When Flashback to February 23, 2011. Financial Secretary John Tsang Chun-wah unveils his 'lai see' budget, so called because it is laden with subsidies and cash offers for Hongkongers. While remembered for its HK$6,000 grant to each permanent resident, the 2011/12 budget was also a potent attack on that persistent income killer: inflation. In his budget speech Tsang declared 'fighting inflation is our major task this year', and he launched a set of initiatives, from inflation-linked bonds to rent holidays on public housing to an assortment of subsidies. Flash forward to current times, with the new budget rolling out on Wednesday, will the city keep up the fight? The likely answer is no. Inflation will be just as rampant this year, but the early signs are the government is in a mood for belt-tightening, and has less desire to bring the kind of costly anti-inflation measures seen last year. Certainly there is still a problem to address. The Consumer Price Index hit 5.7 per cent in December, and the cost of living has been on a steady rise since hitting a trough in mid-2009, peaking at 7.9 per cent in August last year. This has a very real effect on people's lives. Elisa Au lives in Ma On Shan in the New Territories, with her husband, two children and her husband's sister. Her family gets by on a meagre monthly budget of HK$13,000, which covers everything. They are struggling. Largely thanks to the steep inflation in food prices seen in Hong Kong in recent years, food and utility bills account for a massive 70 to 80 per cent of the family's outgoings each month. The family owns their flat thanks to the government's Home Ownership Scheme so they are spared that expense. 'Food is the one item that has the most impact on your life,' Au says. She has taken to cost-saving tactics like cutting her own hair and forsaking non-essential items such as new clothes and cosmetics. She is a typical example of the crushing impact inflation has on the poor. All Hongkongers confront this problem, of course. It shows up in the continuous taxi-fare rises and the rents that seem to climb into the stratosphere. But the general population tends to skate above inflation thanks to a tight labour market that keeps wages above cost-of-living increases. This is not true for low-income Hongkongers, generally defined as the bottom 25 per cent in terms of spending. That is mainly because food takes up a much larger part of their total expenditure, and food prices have risen far above the average inflation rate. Retail food prices in Hong Kong rose 9.1 per cent last year, according to the government, comprising nearly 40 per cent of the city's consumer inflation. Meanwhile, food accounts for more than 40 per cent of the budgets of the bottom quarter of households by expenditure, says Donna Kwok, greater China economist for HSBC. The impact of food inflation is noted by Au. 'When I went to the wet market in the past I could buy two meals with HK$100, but now I need HK$130 to buy food for two meals,' she says. Hong Kong's food prices rises are largely linked to the rising costs of imported items from the mainland, where food inflation climbed to 9.1 per cent in December, according to China Daily. Au blames Hong Kong's high food prices on rising rents paid by shops. She says the sale to the Link Reit in 2005 of retail space attached to public housing estates (thus privatising these areas) pushed up shop rents and, therefore, food prices. The poor also tend to be low-skilled workers, and therefore have less ability to bargain for higher wages. A glimmer of this dynamic can be seen in data from the Census and Statistics Department. From March 2004 to September 2011, figures show that blue-collar wages in the city's manufacturing sector rose 15.6 per cent. Those employed in professional and business services saw their income rise 34.4 per cent in the same time frame - more than double the pace of increase. Finally, the poor tend to invest less, putting their savings in bank accounts that pay little interest and offer no protection against inflation. 'People who put their savings in bank deposits have been hurting. This is not a small minority,' says Dr Alan Siu Kai-fat, associate dean of finance at University of Hong Kong. This is less a problem for the rich, who usually have diversified investments that tend to outpace inflation in the long run. Inflation therefore is a poverty issue, and fighting inflation is largely about redistributing money to low-income Hongkongers. The government was fully engaged in that initiative last year. In his budget speech on February 23, Tsang rolled out a number of inflation-fighting measures. He gave each residential electricity account a subsidy of HK$1,800 and waived two months' rent for public housing tenants. The government also issued HK$10 billion of inflation-linked retail bonds (iBonds) in July, giving retail investors a safe way to hedge against inflation. The issuance was subsidised by the government (it did not need the money and the AAA credit did not need to pay such a high interest cost). This was deemed more in tune with free-market principles than a simple cash handout. The government did that, too, by giving each permanent resident a grant of HK$6,000. Tsang initially wanted to put this money into the Mandatory Provident Fund, thereby avoiding an inflationary mass influx of capital. But that was quashed by popular demand for money today. The government implemented a minimum wage law last year: a base rate of HK$28 per hour. This was to help Hong Kong's low-wage earners keep up with inflation. The financial secretary has little scope to control prices or even set interest rates - the two basic levers used in other jurisdictions to control inflation. Its measures were ad hoc solutions to get around this problem. But Kwok says the government has done a good job managing a difficult issue. 'The Hong Kong government has, to an extent, helped to buffer the lowest-income households from the impact of inflation,' she says. 'The remarkable resilience of both luxury and staple retail sales over the past year is clear evidence of this.' Average inflation ran about 5.4 per cent last year, according to government data. This was the highest annual rate since 1997. Kwok expects this year's inflation rate to beat last year's, which brings the discussion back to Tsang and this week's budget. Will he stay focused on inflation, and will he try to alleviate inflation's impact on low-income Hongkongers with the same zeal as last year? The early signs are that the mood has changed. The euro-zone crisis and US budget battles have created a desire for countries to stay in surplus. Tsang warned in January that the city could suffer a euro-zone scale debt crisis if he abandoned prudent management of public finances. 'The priority concern this year will be growth - not inflation - and on maintaining an adequate fiscal buffer against global financial market turbulence,' says Kwok of the upcoming budget. 'They will likely be more cautious about approving any lavish spending package, and more focused on preserving a healthy fiscal profile.' Kwok expects the government budget surplus to improve to about 3 per cent of gross domestic product by the end of this year, helping to shore up Hong Kong's defences amid an uncertain environment. While Hong Kong's AAA sovereign rating is safe, and the government is sitting on HK$663.5 billion surplus from its Exchange Fund, the tone these days seems to be all about fiscal prudence, glimpses of which were seen in Chief Executive Donald Tsang Yam-kuen's final policy address, delivered on December 10. Tsang flagged the issue of inflation, and proposed a series of one-off measures. These included another two-month rent break for tenants of public housing, and providing an extra month's income to recipients of Comprehensive Social Security Assistance. He also proposed doubling the HK$100 million budget for local food banks. But Christine Loh Kung-wai, chief executive of the public policy think tank Civic Exchange, says the government has been reluctant to commit to big increases in recurrent spending for social programmes. One-off spending has a lower impact on finances than recurrent commitments. Expectations are that the new budget will avoid any big commitments to new recurrent programmes, and that the government will take the brake off big one-off expenditures (another HK$6,000 citizen grant is unlikely). Loh notes the chief executive, in his 2010/11 policy address, asked the city's tycoons to donate HK$5 billion 'to support people in need in areas not covered by the Comprehensive Social Security Assistance Scheme'. The money was not forthcoming. Loh asks why the government has not made up the shortfall, given that Tsang has said government social services are deficient. She adds that one-third of the student population - about 360,000 students - cannot meet the costs of schooling. The 2011 budget provided HK$3.1 billion of support for these students, but this was not mentioned in the chief executive's recent policy address. 'This is, of course, recurrent funding and Tsang could have addressed that in his policy address, but he didn't. In any case, this makes a very good example of government reluctance to take on things that will help many families,' Loh says.