Hong Kong's Budgetary Failure of Nerve

Hong Kong has a new chief executive, Leung Chun-ying, who promised many changes when he took office last July. But the first annual budget since he came to office shows that nothing has changed.

The government is stuck in a rut, dependent more than ever on land revenue and taxes of property and share transactions leading to large surpluses which it endeavors to spend in mostly unproductive ways. That is perhaps not surprising given that Leung kept on as his Financial Secretary John Tsang, a bureaucrat with a long history of budgets dominated by knee-jerk measures and devoid of strategic or even tactical thinking.

Faced with a surplus of HK$64 billion for the fiscal year ending March 31, Tsang has increased welfare and health spending significantly, which is badly needed and will be well received. But most of the budget measures to get rid of an embarrassingly large surplus have been one-off tax reliefs which undermine a long expressed desire to have more stable and predictable revenue sources. He is also greatly expanding capital spending which will reach more than HK$80 billion in the coming year, though most of this will go not on improving the quality of life in Hong Kong but in creating new roads, bridges and other heavy infrastructure likely to add to already dire pollution problems. This massive spending is partly justified by creation of "a large number of jobs which are particularly crucial in times of uncertain economic outlook." This is an absurd statement given the shortage of local labor willing to work on heavy construction projects.

Meanwhile improvement in the environment itself gets just HK$15 billion, mostly on a previously announced plan to subsidize the replacement of old diesel engines, despite the crying need for clean-up of the air, and addressing waste disposal and other issues.

Tsang's biggest tax relief is HK$8.4 billion in reduction in rates (a property tax based on nominal rental value). Rates is the most stable and broad based tax in Hong Kong and in principle should be more rather than less important. But dropping it temporarily is an easy way out for a government seemingly incapable of thinking coherently. It should be a base for reforming the tax system, not treated as an optional extra.

Tsang also repeated another give-away intended to make the government popular but which flies in the face of the energy-saving, anti-pollution measures that advanced societies are adopting. Instead, Hong Kong's bureaucratic leaders, stuck in a 1960s world, are to subsidize electricity with a handout to all households costing HK$4.5 billion a year.

All told with increased spending and cuts in revenue, the government is forecasting a small deficit in the coming year - but its forecasts are almost always very conservative and the chances are that revenue will be higher and spending lower than forecast.

The budget speech dwelled much on Hong Kong's aging population and the future demands that would place on health and welfare resources - all true enough. But there was nothing to help most young families: the middle and upper income groups get bigger tax allowances for children and education, but the majority got nothing. Nor was there any support for nursery and pre-schools - free in most developed countries which have replacement level fertility rates.

The government continues to claim that it is trying to stabilize property prices, recently introducing new taxes and controls on foreign and short-term purchase - though these probably only reduce transactions rather than prices. But anyway the budget projections show that the government expects revenue from land sales and premia on change of land use to continue to increase. There can be no stabilization of property prices unless interest rates rise or the government, which controls most land and determines land premia, is willing to see significant drops in and values. In reality it is not, partly because it is hooked on land revenue drug, and its multiple property owning leaders and civil servants like it that way.

In short, Hong Kong's 2013-14 budget is a depressing example of the lack of new ideas by officials to address today's issues. At the same time it betrays the growing tendency to want to meddle in areas which should be left to the private sector, offering little subsidies here and there, even claiming credit for the success of Hong Kong as a design and architecture hub, and creating more jobs for officials in bodies such as the government-owned HK Mortgage Corporation, a superfluous part of the financial system.