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Hong Kong’s Tsang Gives Cash, Tax Rebates in Budget U-Turn

Hong Kong's Financial Secretary John Tsang
John Tsang, Hong Kong's financial secretary. Photographer: Dale de la Rey/Bloomberg

Hong Kong’s financial secretary caved in to protests over plans to bolster residents’ pension funds, opting to hand out cash and tax rebates that a week ago he said would stoke inflation.

John Tsang said he will give HK$6,000 ($770) to permanent residents aged 18 or above, abandoning a Feb. 23 budget plan to inject the same amount into their pension fund accounts after polls showed the government’s popularity slumped. The government also plans to give the 38 percent of the workforce that pays income tax a 75 percent rebate capped at HK$6,000.

“The fact that half a year of hard work preparing the budget can be thrown away and started again shows populism and not rationality dictates the policy-making process,” said Ivan Choi, a lecturer at the Chinese University of Hong Kong’s government and politics department. “The government will pay for the damage done to its integrity.”

Political parties attacked Tsang for failing to do enough to alleviate the impact of soaring food and housing costs. Asian governments are grappling with inflation fueled by rising commodity costs and capital flows from developed economies drawn by the region’s faster economic growth.

Tsang said when he announced his budget a week ago that battling inflation and getting ahead of a property bubble are his government’s main tasks this year. The cash handouts and tax rebates will cost the government about HK$40.5 billion, a government spokesman Patrick Wong said today. The pension handout was to cost the government HK$24 billion.

Pension Fund

The financial secretary said earlier that the pension plan was preferable because it benefited more workers and wouldn’t drive up prices. There was to have been no tax rebate for the first time in four years in the original budget.

Chief Executive Donald Tsang’s popularity “dropped sharply” and satisfaction with the budget “plummeted amid waves of public anger,” the University of Hong Kong said on its website, citing results from a poll conducted after the budget announcement.

The chief executive, the highest-ranked official in the Chinese semi-autonomous city, was yesterday assaulted at a public event by protesters who said he was ignoring the plight of the poor. Tsang has come under pressure from top leaders in Beijing over social discontent in Hong Kong.

Premier Wen Jiabao told him to address “deep-rooted contradictions” in society in December 2009. A year later, he told Tsang to improve living standards in the city.

Poverty Problem

The number of Hong Kong’s 7 million people living in poverty rose to a record 1.26 million in the first half of 2010, from 1.2 million the prior year, the Hong Kong Council of Social Service, an advisory body to the government, said in an Oct. 3 report. The wealth of Hong Kong’s 40 richest people grew 20 percent to $163 billion from $135 billion in 2010, according to Forbes Magazine in January.

Under the plan announced today, handouts will also benefit about 6 million residents, including housewives, retirees and other residents who don’t have a mandatory pension fund account.

“The immediate cash handouts will add to inflationary pressure in the city, as this will boost already-strong domestic demand and push up prices,” said Irina Fan, a Hong Kong-based economist at Hang Seng Bank Ltd., a unit of HSBC Holdings Plc.

Inflation accelerated to the fastest pace in 29 months in January, and the financial secretary forecast consumer prices this year will rise 4.5 percent, the highest level since 1997.

Lawmakers will vote on the budget proposal on April 13, the Legislative Council said on its website.

‘Should Do More’

The Democratic Party said earlier it will hold a demonstration against the budget on March 6 and other political parties including the Democratic Alliance for the Betterment and Progress of Hong Kong have said the government should have done more, including giving cash.

“We find this is the best way to respond to demands from residents and the most important thing for now is to strive for consensus,” John Tsang told reporters today.

The fiscal reserve will probably rise this financial year to HK$591.6 billion, or 34 percent of gross domestic product, the financial secretary said. The government will likely have a surplus of HK$71.3 billion by the end of March.

The Singapore government said last month it will give S$1.55 billion ($1.22 billion) in cash to all adult citizens as a “dividend” from record growth.

Singapore’s GDP expanded 12 percent from a year earlier in the most recent quarter, compared with 2.7 percent growth in the United States. Hong Kong’s GDP grew by 6.2 percent in the fourth quarter from a year earlier.

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