Opinion | Big business wins again in John Tsang’s budget for Hong Kong

Financial Secretary John Tsang Chun-wah may be “distressed and angry” at recent evidence of social conflict, but his highly political budget speech did not suggest an understanding of the “why”. That surely includes an unrepresentative government comprised of lifetime bureaucrats turned politicians who find it hard to think outside their own little 1970s-designed boxes.

Tsang has been in the job for nine years, but he has yet to make any progress in resolving what the government itself has long admitted is a serious fiscal flaw – the dependence on land price inflation and volatile stamp duty revenue. Broadening the tax base has long been a stated goal. Yet, again, he has made the problem worse by reducing the reach of salaries tax, and by a rates waiver.

Salaries tax now accounts for a pitiful 12 per cent of revenue as the government becomes ever more reliant on less stable sources, including profits tax (28 per cent) – which is now vulnerable to foreign or mainland crackdowns on tax avoidance through transfer pricing. For sure, the cuts are supposed to be temporary, but he will have a hard time reversing the salaries tax concession next year, particularly if the economy continues to face stiff headwinds. As it is, he says the local economy is “laden with risks “ for the coming year.

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The claim that his tax concessions will boost the economy by 1 per cent hides the fact that the government has been a contractionary force on the economy for the past year (and beyond) through its accumulation of reserves. If Tsang’s budget forecasts are correct, the government will at best be neutral. He also vastly overstates the impact that a slew of little measures to help tourism, small and medium-sized enterprises, IT and robotics industry development and the like can have in an open economy. Nor should government be involved in promoting events like the Rugby Sevens tournament – which is always sold out anyway! Government exists to facilitate, not subsidise.

The surplus for 2015/16 was actually bigger than it first appears, as Tsang continued the policy of squirrelling away yet more revenue into special, hard-to-reach reserve funds. For the second year running, almost all the income from investment of the reserves has been credited not, as was and should be the case, to operating revenue but transferred to the Housing Reserve.

This kind of manipulation of the accounts both to conceal surpluses and make them harder to access in future is, Tsang should consider, one reason for distrust of government. As it is, the Future Fund was created with the express purpose of not being touchable for at least 10 years and now comprises HK$219 billion of the fiscal reserves. The fund is supposed to invest longer term, but no details of its performance are available.

Meanwhile, the return on the other reserves are estimated at a miserable 3.3 per cent for 2016 and 2.6 per cent to 3.5 per cent average for 2017 to 2020 – barely above the projected rate of consumer price inflation (2.5 per cent). Clearly these funds would be better invested if distributed to the public for their pension plans.