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HONG KONG DEMOCRATIC FOUNDATION

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Proposals for 2009/10 Budget

The Honourable John Tsang Chun-wah, JP
Financial Secretary
Financial Secretary's Office
Government Secretariat
5/F, Central Government Offices, Main Wing
Lower Albert Road
Central
Hong Kong

5 February 2009

Dear Mr Tsang,

Proposals for 2009/10 Budget

We are writing to submit our proposals for your 2009/10 Budget.

The key factor to consider in formulating your budget is the global financial crisis and recession. So far Hong Kong has, fortunately, been spared the worst effects of the crisis. However, we must be prepared for a possibly prolonged downturn in the economy. As conditions likely worsen in the coming months, with unemployment and business failures rising and fresh turbulence in the financial markets, it will be important for your budget to sustain a message of hope. In this regard, the budget should not only address the coming year, but also paint a medium and longer term strategy.

We would like to make the following points for your consideration.

Favourable starting point. Unlike the major developed economies, Hong Kong enters the global crisis in relatively good shape. Fiscal reserves are very high, and government indebtness is negligible. The banking sector is sound. Under the linked rate mechanism the Hong Kong dollar is stable. In contrast with 1998, there are no major distortions in the economy, for example, no housing bubble. Nor is the corporate sector over-extended. Accordingly, the present crisis can be approached with a degree of confidence.
Dependence on external conditions. As a small, externally-orientated economy, Hong Kong cannot avoid the global recession. A fiscal boost is appropriate (see 3 below), but there are limits to what it can achieve. Under the linked rate mechanism, monetary measures are not an option (although fortunately US monetary policy, to which Hong Kong is bound through the link, is appropriately loose). So Hong Kong cannot lift itself out of the recession unaided. Nonetheless, because the economy is relatively free of problems (see 1 above), once external demand recovers Hong Kong could well bounce back.
Need for fiscal boost. Notwithstanding the favourable factors outlined above, risks and uncertainties remain. There is the risk of overshooting if the private sector cuts back spending too much, which would in turn lead to a self-fulfilling downward spiral. It should also not be overlooked that this is a global financial crisis and Hong Kong has a large financial sector. In fact, Hong Kong is a financial entrepot, highly dependent upon overseas players. Quite possibly many of these players will collapse or withdraw from Hong Kong in the coming months, with major impact on the local employment, business supply and property markets. Therefore, there is a need for government to act to maintain at least a minimum level of demand, while preparing for further intervention if necessary. Such fiscal boost would of itself be mildly inflationary; however, since we are facing deflationary pressures and decreasing demand, the impact would be benign.
Nature of boost. The boost should be gauged so as to have immediate effect on spending. Infrastructure spending does not meet this criterion, since it takes time to roll out projects. Moreover, much of the spending on infrastructure ‘leaks' into imports - of materials, foreign consultants and labour, etc. In the developed economies, tax cuts have been employed. However, in Hong Kong, the bulk of taxation is paid by the middle class who are likely to save most of any rebate they receive. The need is to channel the money to the poorer sectors of our society who are more likely to spend it, and spend it on local goods and services. Moreover, these are the people most vulnerable to the crisis.
Amount. The IMF recommends that all economies which have the resources to do so launch a fiscal boost equivalent to 2% of GDP. This would be about HK$34 billion for Hong Kong.
Other measures. In contrast with other developed economies, Hong Kong has rather minimal spending on welfare. There is, for example, no unemployment benefit, and no universal pension. Both indigent elderly and unemployed people are eligible for CSSA payments, but only about one quarter of the persons entitled to CSSA payments actually claim them. We recommend that,
- Consideration be given to the immediate introduction of a temporary unemployment benefit, say for six months, for lower paid workers (e.g. those formerly earning less than HK$10,000 per month). The scheme could run for a fixed period of time, say 2 years, and would not be means-tested, i.e. it would be a right. In the meantime, detailed study should be conducted of the need for and feasibility of, a permanent unemployment benefit as a right for all workers on a contributory basis.
- At the same time, consideration should be given to the introduction of an Establishing a Future Fund as a financing option for old-age pension scheme, if necessary on a means-tested basis, to provide a safety net for the indigent elderly. The Mandatory Provident Fund scheme is building up funds for the current workforce, but it is insufficient in amount and too variable in returns to provide adequate coverage. Moreover, it is not available to those who are presently old.
- Spending on district improvement projects (each district council to come up with ideas, to be funded by a central budget).
- Spending on environment improvement projects, e.g. introducing LPG cars (for which supporting infrastructure such as LPG filling stations is needed).
- Renovation of older housing stock.
- Reduction of class sizes. (Medium to long term.)
- Consider privatisation of part of public rental housing to tenants for a small sum (e.g. 10 years worth of rent). This would represent a big one-off transfer of wealth to many less-well-off, generating energy for the economy (e.g. collateral to start a small business) and good business for the banks. Need to consider arrangements for estate management, and also what to do with tenants who opt to continue renting.
A New Deal. Measures such as the above should be crafted into a short, medium and long term strategy. The aim should not be just to restore economic status quo, but to effect structural change so as to help long term vitality of the economy as it transits to more knowledge-related activities.
Other tax measures: We recommend making no dramatic changes to the tax system. Resources should not be wasted on tax reductions or rebates. Certainly, no new taxes should be introduced.