Politics will collide head-on with economics today when Financial Secretary John Tsang Chun-wah gets up to deliver his 2011 budget speech. Tsang's problem is that he is under intense political pressure to come up with a generous package of budget giveaways, while economic common sense dictates that the government should be tightening its fiscal stance. But it's hard to feel much sympathy for the beleaguered finance secretary. This dilemma is partly his fault in the first place. That's because his budget speeches over the last few years have been marked by two distinguishing characteristics: a singularly inept inability to make accurate revenue forecasts, coupled with a complete lack of any clear long-term vision. For years now, the government's budget forecasts have been little short of a joke. In last year's speech, for example, Tsang forecast that the government would run up a deficit of HK$25 billion over the fiscal year ending next month. Today, he is expected to say that deficit has miraculously turned into a surplus of more than HK$70 billion - a discrepancy in the original forecast of more than HK$95 billion. His miscalculation could perhaps be forgiven if it was a one-off mistake in an exceptional year. But that's not the case. The year before he had forecast a deficit of HK$40 billion, only to announce a final budget balance in surplus by HK$26 (please see the first chart below) - an unforeseen discrepancy of HK$66 billion. Clearly the government's forecasters have proved themselves unable to learn from their past mistakes. No doubt they would defend themselves saying they erred on the side of justifiable caution. But such woefully inaccurate forecasting carries a heavy cost. All those unexpected surpluses have allowed the government to run up accumulated fiscal reserves of nearly HK$600 billion (actually, more like HK$1.2 trillion if you include the excess reserves of the Exchange Fund). Such an enormous stash of reserves puts Hong Kong in an enviable position. What the government should be doing now is making plans for how it can best deploy those funds over the next 20 years or so for the good of the city's population, given the likely economic shifts and expected demographic changes over the couple of decades. Clearly it should be taking advantage of its accumulated wealth to draw up long-term plans for the provision of health care and for much-needed investment in the city's education system. But by consistently falling short in their budget forecasts, officials seem to have persuaded themselves that the government's finances are perpetually on the brink of a deficit crisis; a crisis, moreover, that prevents long-term fiscal planning. As a result, when the officials' forecasting inaccuracies are exposed, and the government turns in a handsome surplus rather than the predicted deficit, Tsang finds himself under pressure to hand money back to Hong Kong's people. The result is the government's piecemeal approach to handouts, in which it doles out sweeties each year to the interest groups with the loudest voices, rather than making consistent long term plans for how to disburse what increasingly looks like a large structural surplus. This year the government's policy failure is posing a big problem. With such a huge surplus, Tsang can hardly resist making handouts, especially with all sectors of the population clamouring for government assistance to soften the impact of rising inflation. Analysts predict HK$25 billion of giveaways, up from HK$20 billion last year, including a one-off reduction in the salaries tax, a holiday from property rates, and a subsidy for household electricity bills. The problem, of course, is that you can't fight inflation by throwing money around. With consumer prices up by 3.6 per cent over the year to January (see the second chart) and with the inflation rate poised to climb higher still over the coming months, Tsang should now be tightening his fiscal stance in order to lean against price rises, not loosening his purse strings. That will only add to inflationary pressures. There are some fiscal relief measures he could take. A rent holiday for public housing tenants and an increase in social security payments would help the worst off, who are bearing the brunt of rising prices. But handing out tax breaks to the relatively wealthy salaried classes and rate holidays to property owners is crazy. It is the economic equivalent of trying to put out a fire by dousing it in petrol. But political imperatives mean Tsang will have little choice. Alas, in today's collision between politics and economics, it looks like economics will come off worse.