FINANCIAL SECRETARY UNDERCUTS SUPPORT FOR HIS

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 000501

SIPDIS

STATE FOR EAP/CM, TREASURY FOR OASIA

E.O. 12958: DECL: 03/17/2019
TAGS: ECON EFIN PGOV PREL HK
SUBJECT: FINANCIAL SECRETARY UNDERCUTS SUPPORT FOR HIS
BUDGET

REF: HONG KONG 343

Classified By: Consul General Joe Donovan, Reason 1.4 b/d


1. (C) Summary: Hong Kong economic and political observers
have differing views of the Hong Kong budget Financial
Secretary John Tsang presented February 25. Economic
analysts applauded the government's probity and willingness
to "focus on the little things" as the forces buffeting the
global economy are beyond Hong Kong's control. But political
analysts noted the public's disappointment at the absence of
initiatives targeted toward small and medium enterprises
(SMEs) and the relatively small tax rebates announced in the
budget speech. Secretary Tsang has not been an effective
advocate for the government's spending plan, in turns
dismissive and defensive as critics charge that the
government isn't doing enough. The Financial Secretary's
public approval ratings have fallen to their lowest levels
since he took office in 2007, bringing support for the budget
down with them. End Summary


2. (C) Comment: The Hong Kong government has proven once
again that its technical skills surpass its political acumen.
In fact, public criticism of this budget as too stingy is
not particularly well-founded. Government spending is up
sharply over 2007 and is just below last year's record
budget. The government's sizable fiscal reserves have
allowed Hong Kong leaders to move quickly and repeatedly in
the past six months to provide additional support to banks,
SMEs, and savers. Given the seriousness of the current
economic crisis, its uncertain duration, and Hong Kong's
inability to affect global markets, the Hong Kong government
is sensibly seeking to husband its resources carefully while
doling out some assistance to the most vulnerable. The HKG
has not, however, done a good job of making the public case
for its cautious approach. As housing values and stock
portfolios shrink, unemployment increases and the economy
contracts, the public is eager for reassurance. Financial
Secretary Tsang's unsympathetic comments have failed to
provide that and have undermined public support for what
appears to be a sensible and responsible budget. End Comment.


3. (U) The Financial Secretary's annual budget speech is
closely watched in Hong Kong. With trade volumes down more
than 20 percent and unemployment creeping up to over 5
percent, Hong Kong residents watched more closely than usual
for the government's response to increasingly bad economic
news. Tsang's budget contained measures to create 62,000 new
jobs and internships over the next three years, promised
increased spending on infrastructure and building
maintenance, and offered new initiatives to facilitate
creation of a Hong Kong government bond market and allow Hong
Kong to sign double taxation agreements. Tsang also promised
reduced property taxes for the first two fiscal quarters of
2009 and a 50 percent reduction of the salary tax, up to a
limit of HKD 6,000 (US$ 775).

=================================
Economists Praise HKG's Restraint
=================================


4. (C) Economic and political analysts offered differing
assessments of Tsang's budget plan. UBS Bank Economist Sean
Yakota praised the government's fiscal restraint in the face
of pressure for additional spending and the focus on small
projects to benefit some of Hong Kong's lower income
residents. He noted that Hong Kong's exports account for 30
percent of all economic activity. If exports, down over 20
percent from the previous year for the past several months,
remain at current levels, Hong Kong's 2009 GDP will be at
least six percent smaller than it would be if exports
remained at last year's level. Government spending alone
cannot cover this gap, he said. Yakota was disappointed that
that budget did not contain any measures to help reorient
Hong Kong's economy away from its reliance on exports.


5. (C) The slower pace of economic activity is projected to
drive down government revenues for the next several years.
In the long-term, the Hong Kong government should move to
more stable sources of income, like a consumption tax, said
Yakota. Fortunately, Hong Kong has adequate fiscal reserves
to fund additional government spending as the need arises.
But the government is wise to "keep its powder dry" as it
waits to see where the most urgent needs appear over the next
two to three years, he said. Hong Kong proposals to issue
bonds and revise exchange of tax information regulations are
just public relations projects so the government can show
they are doing something, said Yakota.


