Friday, October 21, 2005

Governor Stubbs and the Bolsheviks

Hong Kong's colonial government was very much of the conservative school when it came to spending, even when London had moved towards a more socialist system. This was embodied in a speech I read by Governor Sir Reginald Stubbs (yes, of Stubbs Road fame) in October 1925 when he announced the Budget for 1926. It also reminds us that supply-side economics have been with us for some time (although not the malignant Bush version that also raises spending at the same time as cutting taxes).

Now Hong Kong had just gone through an incredibly painful labor dispute, organized by leftists that at that time were still aligned with the KMT in Guangzhou. The massive walkout brought the Colony to its knees, and ultimately resulted in a humiliating capitulation of the British government to worker demands. However, the British government remained unbowed, and believed that the blame lay with the KMT and their Communist allies rather than with their own policies.

Let me quote from this fascinating Budget speech, where Sir Reggie not only states his belief that the labor stoppage was a one-time event, but that the Cantonese can be expected to repudiate the KMT and the Communists and ultimately go back to some form of local government (He was of course to be disappointed):
In framing the Estimate for Revenue in 1926 I have considered that I am justified that conditions during at least the greater part of the year will be normal... I cannot believe that the intelligent people of Kwangtung - a race which has been famous for centuries for its commercial ability and commercial sense - can be content much longer to put up with the oppression of a regime imposed from outside and supported by mercenaries from other provinces and I think it is not being oversanguine for the establishment of good order by the end of this year or early in the next.
And now for everyone's favorite bugbear, taxes. How has Hong Kong maintained such a low level, and flat, at that, of income taxes? One reason, of course, is the property taxation system. But another has been the parsimonious spending of Colonial governments, a tradition still generally continued on with today. Let Sir Reggie speak for himself:
May I, in conclusion, say a few words to forestall an obvious criticism? It may reasonably be asked is it not possible, considering that many of the works which have been excised from the programme are of great value and importance to the Colony, to take the alternative course of providing additional funds so as to enable them to be carried out. I have given this question much anxious thought and have formed a decided opinion that for the present at any rate the right course is to reduce expenditure rather than to increase income. Admittedly the inhabitants of the Colony are lightly taxed as the members of any community in the world and in normal times I should have had no hesitation in advising that, if our revenues, on the present basis, were insufficient for the carrying out of the large programme of public improvements which we have in contemplation, further funds should be provided by either an increase in taxation or by the issue of a loan or by a combination of both methods. As things are however, I am of opinion that any increase in taxation should be avoided. Most classes of the community have been hard hit by the troubles of the past four months, and if there is any considerable number of persons who have more money than is required for their immediate needs it will, I think, be more in the interests of the community that they should employ it in facilitating the resumption of trade by financing commercial operations. The more loose money there is available in the Colony the easier and quickly will be the return to normal trade conditions...[italics are mine - Ed.]

There remains the question of whether it would be wise to raise the money by loan. For the present I advise against any attempt to do so... It would be far wiser to wait until conditions approach the normal and not to endeavour to raise money until it has been made clear to the public that the efforts of the Bolsheviks to ruin Hong Kong have ended in failure.
Sir Reggie clearly knew what he was doing, because Hong Kong did indeed quickly get back on its feet a year or so later.

He certainly was no Keynesian, but nor was he a hallucinogenic member of Bush II's accounting team, spending like a drunken sailor while cutting taxes, financing the deficit with help from the country Bush himself identified as its most important strategic competitor. Of course, as I demonstrated in a blog on Sir Alexander Grantham and the Shek Kip Mei fire, the Hong Kong government would eventually have to make allowances for social needs. But the tax policy of the city has remained low thanks to a very circumscribed social safety net, a policy that has served it well to this day.


Argleblaster said...

One can only hope the HK government never discovers what a marvellous tax-raising fraud a social security net can be. Although, the compulsory pension business is ominous - they might just call it "national insurance" one day, and be able to double their tax income overnight!

Dave and Stefan said...

Yes, it would be an enormous liability long-term. Despite the smog and pollution, Hong Kong people remain the 3rd longest living in the world!ag