Failing Grade: HK Leader Flunks Policy Test

Although Hong Kong Chief Executive Donald Tsang promised a “new direction” for the territory in his first annual Policy Address since being re-appointed for a five-year term in July, the details revealed in his two-hour long speech to the Legislative Council are widely regarded as more of the same.

The chief executive has performed the double-act of succumbing to both sectional business interest groups and the political priorities of Beijing. Most obviously he made no significant steps to address the two most evident local problems, pollution and the income gap. Indeed, other measures he announced could make them worse.

The most specific move was a promise that in the next budget, for the fiscal year beginning April 2008, profits tax would be cut by half a point to 16.5 percent and salaries by a similar amount to 15 percent. Rates had been raised during the period of fiscal difficulty following the Asian crisis so a reduction was widely expected now that the government enjoys a very large fiscal surplus.

However, the tax change hardly constitutes a “new direction,” merely an adjustment. It was claimed to be needed to enhance Hong Kong’s competitiveness, though there is scant evidence that it has suffered much from rates being lowered in some other jurisdictions.

The cuts also conflict with the government’s avowed aim of increasing stable earnings sources and relying less on the windfall gains from land sales and stamp duties on stock transactions which accompany asset price booms. The concession may look rather foolish by 2009 if stock markets and the global economy take a tumble.

These tax cuts, costing some HK$6 billion, will further increase income inequality as the high tax threshold means that most of the benefits will go to the top 20 percent of income earners, as well as local conglomerates enjoying high margins from oligopolistic markets.

Broader benefit will come from an extension of a temporary waiver of property rates (a form of tax) for the last quarter of 2007/08. But this seems mainly designed to prevent a sudden surge next year in the Consumer Price Index which has been cut by one percentage point this year by the rates waiver. Rates are also a very stable revenue source so a permanent reduction would again increase the government reliance on more fickle revenues.

Tax cuts did not mean that Tsang would curb spending ambitions. Indeed, he announced plans for no less than HK$250 billion of infrastructure investment. These include major highways and bridges and new rail links to the mainland as well as in the urban areas. They are supposed to be built mainly with private money, but several of them appear to have very doubtful economic value at a time when Hong Kong’s role as a port is stagnating as traffic moves to mainland ports, and when its own population is increasing at a slow and diminishing rate.

Yet despite the actual demographics, Tsang wants the population to almost double. There are provisions for new towns to house another 6 million. But where will they come from given that Hong Kong has the world’s lowest birth rate — less than half the replacement level — unless a huge influx from the mainland is allowed. Is this Tsang’s ultimate goal, doing the bidding of Beijing to speed up integration by allowing an influx of mainlanders to keep his job at the expense of Hong Kong peoples’ interests?

Tsang own mindset is anyway still stuck in an earlier era of physical construction when progress was measured in terms of volumes of concrete poured than the needs of a service economy which needs to be focused on high value added skills. The mindset is reinforced by the demands of the property and construction sector – the main contributors to his “election” campaign — and by the need to appear patriotic by spending heavily on links to the mainland, including a new, high speed rail to Guangzhou.

He also justified this massive infrastructure spending on its job creation impact. This is the same futile route that Japan took, building huge roads to tiny places to please rural voters and construction (and yakuza) interests. In Hong Kong’s case it is particularly stupid as it will lead to an influx of temporary construction workers from overseas as well as the mainland but do nothing for the vast majority of unskilled local workers unfit for the construction industry.

Extension of the urban rail network may reduce pollution from road transport. But Tsang is anyway determined to encourage car ownership by building yet more highways at a time when advanced cities elsewhere in the world, such as Seoul, are moving in the opposite direction.

He did make some noises in the direction of the environmentalists but there was scant sense of urgency about tackling locally generated air pollution from power stations and vehicles at a time when drastic action is clearly needed, not only for public health reasons but to keep high value service industries such as fund management from moving to cleaner climes. That is as at least as important as tax cuts.

If environmentalists were disappointed, so too were those expecting serious action to reduce poverty. He again backed away from a minimum wage merely suggesting that legislation might be needed if the corporate sector did not meet government pay guidelines. Meanwhile a select group of private-sector companies, including New World and Cheung Kong, have been chosen to help establish small scale enterprises to employ and provide services to the disadvantaged. These are the very same groups which use private subcontractors to escape government guidelines on minimum wages for guard and cleaners.

A few other sops to middle and lower income groups were on offer but their total cost is a fraction of that of the tax concessions to business and higher income groups. A voucher scheme to cut health costs for the elderly is to be introduced but has been widely dismissed as miserly. Extension of free schooling to 12 years was welcome but poor families still struggle with paying not just for books but for school air-conditioning!

Nor was there any suggestion of investing the billions of surplus into homes for an aged population. Numbers over 60 will rise by 250,000 in the course of Tsang’s term, reaching 19.2 percent of the population by 2012 and 23 percent by 2017. Nor is there much incentive which would encourage a higher birth rate –— supposedly one of Tsang’s earlier priorities — such as child care facilities, maternal leave allowances etc.

As for initiatives to enhance Hong Kong’s role as an international centre they were thin on the ground. Years after Islamic finance became significant and long after London and other non-Islamic centers had rules governing it, Hong Kong’s myopic bureaucrats have just discovered it.

Indeed, Tsang seems to have almost abandoned the idea that Hong Kong should be an international city on its own account. Eager now to pander to Beijing as he once pandered to his colonial masters and to the Pope, he now urges Hong Kong to see its future in terms of capitalizing on the strength of the motherland as though there were not a vast number of businesses, particularly in the high value added services, which owe little or nothing to dealings with the mainland.

In short the Policy Address makes depressing reading for those hoping to see Hong Kong modernize its thinking and its leadership, and reduce the collusion between government and big business at the expense of the community. This is neither a blueprint for the “harmonious society” goal of President Hu nor a city in the forefront of the world.