A Tale of Two Budgets
The gulf in quality of leadership at the top administrations between Singapore and Hong Kong was again illustrated this week by comparing the annual budget speeches of Tharman Shanmugaratnam in Singapore and John Tsang in Hong Kong.
Tharman is internationally respected for his strong intellectual grasp of financial and economic issues. Tsang is a run-of-the-mill, all-purpose Hong Kong bureaucrat with the vision to match. The former described the social and fiscal issues facing Singapore and made clearly defined efforts to address them. They may prove inadequate but at least they were a coherent attempt to address the issues of an aging population and the rise in inequality.
Hence Shanmugaratnam recognized the necessity of a modest increase in government spending to GDP, and the need to supplement directly from the government the incomes of lower income retirees for whom the return on their savings in the Central Provident Fund was inadequate. He was bold enough to address the equality issue head-on by raising the top rate of income tax from 20 percent to 22 percent.
Tharman also announced the need to bring all earnings, not just the dividends, of Temasek, the wholly-owned state investment company, into the revenue stream.
Over in Hong Kong, Tsang is facing rather similar problems as demand for health and social welfare spending is sure to keep rising as the population ages even more rapidly than Singapore’s – the two have had similarly low fertility rates for the past 30 years but Singapore has had a significantly higher immigration rate, and its huge number of workers with no right of residence provides a substantial subsidy to the citizens.
But rather than address long-run issues of income distribution and the future welfare needs of a population which had no compulsory savings plan – and that an inadequate one – Tsang chose the course of trying to buy popularity with one-off so-called “tax giveaways.” These totaled HK$32 billion, or 9 percent of revenue, but are only for one year.
These were supposed to provide a boost to an economy he claimed to have been damaged by last year’s Occupy protests. In fact there is scant evidence of any such damage. Indeed tourism increased 14 percent and consumption rose faster than exports. But the bigger problems with such one-off handouts are that they reflect a total lack of longer-term fiscal planning, and increase income inequality.
Of the total, half is to reduce the salaries tax which is anyway paid by fewer than half of households, and the main benefit will go to the top third of income earners. Another HK$7.7 billion is to provide a property rates holiday. Although there is a ceiling of HK$20,000, the biggest winners will be those owning their own property and bigger than 50 square meters.
Another concession for the taxpaying bracket is an increase in child allowances, costing HK$2 billion. Lower income groups benefit little if anything from this. It would be far more equitable to make direct cash payments for child support, and improve access to nursery schools and child care services. But the latter receive just HK$130 million more.
The whole budget is thus socially regressive and gives money to those who do not need it rather than directing it into funds specifically earmarked for future old age and health spending demands.
It is a budget that talks of “the utmost importance for the government to stabilize and broaden the revenue base,” but that does precisely the opposite. It calls for people to be encouraged to work till later in life, but meanwhile the government itself and related institutions like the universities, force retirement at 60 – except for the favored few top bureaucrats who continue in other roles.
It is a budget which mentions the urgent need for a third runway at Hong Kong International Airport at Chek Lap Kok and aims to start construction in 2016. But it makes no mention of how this project – estimated to cost upwards of HK$130 billion – is to be financed. It looks ever more likely that what should be private sector financed, like ports and telecoms, will become a government boondoggle presided over by civil servants with abysmal records of managing projects.
Tsang also slipped in a project for a de-salination plant to provide 5 percent to 10 percent of water needs. Quite why this is needed was not explained. Hong Kong used to have one but got rid of it when it abandoned the notion that the territory could survive without water from the mainland. Is there really such a water shortage in southern China that Hong Kong needs to spend billions and use scarce land for another one? Meanwhile the government does nothing to discourage waste of water by massively undercharging for it.
It is hard not to get the impression that this is another project of zero commercial viability which benefits vested construction and related interests and will be paid for out of government funds. The ready availability of money is as much a trap in government as in housing markets. Despite the giveaways in this budget Tsang is still forecasting a HK$36 billion surplus for the coming year which, if realized, would provide a platform for more megabuck spending on physical infrastructure when what Hong Kong – like Singapore – needs most now is raising the productivity of both capital and labor.
At a more modest level, the budget also contains a multitude of minor handouts to industries, ranging from moviemaking to fashion design to construction, all to be administered by bureaucrats with scant knowledge of the industries concerned. The construction industry has long had a training subsidy and the government also spends heavily on a Productivity Council. Yet Hong Kong’s construction industry is notoriously inefficient and high-cost. It pleads to import more cheap temporary labor rather than improve productivity.
In contrast to these multifarious schemes to help business by removing obstacles as suggested by various chambers of commerce, more helpful measures are limited to a proposal for a stamp duty waiver for private equity funds and the possibility of interest tax concessions for multinational treasury operations.
As for the broader economy, Tsang makes a forecast of growth this year of between 1 percent and 3 percent -- a very large target! But he also sees inflation continuing at 3.0 to 3.5 percent, a high number by current standards particularly given the strength of the US dollar to which Hong Kong’s is pegged. It is a recipe for problems.