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