Hong Kong's Budget Blues
Around the world, governments are feverishly trying to reverse unprecedented sharp declines with huge increases in immediate public spending. China has even taken a lead. But the bureaucrats who administer (not govern) its Hong Kong territory have come up with a budget for the coming fiscal year beginning April 1 that is remarkably only in its determination to employ more civil servants and fund politically-inspired road and cross-border infrastructure projects whose economic benefits for Hong Kong have not been proven.
In sum the government’s budget shows a deficit for the coming year of HK$39 billion or 2.4 percent of gross domestic product – roughly half the level that economists have been suggesting is needed if the public sector is to have any significant impact to offset the steep decline in trade and financial services and their knock on effect on non-essential consumption. Even the 2.4 percent is overstated as it includes a loan repayment of HK$3.5 billion.
The scrooge mentality of the highly paid, jobs-for-life bureaucrats is most starkly illustrated by the Social Welfare budget. At a time when the population is aging rapidly and unemployment is rising sharply, the government estimates that in real, inflation-adjusted terms its recurrent spending on this sector will fall by 4 percent to $39 billion. Yet already unemployment has risen to 4.6 percent from 3.2 percent in mid 2008 and is expected to keep rising at least until mid-year. Meanwhile expenditure on infrastructure will rise by 57 percent to $39 billion.
Infrastructure spending has limited short-term impact and in the longer run is more of a drain on the budget as spending commitments are mostly for several years whereas tax cuts and consumer subsidies can be made temporary and withdrawn when the economy picks up. The infrastructure surge dwarfs recurrent expenditure which will rise by a mere 0.9 percent.
So much for talk of stimulus.
The government is continuing a property rates reduction and electricity subsidy introduced last year. But even this does not count as additional stimulus. On the tax side, the only significant measure is a salaries tax reduction capped at HK$6,000 per taxpayer. But even this helps only the top 40 percent or so of the population with incomes sufficient to be income tax payers. For 30 percent of those paying tax the benefit will be less than HK$500. Meanwhile a doubling of already high tobacco taxes, supposedly in the interests of public health, will mainly hit low income households where smoking is also most prevalent. It will also ensure a huge rise in smuggling.
Nor is there any short term relief for small businesses which have to pay provisional tax based on the previous year’s profits, not the actual level being experienced at a time when shop and restaurant turnover has fallen steeply, pushing many businesses close to the wall.
Instead of using the government’s fiscal strength to boost consumption, the Financial Secretary announced a slew of mini schemes which will supposedly help employment and encourage the development of science, arts, sports etc. But the sums involved are mostly small and will require lots of additional civil servants to implement them.
The big infrastructure spending increases will benefit some – mostly mainland – construction companies but will draw heavily on imported labor rather than creating jobs for the middle aged and predominantly female former factory workers and clerks.
While big public road and bridge projects get lots of money, private sector construction in Hong Kong remains at very low levels as both government and major developers are more interested in keeping land prices at exorbitant levels than letting land prices fall to levels which would create new demand for housing.
The budget makes some nods in the direction of green issues but is more about studying the issues – electric cars are this year’s focus -- than taking strong measures.
Even assuming that the deficit is as large as predicted, by the end of the coming fiscal year the government will still have some $350 billion in fiscal reserves -- 18 months of total spending – plus a similar amount of undistributed profit held by the Monetary Authority and which should be handed over to the fiscal reserves.
In short, there are few governments in a better position to engage in domestic demand stimulation – huge fiscal reserves, a large current account surplus in the balance of payments, and a stable currency. But its weak-minded bureaucrats, headed by lifetime civil servant Donald Tsang, have failed both their own community and a wider world needing consumption stimulus.
The government’s own forecast is that GDP will fall by 2-3 percent . That seems a reasonable enough guess, but it could be worse, in which case the budget will look even more timid.
As for last year, the government reported GDP growth of 2.8 percent. But half of that was illusory. It relied on the GDP deflator rising by only 1.4 percent or almost half the domestic demand deflator which was up 2.7 percent. This divergence was caused mainly by a deterioration in the terms of trade (export prices compared with import prices). In other words an actual loss of income is translated into a notional gain!