HONG KONG 00000501 002 OF 003


========================================
Public Wants Responsive, Not Responsible
========================================


6. (C) South China Morning Post columnist Chris Yeung
offered a different perspective. Yeung noted that the
immediate public reaction to the budget had been decidedly
lukewarm, with 43 percent of respondents in a Hong Kong
University survey saying they were only "half" satisfied.
Support for the budget has continued to drop as press and
political commentators have begun to criticize specific
measures in the bill. Yeung contrasted the public reaction
in 2009 to that of a year ago, when public support increased
from 53 to 59 percent in the days after the budget address.
The public was hoping for more benefits from the government
again this year, he said, particularly in the area of tax
cuts and rebates.


7. (C) Yeung expected that Hong Kong political parties would
seek weaknesses in Tsang's budget as a means to increase
their own visibility and popularity. The pan-Democrats have
led calls for additional increases in public spending during
the economic downturn, pointing out that government spending
regularly topped 20 percent of GDP during the last economic
slowdown from 1998-2004. Increasing public expenditure from
the current projection of 19.4 percent of GDP to 20 percent
would add another HKD 10 billion (US$ 1.3 billion) this year
without significantly affecting Hong Kong's stock of fiscal
reserves, currently worth about 18 months of government
spending. Political parties have been less helpful in
identifying credible uses for the additional funds.


8. (C) Yeung noted that some are also criticizing the
absence of specific measures in the budget designed to help
SME businesses cope with the economic downturn. (Note: SMEs
received some benefits in the form of a government program to
guarantee 70 percent of eligible bank borrowing in the Chief
Executive's November 2008 Policy Address. End Note.)
Measures to support building renovations for elderly tenants
and homeowners will be politically popular, as will
additional spending on health. Given that they do not have
the ability to reverse global economic trends, the crucial
mission for the government, said Yeung, is to be seen as
being responsive, not responsible. The government still has
significant fiscal reserves, and he expected additional
spending or tax cuts to be announced later in the year.

======================
No Sympathy From Tsang
======================


9. (C) Financial Secretary Tsang has seen his public
approval ratings drop from a high of almost 68 percent after
the 2008 budget announcement to below 50 percent today.
While a portion of this drop can probably be attributed to
public concerns about the economy and disappointment that the
government did not sweeten the budget with additional tax
cuts, Tsang's responses to the inevitable public criticism
haven't bolstered support for the budget or for his
leadership. Political commentators have charged Tsang is
insensitive to the needs of the middle class, seizing on his
remarks that students should be thankful for internships
paying HKD 4,000 (US$ 525) per month and his call for white
collar workers to dip into their savings if they need
financial help.


10. (C) Tsang has not helped his case by appearing defensive
in his subsequent public statements on the budget and
economic situation. In a March 9 speech to several Chambers
of Commerce in Hong Kong, instead of explaining the rationale
behind the government's spending plan, Tsang used the
platform to lash out at critics who accuse the government of
lacking boldness. The Financial Secretary ticked through the
list of recent government spending and support programs,
including temporarily providing 100 percent deposit
insurance, loan guarantees for SMEs, and new spending on
education and social services. He noted that the HKG has
announced five times in the past year new programs to support
job creation, cut taxes and increase public spending.


11. (U) Tsang insisted that the worst effects of the
financial crisis have yet to materialize. The prospect of
even tougher times ahead argues for caution and supports the
need to hold back reserves for later, when additional
spending needs may become clearer. He noted that his 2009
budget is actually 20 percent larger than Hong Kong's 2007
budget. While the government budget was HKD 13 billion (US$
1.67) larger last year, it was slightly smaller as a
percentage of GDP (19.2 percent) than this year's plan.

HONG KONG 00000501 003 OF 003


Tsang promised that additional spending measures would
follow, as needed.
DONOVAN