Is Tsang the best financial secretary HK can find?

Incoming chief executive C.Y. Leung announced his new government line-up yesterday, and John Tsang Chun-wah is to stay on as financial secretary.

“In the coming few years, the economy of our globalised world will be undoubtedly clouded by uncertainties and volatilities,” Tsang said. “We in Hong Kong will face unprecedented challenges.”

You have to wonder what he’s blathering about. Hong Kong’s economy has experienced nothing but uncertainty and volatility for the last 15 years.

Within a year of the handover both the stock and property markets had plunged 50 per cent. Then in rapid succession we had the dotcom boom and bust, Sars, and the financial crisis.

Still Hong Kong prospered. So there is nothing either unprecedented or unusually challenging about the near future.

Even so, doubtless C.Y. wants a steady pair of hands on the city’s financial tiller, and looking at Tsang’s record, he obviously thinks the bewhiskered one is the right man for the job.

That makes me wonder if C.Y. has really looked closely enough at Tsang’s performance.

As financial secretary Tsang likes to talk up his prudent management of the city’s public purse. Yet in his latest budget speech delivered in February he boasted that “for my five budgets, I have increased government expenditure by nearly 70 per cent. This exceeds GDP growth of 21 per cent for the same period”.

It’s that sort of budgetary prudence that got Europe where it is today.

In one sense, however, Tsang has been overly conservative. Every year since his appointment, Tsang has forecast a budget deficit. And, as the first chart shows, every single year, including the crisis year of 2008-09, the government actually turned in a surplus.

On average since he started the job, Tsang’s initial budget forecasts have been wide of the mark by an astonishing HK$64 billion. On that form, the HK$3.4 billion deficit he is forecasting for the current fiscal year will end up as a HK$61 billion surplus.

Conservatism in budget forecasts is all very well, but this is over-egging the tart on a grand scale. Tsang’s inability to make accurate forecasts and his repeated prediction of deficits when he actually generates fat surpluses hampers the administration’s ability to make long-term fiscal plans and ends up sucking money out of the economy in the form of excessive government reserves.

Of course, Tsang has given some of that money back to Hong Kong’s people. Declaring last year that “fighting inflation is our major task” he announced a set of one-off measures intended to alleviate the pressure of rising prices on ordinary households.

These included a rent holiday for public housing tenants, a rate waiver, and a subsidy for household electricity bills. The overall cost came to some HK$17 billion.

In fact, these measures were hardly original. They simply reinstated earlier anti-inflation efforts dating from Tsang’s debut budget in 2008. Most were rolled over again this year.

Now, at this point anyone with even the most rudimentary knowledge of economics will protest that you can’t fight inflation by throwing money at the problem.

And as the second chart shows, he or she will be absolutely right. The blue line shows Hong Kong’s official headline inflation rate ever since Tsang’s first budget took effect. The red line shows the underlying inflation rate after stripping out his relief measures.

The most obvious effect of Tsang’s inflation-fighting efforts is that they have merely made Hong Kong’s inflation rate more volatile.

But their impact on overall price rises has been doubtful at best. Looking back over the last three years, we find that the average inflation rate after Tsang’s anti-inflation measures has been 3.3 per cent. Without them, it would have been slightly lower at 3.1 per cent.

In other words, as financial secretary Tsang has been spending some HK$17 billion a year to no good effect whatever. Unfortunately, C.Y. appears to think that makes him ideally qualified for the job.

tom.holland@scmp.com