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[Andy Mukherjee] Hong Kong’s helicopter money struggles for lift

If you’re raining cash on people and want them to spend it, you have to convince them that the benevolence is being financed by printing money. Nobody wants to worry about being taxed more in the future.

These things are going to be problematic for Hong Kong Financial Secretary Paul Chan. He plans to give away 10,000 Hong Kong dollars ($1,285) to every adult permanent resident to blunt the economic impact of the coronavirus, but since he can’t conjure money at will, he’s being asked if the city will consider a consumption tax to make such giveaways more than just a one-time palliative. That’s the last thing the receiver of gifts wants -- being made to pay for them.

The liberal handout is seen by some analysts as a weapon that even large economies could deploy to fight the corrosive effects of the disease on supply chains and consumer demand. Global interest rates are too low to cut much further. And since governments never have enough shovel-ready projects to quickly ramp up spending, it’s perhaps best to give people cash to stimulate activity, especially when the virus itself can hinder mobilizing men and materials.

Even so, Hong Kong isn’t a global exemplar of a money-financed tax cut. “Helicopter money,” as economist Milton Friedman evocatively termed it, requires monetary and fiscal policies to work together. But since Hong Kong pegs its currency to the US dollar by forsaking its own monetary policy, it doesn’t have a chopper to send up. People will expect the HK$71 billion bill of Chan’s largesse to eventually come to them, to be settled by drawing down the city’s HK$1.1 trillion of accumulated fiscal wealth.

That may see off the current challenge. But what if such handouts become more permanent because of a prolonged downturn? As one of the world’s top financial centers, Hong Kong can’t deplete its wealth and risk its high credit rating. Hence, when transfers from the government start hitting their bank accounts this summer, the 7 million people who get them won’t be able to shake the feeling that they’re loans, to be returned one day via higher taxes. Should they save some of the money, then, and defeat the whole point of Chan’s bounty?

The rich Asian city doesn’t tax consumption, and charges a maximum rate of 17 percent on incomes. Its fiscal dependence on land premiums and stamp duties (and hence, property prices) is a millstone. Rival Singapore is also opening its purse strings to fight the coronavirus. It has a better-diversified revenue stream, including a more progressive income tax (top rate of 22 percent), a 7 percent goods and services tax that’s set to rise to 9 percent by 2025, casino levies and contributions by its sovereign wealth fund and state investment firm.

Hong Kong is hemmed in. Chan is predicting a record budget shortfall of HK$139 billion for the coming 12 months. He expects deficits in the future, too. The city’s accumulated reserves are projected to fall to HK$937 billion by March 2025, enough to finance 15 months of government expenditure. In March 2018, it had dry powder for 28 months of spending. But the economy, hit hard by anti-government protests, shrank last year. Before it could shrug off the recession, the coronavirus arrived.

This raid on past wealth can’t go on indefinitely. In a post-budget Bloomberg Television interview, Chan said that revenue-raising measures including consumption taxes are up for discussion. “Hong Kong has been famous for a very simple and low tax system,” he said. “I’m going to invite scholars, business sector and tax experts to work together with us as to the appropriate response.”

A Singapore-style GST is something Hong Kong has contemplated before. But as Chan himself says, a levy on consumption will be regressive. It will hit the poor more than the rich in a society plagued by income inequality. Singapore, too, has a wealth divide, but it has put together an elaborate system of returning cash to the less affluent, a task made easier by the fact that, unlike Hong Kong, most Singaporeans live in public housing. The apartment size becomes a tool for means testing.

Hong Kong, meanwhile, is just about managing to use some social transfers -- such as for education, health and housing -- to mitigate the in-built disparity of earnings. A regressive GST could see those gains vanish. That’s bound to trigger fresh backlash.

Another idea could be to use investment returns on past surpluses to finance future giveaways. The more than HK$90 billion of unspent balances tied up in special-purpose funds could also be deployed better. In the absence of structural changes, the only way Hong Kong can sustain generous handouts without compromising tax competitiveness is to keep apartment prices high and sell more land parcels to developers. Since there isn’t much more scope left in Hong Kong island and in Kowloon, attention will shift to controversial new projects like Lantau Tomorrow, a HK$624 billion plan that involves building artificial islands over 1,000 hectares of reclaimed land.

Unaffordable housing also breeds inequality and angst. But once a government has decided to ride a property tiger, it can’t get off. Larger economies can experiment with helicopter money. Hong Kong can only throw down cash from condominium roofs, hoping that the illusion of having more money will keep people dreaming of owning one. 

Andy Mukherjee
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. -- Ed.