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劉廼強 | 25th Jan 2011 | China Daily (Hong Kong Edition) | (27 Reads)

Chief Executive Donald Tsang forewarned us in his recent question-and-answer session in the Legislative Council about the “unusual” inflationary pressure we are going to experience this year.

The textbook definition of inflation is a continuous rise in general price level. Because the price rise is continuous, it will generate expectations of further rises in the future and will set off people jockeying to stay ahead of the situation. There will thus be a fight among suppliers and consumers, employers and employees, all wanting to have a bigger share in the puffed up pie; and that implies social instability. Expectations are self-fulfilling if we do not do anything about them.

As a small island economy, our inflation is mostly imported and there is not much the government can do about it. It can do its part though by stopping its share of the expectation by telling Hong Kong citizens there will be absolutely no price increase in government services in the next financial year.

To drive this point, the Financial Secretary can in his new budget next month declare a 12-month moratorium on all government fees and charges, including public housing rental. To be extra-generous, which the government can well afford with its huge reserves and a fat surplus this year and a fatter one in the coming year under inflation, he can announce a lowering of Hong Kong’s tax rates.

A lower tax rate is something we will have to consider anyway as Hong Kong is now no longer the lowest tax regime in this region. To remain competitive in attracting capital, we might have to bite this bullet sometime in the future.

Let us not discount the effect of price stability in the public sector, because it accounts for about 20 percent of Hong Kong’s GDP. With the government setting a good example, it will stand firmly on the moral high ground to persuade big business to follow suit, or at least to make the price increase milder.

A case in point is the Mass Transit Railway (MTR) which despite its being a publicly listed company, the government is still its biggest shareholder and one of its directors. It can exert its influence on MTR’s management to declare a smaller fare increase. With the MTR towing the line, other public transportation companies will have to follow if only for market reasons.

Yes, there are certainly things our government can do to tame inflation.