Inflation Fears in Hong Kong as Government Proposes Cash Handouts

In a surprise turnaround, the Hong Kong government is dropping its original budget proposal to inject HK$6,000 into every Mandatory Provident Fund (MPF) account in Hong Kong, which could generally be accessed only upon retirement at age 65.

 
Instead, every permanent resident aged 18 or over, regardless of whether he or she has an MPF account, will be given the cash, which is equivalent to about US$770, to do with as they please. The government will also reduce by 75% salaries tax and tax under personal assessment in the coming year, up to a maximum of HK$6,000 for every taxpayer.
 
The new proposals will cost the government HK$40 billion (US$5.1 billion), more than half the HK$70 billion budget surplus the government realised last year. The original proposal for MPF injection would have cost only HK$24 billion. The new measures are raising fears about further igniting inflation. The composite consumer price index was tracked at 3.6% year-on-year in January, up from 1% in the same month last year.  
 
More handouts are planned for other people in Hong Kong who will not benefit from the tax relief. A separate sum will be set aside to provide relief to the needy, who are outside the tax net.
 
This measure should be able to benefit most people in Hong Kong, including civil servants, housewives and retirees, said Financial Secretary John Tsang. Asked by reporters about the impact on inflation, he said that the government must be vigilant. “I have just mentioned that already,” Tsang replied when pressed further.
 
The MPF injection was seen as non-inflationary because the money would not be immediately accessed. But the government was apparently under pressure even from allies in the Legislative Council, which must approve the budget.
 
“We have heard many noises, many recommendations that [citizens] found some of the measures not acceptable,” said Tsang. “Given what I’ve heard and given a discussion a discussion that I had with members of the legislature, we have decided to make this decision.”
 
Opposition parties had called for a protest rally on March 6, something that may have weighed on the government given the “Jasmine Revolution” demonstrations currently going on in the Middle East and North Africa. The MPF injection proposal had excluded some 4 million civil servants, police and public school teachers, who are covered by a different pension scheme, and housewives, retirees, unemployed and students 18 years and older. Many had indicated they would join the protests.
 
Albert Ho Chun-yan, chairman of the opposition Democratic Party, urged Hong Kong people to join the march anyway. “Some people might be happier with these amendments,” he told the South China Morning Post newspaper. “However, a number of problems, such as surging property prices . . . are still not being resolved. So I appeal to people to join the protest on March 6 to express their concerns.”

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