Why Hong Kong subsidies should go towards food, not fuel

Hong Kong should not renew the HK$3 per litre diesel subsidy when it expires at the end of June. Instead, it should use the funds to launch a crash programme to accelerate electrification of public transport, starting with the minibus fleet. The crisis in the Middle East has had a serious impact on fuel prices. In response, a government task force has recommended a package of measures to provide temporary relief, including the diesel subsidy to be paid directly to local fuel companies and a 50 per cent cut in tunnel tolls for commercial vehicles. There is no relief for petrol-driven vehicles or private cars. The diesel subsidy alone will cost HK$1.8 billion (US$229.7 million). While the measures are no doubt well intended and will be welcomed by the public in the short term, there are several fundamental problems with such subsidy schemes. This one in particular has weaknesses, not least that sooner or later – in this case, quite quickly – it will become fiscally unsustainable. There are other, more compelling areas where a degree of subsidy might become inevitable and which should have priority. The problem all subsidy schemes have in principle is that they distort market forces. The increase in prices is telling us that it is more difficult to export oil and gas from the Gulf because of the war launched by the United States and Israel against Iran. Around a fifth of the world’s oil passes through the Strait of Hormuz but because it is now effectively closed, there is a global shortage which is pushing up prices. Softening the blow by limiting retail price increases is all very well, but it does nothing to shorten the war. This brings us to the next weakness: nobody knows when the war will end, not even the participants. The two sides are far apart in their negotiating positions, and even the task of getting talks going is proving difficult. The one round facilitated by Pakistan was conducted indirectly, with both sides conveying their stance to the intermediary and indirectly to each other via the media. The only thing we do know for certain at this stage is that even when the fighting stops, it will take a long time – many months at least – for the infrastructure damaged by the hostilities to be repaired. A related problem is that we will not know the outcome until peace has been restored and there has been a chance to survey the damage done around the region. Estimating repair costs and arranging funding will all take time, so both the timing and final outcome are uncertain. Therefore, any proposal to continue the subsidy after its expiry would be committing to an open-ended drain on public resources. That would not be financially prudent. All governments know that scaling back, let alone eliminating, a subsidy once it has become an established part of life is extremely difficult. For example, the UK government’s finances are being increasingly strained by the so-called triple lock on state pension increases. This involves a commitment that every year the state pension will go up by inflation, wage increases or 2.5 per cent, whichever is higher. This formula appears unsustainable, but no politician seems ready to say so. In Hong Kong, we could soon have a similar problem with our HK$2 transport fare scheme. Currently, more than a third of the city’s population is eligible for the subsidy. A further problem with subsidising consumption is that it indirectly encourages more consumption. It would be far better in the long term to take firm action to permanently reduce our dependence on fossil fuels. We already know it is possible to power minibuses, buses and even ferries with electricity. So that is where we should be putting our resources. If the switchover process requires help commercially to cover the costs, then that is worth considering. There is one further important factor that we need to take into account, and that is food supply. A significant percentage of the world’s fertiliser passes through the Strait of Hormuz. Planting season in various countries is imminent. If the fertiliser cannot be transported in time to the farms where it is needed, crop production will be lower and there will be food shortages. In poorer countries, this could mean famine. Even in wealthier economies, food prices will go up. We will not starve in Hong Kong, but less well-off families will struggle to cope with higher prices for daily necessities, given that they spend a higher proportion of their income on food. When it comes to transport, there are choices. People can walk, ride a bike, go by bus or carpool. Companies can make greater use of working from home. But, however you travel and wherever you live, you need food. Electricity and gas prices will also go up, but if the worst comes to the worst, people will find ways to cut back. For food, there is an irreducible minimum. If increased food prices become unbearable, that is where public subsidies must go, most likely on a means-tested basis. If we have to raise taxes or run a deficit, then the money should be used to pay for food vouchers.

Why Hong Kong subsidies should go towards food, not fuel

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Rather than encourage energy consumption amid the effects of the Iran war, the city should also speed up the move to greener public transport

Rather than encourage energy consumption amid the effects of the Iran war, the city should also speed up the move to greener public transport