Monday June 25 2007

Halting the slide

It's time for the government to stop prevaricating and take an active role in income distribution, writes Philip Bowring

The new census data showing the continued growth of income inequality comes as no surprise. Hong Kong is heading for the Latin American level of inequality, rather than that of recently developed East Asia or old Europe - or even the US.

But the data does contain a few clues as to what might be done to reverse the trend. By that, I do not mean more hand wringing by officials, leading to committee recommendations, which are intended to be a sop to the community rather than a way of addressing the issue.

First, the facts. The numbers in the top three and bottom three income brackets have soared since 1995, with the biggest rises being in those over HK$40,000 a month and under HK$4,000. The international standard measure of income inequality, the Gini co-efficient - in which 0 is perfect equality and 1 is total inequality - has risen to 0.533, from 0.518, from 1996 to last year.

Second, let us dispense with the excuses. It is true that there has been a global trend in the developed world towards increased inequality. But to blame, as the government is attempting to, the increasing dominance of service industries over goods-producing ones makes little sense. That is especially the case if one compares Hong Kong with, for example, other service-centred economies such as Britain and the US.

Let us also recognise that the data actually understates income inequality by not taking into account the fact that the top 15 per cent of households have access to domestic helpers, who are paid a fraction of the median wage, and in many cases far less than the supposed minimum for helpers. Indeed, this access to cheap foreign labour is one reason for the increase in household inequality: many middle-class families have two full-time incomes because, with a helper, neither partner has to stay at home to cook, clean and look after young or elderly family members. Furthermore, access to this, and other non-permanent labour, pushes down the wages of unskilled locals, particularly women.

But perhaps the most interesting statistic in the report is the Gini co-efficient for Hong Kong, adjusted to take account of actual or implicit government subsidies for health, education, and the like. This also indicates that inequality has got worse (the adjusted co-efficient has risen from 0.466 to 0.475). And the gap between this adjusted figure and the unadjusted one tells us most clearly what the government is already doing to narrow the poverty divide and, hence, that it could do more.

Two principles need to be at work in assessing the role of government in income distribution. First, it must accept that it should have no control on relative wages, other than those of civil servants. The tendency of incomes of highly skilled workers to rise, relative to those of low-skilled employees, may well continue.

Second, in any well-ordered society, some minimum standards have to be attained if class tensions are not to induce dangerous resentment. It is no more acceptable to leave society entirely to the mercies of economists than it is to leave it to those of clerics or generals. All governments have a redistributive role.

The Hong Kong government has long accepted its responsibilities - through health, housing, education and water policies, for example - to a modicum of income equality, as well as to providing public services. The colonial government often acted out of fear of a backlash from the public if it ignored popular sentiment. But the trend in recent years has been in the other direction: to push for lower government spending in most of these sectors. Cutting recurrent spending, as a percentage of gross domestic product, remains a major government objective, over and above achieving further fiscal surpluses.

The hypocrisy is stunning. The bureaucrats responsible for most policies are not only highly paid by any measure, they also enjoy all kinds of perks. Yet they demand that the rest of the population fend for itself. Those non-bureaucrats with influence have inherited their billions, yet seem to think they owe their wealth to hard work rather than good luck.

In practice, there are several easy ways to adjust income equality while balancing the budget - and without increasing the size of the civil service.

Here are some ideas:

Raise direct payments to the elderly - most of whom have worked very hard yet have seen their savings eroded by the near-zero real interest rates on savings deposits;

Provide large cash allowances, rather than income tax breaks, to all families with children under 16. (This would be an investment in future manpower);

Cut all income tax allowances for the top 20 per cent of salaries tax earners;

Enforce the minimum-wage law for domestic helpers;

Ease entry of highly skilled mainlanders and tighten restrictions on unskilled ones;

Introduce a minimum wage for locals - at, say, 50 per cent of the median wage for full-time work (HK$5,000 a month);

Introduce road pricing and spend the income on non-polluting public transport;

Reduce funding for elite semi-private schools (entry to which is usually through influence, and often through bribery) and spend more on improving the quality of public primary and secondary education;

And, cut taxes on gambling and cigarettes, the most regressive of all Hong Kong taxes. (This proposal will infuriate overpaid health academics and assorted do-gooders but would be a major benefit to lower-income groups).

None of these measures takes away from the need for the 'ability to pay' to play a larger role in health and housing policies. As an ageing society, more will have to be spent on health care and pensions provisions in Hong Kong, so any policy must focus on ensuring that those who can pay, do pay. It is time for the government to recognise its own role in income distribution, and take action.

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