I am reposting another good article from a friend, Nick Smith of Lion Rock Inst. in HK. This was published in March 2018.
Nick Sallnow-Smith
Chairman, The Lion Rock Institute
You may not think it from my title but this piece is
about the Budget. Let me explain. Human beings, when faced with the chaos of
nature, crave some degree of certainty. Governments respond to that innate
desire with welfare programmes, the promise to outlaw or regulate all unpopular
behaviour, and other measures that promote the idea of keeping society “under
control” for the public good. What, you may ask, has the budget got to do with
that?
Let’s take a step back from the myriad individual tax
changes, Government subsidies, incentives and the other minutiae that the media
tend to obsess over with any budget. The immediate news round is taken up by a
litany of groups who didn’t get a handout or received too little. Our local
Santa Claus never gives out enough presents to satisfy those with their begging
bowls outstretched. But behind the usual post-budget noise what longer term
trends can we discern?
Budgets can be broken down into three parts. How much
does the Government take from individuals and businesses? What does it spend it
on? Can the first element fund the second? In much of the world, the third
question gets most attention. How big is the “deficit”? Is the borrowing or
money printing required to make up the difference a problem? Because Hong Kong
typically does not have this problem, attention can move to the first two. On
the face of it, since the government takes much more than it currently spends,
an obvious solution would be to cut taxes. Yet this is not seriously considered
by Government, nor by commentators or political parties. Of course there is a
debate about “handouts” but not about tax reductions. (The idea of “giving
back” something the Government took in the first place is rather odd. If I take
$100 from your pocket and then give you $20 back, is that a handout?)
Instead of thinking about a lower tax economy, the debate
and pleadings are about how the cash is spent by Government. The Government has
the wherewithal to do “more” for society. The assumption is that it is a
positive thing for the government to be able to spend more, without thinking
that the private sector is thereby spending less, because of the excess taxes
paid. In a Western economy, this focus on spending would hardly be a surprise.
But Hong Kong’s reputation as a free economy has been built on low taxes and
small government. These principles have the combined effect of leaving a large
portion of daily life in the hands of individual choice. Moves to reduce the
size of the private sector and grow the Government ought to attract a lot of
attention here. But since the handover, and with increasing frequency since C Y
Leung’s tenure as CE, voices have been raised against free market principles.
These voices now come from within the Administration as well as from political
parties. Positive non-interventionism had already been denounced as out of date
long before this budget. Now two more nails have been hammered into free
market’s coffin.
The risk that pressures would grow to increase the size
of the public sector was recognised by the Basic Law drafters. A number of
lines in the sand were drawn, in an attempt to provide some barriers that might
help administrations resist these inevitable political pressures. I use the
metaphor “lines in the sand” advisedly. Such lines can, after all, be erased by
a rising tide. And a tide in favour of a bigger role for government is now
creeping ever higher up the beach. Two of those lines in the metaphorical sand
were that Government spending should not exceed 20% of GDP and that should not
increase faster than the growth of the economy. This budget erases those lines
from the sand. It does so without any expressed concern or excuses. Instead,
the Administration appears to be proud of getting rid of these tiresome
barriers to more Government. Yet here was a great opportunity to reassess the
overall burden of taxation. A ten year projection could have been made which
concluded that a balanced budget could be achieved with, say, taxes reduced to
10% on both individuals and companies. Businesses large and small could then
have been able to plan investments with the expectation of higher returns. But instead of increasing the number
of investments driven by private decisions, Government bureaux will guide an
ever larger portion of our economy. The IT sector is a classic global
example of how entrepreneurial investments can create huge value. The idea that
Government committees can help decide what is “right for Hong Kong” in this area
by favouring some startups over others is astonishing. Despite a hundred years,
and counting, of the failure of state decisions over those of individuals to
create sustainable growth, the call for Government to intervene to save us from
ourselves never seems to die.
Where does this perennial call come from? At the
beginning of this piece I hazarded a guess. The idea that Government can take
away risk, make the right choices, protect us from “bad things”, runs very
deep. In economic choices this is very damaging. Governments protect the status
quo and delay adjustment to change. This disincentivizes new ideas and risk
taking. Yet many people crave it. Like a life-long parent, the government makes
decisions, allocates pocket money, protects us from harm. This temptation; to
expect Government to create a city-wide “safe space” for all citizens; is
massively damaging. It disincentives accountability and self-reliance and makes
it much harder for our city to adjust to change and cope with threats, because –
after all – the Government does that, doesn’t it? But it cannot and it will
not. We each need to be accountable for ourselves, to plan for our own futures,
to take our own risks, and not think we can outsource these to our bureaucracy.
As Hong Kong grew to maturity in the postwar period, these personal
accountabilities were widely respected and shared. Step by step they are fading
away.
Someone once said “democracy dies in the darkness”, now
on the Washington Post masthead I believe. However my concern is that in Hong
Kong “freedom will die in the clear light of day”! Freedom can of course be
lost at the hand of oppression. But it can also be lost because ordinary people
ask, even require, their governments to take charge of their lives; to “take
control”. Without the worry of rising taxes (and without asking for them to be
reduced), many people spend their time pushing government to get involved in
more and more aspects of our lives. The uncertainties of life, which create
freedom and opportunity, are rejected in favour of safe spaces of all types.
The ultimate “safe space” is a padded cell however.
If calls for the Government to “take control” continue to
grow, freedom here will wither like leaves in autumn. It is crucial that these
risks are recognised and discussed in our society. Change can happen very fast.
In high summer, autumn seems impossibly far away. Yet if you look closely, the
leaves are already reddening. In Europe, Estonia has blossomed from a communist
winter to a wonderful spring of free enterprise within two decades. Don’t think
Hong Kong cannot equally quickly wither from its free market glories to a limp
socialist-style economy with too little enterprise to generate the wealth an
aging population will need.
The announcement of a huge surplus, with cash handouts
everywhere may look like the wrong time to play the fiscal Cassandra. I
disagree. The leaves are turning colour in Hong Kong. Don’t assist by pulling
them off the tree yourselves.
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See also:
Lion Rock 21, Dangers of Universal basic income (UBI) philosophy, August 11, 2017
Lion Rock 22, Hong Kong's early policies on free trade, zero income tax, October 24, 2017
Lion Rock 21, Dangers of Universal basic income (UBI) philosophy, August 11, 2017
Lion Rock 22, Hong Kong's early policies on free trade, zero income tax, October 24, 2017
Lion Rock 23, Our “Should” “Must” Society, April 09, 2018
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