MPF back tracked

John Tsang just announced the administration will withdraw the plan to inject HK$6000 into MPF accounts. Instead, the Government has decided it will just hand it out to permanent residents aged 18 or above. More on this later...

Also, in what is a vast improvement for families, the Government announced that salaries tax reductions would be up to 75% for the coming year. The Hon Fin Sec Tsang made these announcements after meeting with awmakers this morning. With public support and opinion polls low, legislators had enough weight to threaten voting against the budget unless aspects were changed.

Budget woes and MPF

Recently, Hon Fin Sec John Tsang has said that he will consider other measures in this year's budget. The budget, at best, hasn't been received well by the public, noted through numerous demonstrations and protests at the Government House and LegCo. Like many of us, LegCo has raised concerns about the plan for a one-off injection of HK$6,000 into Mandatory Provident Fund retirement schemes. Their cause for worry is that recipients couldn't immediately use the funds given they would be locked up in the MPF for years.

Real cause for worry is that the MPF is a waste. With such high administrative and management fees, the (opportunity) cost to account holders is high and contributions forced by law into the MPF, where only fund managers have something to gain, could be better invested somewhere else. If there were ever a time for an injection (grating against the tradition of Hong Kong's laissez faire principles in what amounts to a redistribution of wealth), it would have been during the financial crisis, after the Government forced your salary into MPF accounts, and couldn't ensure it's value.

Estimates are that higher fees (administrative costs are ~1.92%) reduce future returns by as much as a third. Therefore, theHK$6000 injection actual value is less by at least one thousand dollars as a result of the high administrative costs. From the HK$24 bn injection, fund companies receive roughly (.02 x 24bn) HK$480 million. There are estimates that administration costs have already made fund companies HK$33 billion. In essense, you pay HK$13 K from your MPF acocunt just to have one.We're glad that political parties and individuals see eye to eye with Lion Rock on this, and further, that Tsang is willing to take a closer look.

See more writing on MPF from Lion Rock's website and the recent article below: 

Extra MPF cash only benefits fund managers
March 1, 2011
SCMP

Handouts have remained the norm in the government's yearly budget, thanks to a surplus. And, with large fiscal reserves, it finds itself deep in a quagmire of political hypersensitivity, pressured to portray its measures as returning funds to residents. Rather than tax breaks, erroneously perceived to aggravate inflationary pressure, the government suggested a one-off MPF injection of HK$6,000 into all accounts. The logic that, with high inflation, it was safer to make use of the Mandatory Provident Fund is highly questionable; Hong Kong's inflationary problems are a monetary phenomenon, imported from the US. 

An additional HK$6,000 in our pockets would not have significantly increased inflation; instead, it would have made life easier for those having a difficult time. If the government logic is applied, Hong Kong would have been in deflation given that last year's IPOs absorbed approximately HK$480 billion of funding in 2010 (20 times the MPF proposed injection). Now, MPF funds sit useless and losing value.

The MPF, like inflation, acts as a regressive tax and is thus a hypocrisy, forcing residents into arrangements with certain financial institutions. Collusion is evident in that the government forces salary earners to pay into certain funds, cared for by certain banks. It is a tragedy that, regardless of the salary earner's economic situation, their own fiscal choices are cast aside.

Whether it is someone's relative who needs expensive medical treatment, parents who wish to send their children to study abroad, or young professionals who want to make a down payment on a property, the government forces these income earners to buy a fund where only the fund managers have something to gain.
Worse, the HK$6,000 injection faces the same eventuality as all funds thus far contributed: high management fees and, due to a lack of competition, lower rates of return. Should the contributions which employees are forced to pay into the MPF be freed up, people could look at other investment vehicles and competition would rush in, offering 2.3 million workers better options. And returns on other investments should not be underestimated given the relatively poor rates of return and high administrative costs of the MPF accounts.

Legislators and the government supported lifting the minimum income level so that low-income workers could be spared the mandatory contribution, but discussion concerning the other two million workers who remain burdened was stymied last year.

