factors in compiling the index.

In recent years, Chinese leaders had repeatedly called on Hong Kong to diversify its economy through innovation, while the city’s traditional pillar industries, such as the financial and tourism sectors, need new vigour and imagination.

As President Xi Jinping visited Hong Kong last year, he urged the city to focus on “development and the economy”, the key to greater success.

In a high-powered forum in Beijing earlier this month, China’s No 3 official Zhang Dejiang urged the city to focus on the nation’s needs and take the initiative to match national development strategies and to promote innovation.

These sound good on paper but how will Chan be able to work the bureaucracy to make things happen is another question, say politics watchers.

Ma Ngok said it might not be as easy for him to work with Lam, who has been in government for more than three decades.

“I think Paul Chan would have faced some constraints from Lam on spending more … while the policy bureaus could be conservative about expanding their expenditure too,” he said.

It was widely reported that since Lam won the city’s top job in March last year, she had wanted Rex Auyeung Pak-kuen, Asia chairman of a United States-based insurance firm, for financial secretary. Commentators said Chan was reappointed by Beijing because he was trusted by the central government, especially when elites showed a reluctance to join the cabinet in a politically divided city.

“When it was leaked at such an early stage that the government will have a huge surplus, it only made Chan’s job more difficult … as some people will be getting fewer candies than others,” Ma added.

Another challenge for the financial minister, Chinese University economist Dr Terence Chong Tai-leung said, is to keep track of the economic changes in mainland China and abroad, given its standing as an open economy heavily reliant on China.

Last year, for example, the government estimated its revenue in the year 2017-18 financial year to be HK$507.7 billion, with profits tax, land premiums and stamp duties accounting for 27, 20 and 10 per cent, respectively. Revenue from land sales accounted for 22.3 per cent of the government’s revenue in 2016-17.

“The government’s revenue is easily affected by the mainland, especially [with its reliance on] income from stamp duties, profits tax and land premiums,” Chong said.

Liberal Party leader Chung also said that with the Hong Kong government enjoying a comfortable surplus and fiscal reserves, it should not be difficult for Chan to keep the city prosperous and financially stable. Yet it all depended on whether the administration was willing to adopt a more proactive philosophy of fiscal spending.

“It depends on the secretary’s political wisdom. With so much money, it can make him popular with the public, but if he sticks to a conservative approach, it is likely he will face much criticism,” Chung said.