Great expectations

John Tsang has a real opportunity to close the wealth gap and address social needs with his budget

SCMP Feb 23, 2010

Executive Council convenor and aspiring chief executive Leung Chun-ying recently drew attention to the appalling statistic that since 1996, the economy has grown by 34 per cent but real incomes have fallen for 30 per cent of people. That is a good starting point for remembering that the role of a budget is not just to balance the books. It is to raise and spend money in ways that help the development of the economy and are seen to contribute to a just and harmonious society.

So Financial Secretary John Tsang Chun-wah has an opportunity now to show that this government is not simply the tool of the vested interests - represented in Exco by feudalists like Lau Wong-fat and in the Legislative Council by corporate constituencies - but will address the issues implied in Leung's remarks and reflected in the unpopularity of Donald Tsang Yam-kuen's administration.

The government will probably end this financial year with almost no deficit, compared with the HK$39 billion projected a year ago. But it can claim no credit for this outcome. Indeed, it underlines just how dependent Hong Kong has been on the stimulus policies of the rest of the world - notably credit expansion on the mainland and low-interest-rate policies in the United States, but including big budget deficits throughout the developed world, including Asian neighbours South Korea and Japan.

Government finances have improved faster than the economy due to stimulus elsewhere pushing up asset prices and turnover, increasing land premium income and the returns on fiscal reserves.

This outcome has underlined, yet again, how skewed the economy has become, rewarding the richest sector of the community and the government itself, and adding to the already huge income and wealth gaps. Meanwhile, government spending has become increasingly directed towards costly capital projects, which further fatten the wallets of contractors but offer very poor returns to the economy and a narrow range of employment opportunities. Grandiose concrete-pouring projects of the type favoured by mainland officials get priority over intelligent capital spending to make Hong Kong a cleaner, more attractive city to which the world will want to come.

Infrastructure spending this year is set to rise from 7.4 per cent to 12.4 per cent of public spending, at the expense of most other sectors. Social welfare and health, meanwhile, were to get a lower share of recurrent spending. Private construction, on the other hand, remains weak as a result of the government's preference for high land prices and developers' desire for high margins, at the expense of improvement and increase in the housing stock.

It is time to reverse these trends by focusing not on the low-paid generally - though a realistic minimum wage remains important. The focus must be on two groups. One is the old, the people who built the economy with their labour but are now living in abysmal conditions. Most have seen their savings eroded by negative real returns on savings deposits. There is every scope and justification to raise allowances generally and spend serious money to end the disgrace of cage homes and the illegal subdivision of crumbling buildings (many covertly owned by developers who flout the law with impunity).

To fund future payments as the number of old people increases, the government should pay HK$250 billion of the Monetary Authority's accumulated surplus of nearly HK$500 billion (which belongs to the community, not to HKMA executives) and HK$100 billion of the fiscal surplus into a fund for all old, long-term residents. This would act as a de facto pension system until such time as the Mandatory Provident Fund has been in existence long enough to provide meaningful retirement incomes. Some could be paid into MPF accounts, some set aside to fund annuities.

The other deserving group is at the opposite end of the age scale. Donald Tsang frets about the birth rate among permanent residents but it remains abysmal because of the extreme difficulty of raising children on a single income. Big child allowances in cash (not tax allowances for the middle- and upper-income groups) and provision of government-funded nursery care would be a small price to pay for a healthier birth rate and to relieve the huge social problems that are causing frequent family tragedies, particularly in remote, low-income estates. These could be readily financed by ending the electricity subsidy and phasing out rates and salaries tax concessions made last year, and by an increase in tunnel tolls and fuel taxes for all vehicles other than public transport.

At least in urban areas, travel by car is a luxury enjoyed by few but subsidised by a government that spends billions on roads but does not charge for their use. For the future, there should also be a tax of at least 25 per cent on power and gas consumption - a fair, easy-to-collect and environmentally desirable tax.

These tax measures would also broaden and stabilise the tax base - which the government claims to want. Meanwhile, higher land sales would keep prices under control and encourage private construction, which is at a very low ebb. The business, social and economic benefits would far outweigh any losses in capital revenue for a government with excess reserves.

Indeed, the list of things the government could do to reduce real income imbalances and improve the quality of life in Hong Kong is long. Complacent and overpaid top officials so far have simply lacked the will to act. Can John Tsang show he is made of sterner stuff? Or is he just a cipher for those Legco and Exco vested interests?

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