Clearly, the policy agenda for the MPF has expired. It was implemented to save the government from future expenditure, making it mandatory for people, who wouldn't otherwise, to save for a rainy day or retirement. In the mid-1990s, in MPF debates, many legislators had the foresight to claim that businesses would be happier with the MPF than residents. Now is the perfect time to start getting rid of the "mandatory" in the Mandatory Provident Fund.

Nicole Alpert is a research associate at the Lion Rock Institute, Hong Kong's leading free-market think tank

Forget draws, just put cash in our pockets

Forget draws, just put cash in our pockets

The government recently committed to infrastructure projects in order to create jobs and bolster the economy. But if these public works projects aren't truly necessary and the costs outweigh the benefits, all is in vain and taxpayers' money has been wasted.

Nicole Alpert

Friday, December 05, 2008

The government recently committed to infrastructure projects in order to create jobs and bolster the economy. But if these public works projects aren't truly necessary and the costs outweigh the benefits, all is in vain and taxpayers' money has been wasted.

Political parties have been quick to prescribe remedies to the government to boost the economy, perhaps too quick.

The Democratic Alliance for the Betterment and Progress of Hong Kong and the Liberal Party have made the community wince with their suggestions.

The DAB wants makeovers in areas such as Tin Shui Wai and the Liberals call for HK$6 billion in shopping coupons with billions more in freebies, lucky draws and passes to Disneyland.

While most of the proposals are laughable, their calls for tax relief are right on.

We've cut taxes before and seen great progress. For instance, the levy on wine - alcoholic content under 30 percent - in Hong Kong was 80 percent at the beginning of 2007, cut to 40 percent in last year's budget and then abolished in February.

Some criticized the cuts, but they have created jobs and fueled a new and successful industry.

The benefits are numerous and include the growth of new business, expos and fairs, more value-added industries such as retailing and a wider choice of quality wines for consumers.

Tax cuts have great potential to stimulate growth - individuals will have more money to spend on whatever they wish, which will improve the economic climate.

The government is always being criticized for incompetence - it's definitely smarter to let people manage their own money. Families may choose to save, invest, pay off debt or spend.

The same funds that pay for makeovers at Tin Shui Wai and giveaways may help those having trouble managing the most basic necessities, such as food and rent.

Instead of going for coupons and freebies, both with high administrative costs and risks of corruption, we may stimulate growth by putting more money into people's pockets.

Proposals that seek to control the way individuals spend will create market inefficiencies.

We have been told that we need a stimulus, an injection of billions of dollars, but instead of spending our taxes on risky projects the government should explore public policy that will encourage new growth.

It should only invest in public projects that are necessary - if they aren't it might as well pay people to dig holes and refill them. It should increase the amount of money in taxpayers' pockets, scrap laws that hamper growth and help the unemployed find jobs and acquire new skills.

The recession is not something a lucky draw or Disneyland passes can get us out of, real improvement in the economy takes sacrifice, hard work and patience.

Nicole Alpert is a research associate for The Lion Rock Institute, a free-market think-tank

Can be viewed from the Standard here

It’s nonsense to fault offshore financial centres

From Prof Craig Boise and Prof Andrew P. Morriss.

Sir, Your analysis of offshore financial centres (“Harbours of resentment”, Analysis, December 1) makes three important errors.

First, you repeat the silly claim by the Organisation for Economic Co-operation and Development that the current financial crisis has “brutally exposed the risks inherent in small countries with large financial sectors”.

As anyone who has read the FT’s coverage of the financial crisis would know, its roots lie not in Grand Cayman or the Isle of Man but in New York and London. If there has been any “brutal exposure” it is of the inadequacies of the US and European Union oversight of their financial systems.

Second, your article suggests that Cayman and others “thrived” because the second half of the 20th century was “free-wheeling”. Nonsense. Cayman and the other top offshore financial centres all have more rigorous anti-money laundering regulatory regimes than the US or any member of the EU. Our research into OFCs has consistently shown that they have better legal tools and tougher standards than do most onshore jurisdictions.

