Only a few weeks into the job, and only months away from an impending change of Chief Executive, Financial Secretary Paul Chan Mo-po's safest option was to continue his predecessor's economic strategy and refrain from any major initiatives. He did this well.

Finance ministers in most of the world's developed economies - which Hong Kong has become, with GDP per head of $44,000, higher than Japan's - would obviously envy his position. Hong Kong just recorded another government budget surplus and has received a bonus in the form of income boosted by the seemingly unstoppable property boom.

Gone, though, are the days of rapid GDP expansion. Facing low single-digit real-term growth this year, Chan decided to use some of the extra funds to stimulate growth, pointing out, rightly, that the US dollar link meant Hong Kong was limited to fiscal, not monetary, policy to stimulate the economy.

The resulting one-off payments will be distributed in the form of 75 percent rebates on income tax for last year, up to a maximum of HK$20,000. This will put more spending money in the pockets of middle-income earners rather than of the poor, who don't earn enough to pay tax, along with similar measures for business.

These handouts are forecast to add 1.1 percent to GDP this year. Maybe that is why the financial secretary is forecasting growth of 2 percent to 3 percent rather than the private forecasts of just more than 1 percent.

As I once told the then financial secretary Donald Tsang Yam-kuen when he gave income-tax payers a rebate of 20 percent, it makes more sense to give money to the poorest as they will spend it (in economist talk, they have a higher "marginal propensity to consume").

But the general ambiance of the budget was a heightened awareness of the uncertainty of Hong Kong's economic environment, which matters because of the SAR's tremendous openness. Think Trump, think Brexit.

As well as the looming threat of a trade war fought between economic nationalists, initiated by the United States, there is the less obvious challenge of a lowering of business taxes in developed countries.

Hong Kong has a profits tax rate of only 16.5 percent, much lower than most of its partners and competitors (nearly 30 percent in Australia, 25 percent in the Chinese mainland, 30 percent in Germany, 32 percent in Japan, 24 percent in South Korea and 35 percent in the US). Singapore is an established competitor, with a rate of 16 percent.

Unfortunately for Hong Kong, the rest of the world has noticed how successful its low tax rates have been in attracting business. The UK has already brought its profits tax rate down to 20 percent and is doubtlessly plotting to lower it further. The Trump administration is preparing to plunge the US business tax rate from the top to the bottom of the international league table.

Europe may be next. Ireland some years ago was instructed by the European Commission to stop charging different tax rates to foreign and domestic businesses. The Irish decided to abolish the higher domestic rate; the business tax rate there is now 12 percent. Others in Europe are complaining about multinationals moving their headquarters to a country with such a small market just to avoid higher taxes elsewhere. They may follow suit.

Hong Kong could cut taxes further but this would be risky in a world where, as Chan correctly said in the budget statement, Hong Kong's openness renders it vulnerable to fluctuations in the world economy and the SAR needs to maintain a high level of reserves (though recent levels may have been excessively high).

Hong Kong could follow the trend and adopt an economic nationalist posture; Chan is also right in adamantly opposing such a turn, which would be suicidal.

The best option is to consider broadening the tax base to produce greater stability in government revenue and less dependence on volatile sectors such as property.

This is what the financial secretary has done in announcing that he plans to set up a tax policy unit in the Financial Services and the Treasury Bureau to examine the international competitiveness of Hong Kong's tax regime and "address the problem of a narrow tax base".

A word of warning: So far, the financial secretary's approach to encouraging reindustrialization is the right mix of permissiveness and subsidy. However, some of the wording in the budget statement suggests a possible move toward a more interventionist "picking winners" industrial policy that would be wasteful and counterproductive.

Another thing to avoid would be the temptation to engage in a race to the bottom in the form of harmful tax competition with other jurisdictions, especially any kind of fiscal incentive aimed at foreign investors.

While not spectacular or innovative, this budget represents a sound, prudent approach to an international situation that looks like becoming ever more precarious.

(HK Edition 03/02/2017 page7)