The budget presented by Financial Secretary John Tsang Chun-wah has proved to be one of the least popular in recent years - so much so it had to be significantly recast soon after its presentation. A range of factors help explain this; not least is the way the government chose, at first, to allocate its yet again larger than expected revenue surplus from the preceding financial year. Also, some sectors, especially the middle class, felt that they were particularly poorly treated in this budget, as originally announced.
Apart from these considerations, another menacing concern has shaped our budget debate: the impact of inflation and the fear that it will persist. It is this anxiety about inflation, which has not been seen in Hong Kong as a potential danger for well over a decade, that has amplified and made more acute the negative reaction to this year's budget.
Inflation is often argued to be an 'implicit tax' - an impost which has greatest impact on the most vulnerable. Those who hold what (often little) accumulated wealth they have in cash usually have no choice but to do so and typically are among the poorest in society. Serious inflation quickly and alarmingly degrades the purchasing power of such savings.
There is a durable way to reduce these underlying inflation concerns significantly: by the use of a comprehensive 'indexation' system for public revenue and spending. Any such system should be authorised by legislation so that its details are spelled out in full, and residents can feel assured that such a system is ongoing and legally embedded - and not some sort of passing-year, 'pacifying' initiative.
Indexation may be defined as an automatic adjustment of an economic variable, such as taxes or social security benefits, according to movements in a cost-of-living index, so that the variable rises in accordance with the rate of inflation. Indexation can also be used to operate in reverse - if an economy encounters a period of deflation. But, given that such deflationary periods usually occur during periods of poor economic performance, and thus hardship, governments rarely apply it in this way.
One serious question about introducing a comprehensive indexation system is: who will pay for it? In some jurisdictions, the answer has been yet more public debt financing. But, in Hong Kong, the answer to this question is much less problematic. Our public financial system generates a surplus in most years, typically swelling our free fiscal reserves - recently said to total HK$1.3 trillion - to yet higher levels. It seems quite clear that we could pay for indexation costs directly from those surpluses and still have money left over to save.
In a downturn, indexation would still not cause any debt creation, because of that HK$1.3 trillion money bin.