Third, while institutions in OFCs may well have $6,000bn on their books, that money is not sitting in safe deposit boxes in Grand Cayman or Jersey. It is invested in assets located virtually everywhere else. Indeed, it is the US and the EU that benefit most from foreign direct investment channelled through OFCs. Blocking these capital inflows in the midst of a liquidity crisis would be folly.

We have together taken dozens of US law students to study the Caymanian legal system, interviewed professionals throughout the offshore world, and conducted research into the history and current status of several of the largest OFCs. Our teaching and research have shown us both the importance of OFCs to the functioning of onshore economies and the high standards prevalent among the more reputable OFCs.

Attacking the offshore sector may be politically popular in Paris, London and Washington, but it has nothing to do with resolving the global financial crisis.

Craig Boise, Associate Professor of Law, Case Western Reserve University, Cleveland, OH, US

Andrew P. Morriss, H. Ross & Helen Workman, Professor of Law and Business, University of Illinois, Champaign, IL, US

Tax Havens: Myths vs. Facts

http://www.youtube.com/watch?v=aTfZADGK6TY.

The Center for Freedom and Prosperity Foundation has produced videos showing the economic and moral benefits of so-called tax havens. This final video in the three-part series addresses some of the most common myths put forth by politicians from high-tax nations. Using academic research and data from international organizations, the video shows that the most common attacks made against low-tax jurisdictions are empty demagoguery.

Resorting to Keynes and other crutches

Dan Ryan is a director of the Lion Rock Institute

The world's governments are about to embark on a massive spending spree. China is busy spending US$586 billion. Others in the region have committed to large government spending packages. US president-elect Barack Obama has just announced he plans to save or create 2.5 million new jobs through spending on government projects.

Now, our chief executive has suggested that there needs to be large-scale government-funded infrastructure spending here. Before we go ahead, it is worth asking whether such government spending will actually bring our economy out of recession earlier than would otherwise be the case.

The rationale for such action is that a "stimulus" is needed, through "deficit financing" if necessary, as a "countercyclical measure" to "kick-start" the economy by injecting money into the system.

We have grown used to this language and thinking but, before the era of economist John Maynard Keynes, for government to assume such a role would have been considered very foreign to the average citizen. While deficits certainly occurred, they were generally seen as something to be avoided. Instead, the rather quaint view prevailed that a government should balance its budget and live within its means.

Keynes' influence was created during the Great Depression when he found a receptive ear in governments eager for new solutions. Yet there is meagre evidence that his policy prescriptions did anything to reduce the length of that downturn.

Spending on make-work projects and infrastructure simply failed to pull the economies of the world out of recession as Keynes claimed they would - real growth only occurred after the second world war because of the peace dividend and a more liberal global economy.

Keynesian-style public spending and borrowing were further discredited during the stagflation of the 1970s when governments reluctantly came to accept the view that you can't spend your way out of a recession.

The fact that Keynesianism seems to be once again the default policy setting for most of the world's governments is not because the theory isn't false. It is because it allows governments to expand their role, to "do something", and to gain popularity by dispensing largesse to key interest groups.

Certain private companies may benefit from government-directed projects, but it does not contribute to growth of the private sector as a whole - it just gives bureaucrats a role to decide which firms or industries do and don't get funding.

But, they say, we're spending money on "infrastructure". The problem is that it matters a great deal what is being built, not simply that you're building something. Either a project provides a net benefit to the economy as a whole or it doesn't. If it doesn't, then it is an overall drag on growth. If it is worthwhile, then it should be justifiable in good economic times or bad - and it is preferable that the private sector should finance and take the risks associated with it.

Hong Kong’s Competition Problem in Hong Kong Lawyer

http://www.hk-lawyer.com/2008-11/Nov-13%20Viewpoint.pdf

The proposed cross-sector competition law attempts to rearrange the furniture while ignoring the elephant in the room, suggests Hans Mahncke