Friday, February 21, 2014, 10:55
Focus HK: Bitter pill may replace budget sweeteners
By Oswald Chan

Focus HK: Bitter pill may replace budget sweeteners

The Hong Kong government is expected to cut back drastically on financial candies and other sweeteners in its budget for the coming year, as the city bears down on what could turn into a structural fiscal deficit. As Oswald Chan reports, the government’s decision could cost the government a heavy political price with an already alienated public.

Fiscal measures to mitigate the burdens on ordinary people — the so-called “sweeteners”, have become habitual for Financial Secretary John Tsang. The candies have been doled out in every Budget announcement he’s made since 2008 — the year financial misdeeds by the world’s banks shattered the global economy.

In recent years the government had the “powder” to hand out sweeteners when revenues soared above expenditures. Prudent fiscal and conservatism in setting out forecasts, led to an extended period during which government revenues always exceeded government expenditures.

This year, however, could mark the start of a new era, and an end to government largesse. The sharp rise in social welfare spending promised by Chief Executive Leung Chun-ying in his mid-January policy address, touched off fears that structural fiscal deficits might evolve as the government took on more and more recurrent expenditures, and more people became eligible to become beneficiaries of the government programs.

Fiscal package to shrink

“Those one-off sweeteners are counter-cyclical defensive precautions against the unstable global economy so that the government should gradually withdraw these measures when the global economy stabilizes,” Financial Secretary John Tsang said on his personal webpage in early February.

“Judging from the current situation, that day is coming soon,” he reckoned.

Tsang added that the local community is too closely focused on the magnitude of the one-off sweetener measures, paying less attention to the long-term measures to boost the city’s economic competitiveness. He also noted that a structural fiscal deficit would bring far-reaching effects on public finance management so that any structural deficit must be strenuously avoided.

The government introduced fiscal stimulus measures worth more than HK$200 billion ($25.8 billion) since 2008, including one fiscal package worth HK$33 billion last year.

Hang Seng Bank predicted the government will trim the package of one-off handouts and tax concessions unveiled in budgets over the last few years. The bank predicts the size of the entire fiscal package will shrink drastically, from HK$33 billion last year to around HK$5 to 7 billion this year.

The government has launched various targeted measures aimed at offsetting higher living costs and alleviating burdens on middle-income and grass-roots families: public rental waivers, the electricity subsidy and tax concessions.

“A scale-down of the fiscal package is likely in the coming Budget announcement,” Hang Seng Bank Economist Ryan Lam said in the bank’s Hong Kong Economic Monitor report. “Resources freed up will be directed into healthcare and social welfare spending that will provide a mild boost to domestic consumption.”

“The government should remain prudent in the upcoming budget and should gradually reduce those sweeteners, as Hong Kong still faces many global economic uncertainties and expected increased in government recurrent spending,” Ernst & Young (EY) Hong Kong and Macau Managing Partner Agnes Chan says. “Fiscal resources saved can be diverted to provide other specific measures that can be more effective to help the middle class and grass-roots public.”

Long-term plan needed

The Hong Kong government is facing a dilemma here. If the administration really retrenches its sweetener measures, it should simultaneously offer a long term visionary plan on how to stimulate the city’s economic competitiveness. Otherwise the general public may feel disgruntled when the government is sitting on a huge fiscal reserves of over HK$700 billion but declines to give more sweeteners while simultaneously proves unable to bring a long-term perspective to bolster future economic growth.

Yet the government at the moment seems more likely to retrench sweetener packages. It is not clear whether it will introduce long-term policies to enhance the city’s competitiveness.

“The administration always fails to provide a clear roadmap to enhance the city’s economic competitiveness, and actually I do not expect it can do that in the coming Budget announcement,” Chinese University of Hong Kong’s Faculty of Business Administration Senior Lecturer Simon Lee tells China Daily.

“The scenario (when the government slashes sweeteners without accompanying clear long-term visions for the city’s economy) will very likely happen, and then the administration may encounter more political pressures,” Lee cautions.

“In this case, the middle class especially will be infuriated, even further. Though they may not express their discontent immediately after the Budget announcement, they may pour their anger out on the government when there are new social issues fueling their discontent.”

Focus HK: Bitter pill may replace budget sweeteners

Tax refunds proposed

Jennifer Wong, a tax partner at KPMG, says the government should not tackle the problem in short-term perspective (through giving sweeteners) just to ease political pressure.

“Among the over HK$700 billion fiscal reserves, the government only is really free to spend around HK$400 billion after excluding the amount set aside for dedicated funds, which approximately equals 14 months of government’s recurrent expenditure. The government should tell the public that the government really is not sitting on a file of cash,” Wong cautions.

“Moreover, the aging population issue in Hong Kong in the future also highlights the importance of accumulating sufficient reserves for the administration to meet expected jump in recurrent expenditures.”

The convener of the middle class advocacy group, 107 Momentum, Raymond Ho says, as local economic growth steadies, the government should not give more sweeteners to the grass-roots segment. It should give more tax refunds to the middle class, he argues and relieve their living burdens while at the same time, stimulating more economic activity in the city.

Even grass-roots advocacy groups do not consider it necessary to give out many sweeteners. “Those measures such as tax concessions, public rental waivers and the electricity subsidy really cannot help the working poor very much. Instead, the low-income working family allowance proposal and a relaxed threshold for the working poor to rent private residential flats can really help this population segment to improve their living standards,” says Ng Wai-tung, a community organizer at Society for Community.

Other accounting professional bodies hope the government will continue to hand out sweetener measures specifically targeting the middle class, as that group was relatively neglected in the Policy Address in mid January. (See Table)

Ernst & Young estimated its proposed relief measures targeting the middle class should cost the government HK$17.9 billion and the government should have the ability to pay that bill while its revenues are still higher than expenses.

The above recommendations are targeted at alleviating the financial burdens of the local middle class, whereas these middle-aged wage earners have to endure tremendous financial pressure in repaying their mortgage debts, paying for their children’s exorbitant education expenses and giving monetary assistance to their parents.

Contact the writer at oswald@chinadailyhk.com

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