CONFIDENTIAL
1
HONG KONG: HANDLING OF THE ECONOMY
Summary
The Hong Kong government's ability to manage the economy has appeared weak as it reversed taxation increases in response to vocal lobbies and an increasingly assertive Legislative Council which it previously guided to concensus decisions. The BCCI affair looked poorly handled and created panic runs on major banks. The budgetary position to 1997, including expenditure on PADS is manageable although taxation may have to rise to maintain an adequate reserve position. The outlook which is largely determined by confidence factors and growth in China promises higher growth than the last two years despite recent upheavals.
Background
Government indecision was highlighted in May when tobacco tax increases announced in the March budget were halved to 100 per cent. Although portrayed in the media as an unprecedented cave-in to an increasingly politicised Legislative Council, pragmatic considerations of increased cross-border smuggling supported the policy reversal.
Indirect taxes in the government budget also contributed to а renewed surge in inflation which peaked at
inflation which peaked at 13.9 per cent in April. At the end of May a package of counter-inflationary measures were announced which included a one point increase in interest rates to curb property speculation and a freeze in government charges.
However inflation is not fundamentallly a symptom of poorly timed tax increases. A tight labour market, with unemployment at 2.4 per cent in the three months to May, has pushed up wages (after inflation) at an annual rate approaching 10 per cent. Criticism of public sector wage increases need to considered against the backdrop of economy-wide increases in pay. Importation of labour, which could reduce labour market pressures, has been
has been tightly controlled, although there are signs of increased flexibility relating to the labour demand for major construction work on the port and airport developments.
to
1997,
OMIT Plans for government expenditure and revenue
incorporating capital expenditure for PADS appear sound. Budget surpluses are expected over the next two years supported by further increases in taxation in 1992/93. The level of fiscal reserves is projected to be above the required HK$ 25 bn in 1997 with some additional leeway for expenditure increases built into the projections.]
The closure of BCCI two days after government assurances that deposits were safe did not inspire confidence in the banking system or its regulators and panic runs on Citibank and Standard Chartered ensued. Whilst the authorities coped well with a mini- crisis of its own making, questions over the adequacy of banking
CONFIDENTIAL