March 17, 2005

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Hong Kong Budget

It has already started. While most of Hong Kong's budget was drawn up well before the coup d'etat of recent weeks, it reflects one thing: Henry Tang's desire to be as uncontroversial as possible. This is despite Mr Tang having little chance of actually becoming Chief Executive in 2 years time, as is pointed out by Willy Lam's excellent Jamestown Foundation article. Tang is from Shanghai, which would have helped if Jiang Zemin remained in power but is a problem now President Hu and Premier Wen are trying to break up the Shanghai faction. The race for 2007 is for The Don to lose, although he's under notice the civil service unions.

So to the budget itself. Estate duty is abolished (but won't someone think of the lawyers and accountants?), but it was a costly and ineffective tax. No change to the punishingly high alcohol duty, but given Mr Tang's well-known overseas wine collection that's prudent politics and learning the lessons of his predecessor's fall. An increase in allowances for those caring for parents and those with kids will benefit a few while appearing to "do something". Booming receipts from land sales and taxes will bring the budget back into balance faster than originally expected. A couple of spending schemes to boost tourism and improve old buildings.

So to the problems. This was "an opportunity missed". The difficult issue of a sales tax has been pushed out until after 2007 and the next CE election. Instead the budget signals a return to the bad old days of relying on the property market. Land sales revenue is predicted to slowly rise over the next 5 years, even though this year it was 2.5 times higher than the original estimate. Property prices in this city are volatile. Basing Government expenditure on it is dangerous and why the deficit opened up in the first place. A rebounding economy is the best time to introduce a reshuffling of the tax base, with a broad-based GST along with increased welfare assistance and income tax cuts. But fear, timidity and a desire to be CE in 2007 put paid to that. Philip Bowring in today's SCMP is clearly not a fan of a GST and contradicts himself withing three paragraphs, lamenting the increase in property rates while suggesting further increases as an alternative to a GST. Jake van der Kamp laments the reliance on land sales income and the continued addiction to big infrastructure projects that pander to the functional constituencies.

But Henry Tang is just responding to the incentives presented to him. He wants to be CE, so no controversial GST. He wants to be CE, so continue to butter up potential electors who are also functional consituency representatives. He wants to be CE, so he tinkers at the edges and presents a business as usual approach.

We can expect 2 more years of this.

posted by Simon on 03.17.05 at 09:48 AM in the


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