Response to the 2003 Budget Speech
Speech by the
Honourable Eric Li Ka-cheung 2-4-2002
Our debate today on the Budget is conducted at the most extraordinary of times: our city is on the verge of a SARS pandemic, and peace is once again shattered in the Middle East. It saddens me to see the people of Hong Kong losing so much of their confidence in the future of our economy; it pains me even more now that we have to face a huge fiscal deficit. Times of such hardship do not only put to the test the leadership of the executive and legislative members of our administration, they are also a challenge to us – to you, to me, and everyone in Hong Kong. What manner of “civilized political culture” would this council be witnessing in the course of these two days of the Budget speech? Would it be another session of “political bickering and shirking of responsibility”? Or would we see something more encouraging? Signs of unity in adversity perhaps? And a more determined display of our spirit of resilience? There is no better time than now for us to examine exactly how mature our council and our public have become after all these years of development – within a political system of limited democracy.
We can approach the Budget from a number of angles. I would, irrespective of changes in circumstances in the outside world, endeavour to examine and analyse this Budget from three specific angles: as a professional accountant who is objective in his financial analysis; as a politician with an unbiased stance; and as a typical middle-class individual who treats the Budget as a social issue.
Be True and Fair
As a professional accountant, I believe in the importance of being true and fair. An accountant tries to make accurate projections and inferences based on logical assumptions. As a financial expert, he would place high priority on reining in the expenses lest his clients should suffer crippling losses at the end of the year when the accounts are closed.
In its Budget for the year 2002-03, the government has made projections that are completely off the mark. The consequence is a staggering consolidated deficit of $70 billion – an operational failure that is utterly unacceptable. What’s more, the government is powerless to keep public expenditure under control. Who then can blame me, a professional accountant, for stamping “major qualifications” on the Budget?
Ever since the 1999 Budget Debate, I have repeatedly warned the government that our “structural fiscal deficit” is “severe”, and I have urged the administration to carry out a series of public service reforms in order to minimize expenses and to seek ways to enhance the value of government assets. In last year’s Budget Speech in particular, I have once again reminded the Financial Secretary that “major medium-term financial targets set by the Budget involve high strategic risks. These targets include the projected rate of investment return, land premia, the scope for downward adjustment in civil servant salaries, and the rate of economic growth.” (excerpted from the response of Eric Li Ka-cheung to the 2002 Budget Speech) Unfortunately, the risks turned out to be real, and the price we paid for taking those risks accounted for a substantial part of our huge fiscal deficit.
Some time ago, the government put forward, through this council, its proposal for a one-off civil service pay-cut. I believed then that no more time should be wasted and that prompt and resolute action is called for, i.e., to conduct a thorough consultation on the civil service pay level review and its adjustment mechanism and set into motion corresponding legislation. I believed that flexibility should be introduced into this mechanism to close the gap in salary between the public and private sectors. It is a shame our government has sacrificed that golden opportunity for some short-term benefits, thus putting on hold a task that is of great long-term importance. Lately, however, the government has shown a clear resolve to tackle the fiscal deficit and has taken a step in the right direction. I will do my best to help the government realize this goal in future.
A “Pseudo” Political Consensus
In the past decades, through public consultations, the government has been able to achieve some degree of consensus amongst the major political parties and concern groups on how the Budget should be drawn up. This year, however, the government departed from its usual practice and made a series of rather rash proposals, especially where the increase of revenue is concerned. On the face of it, many of the proposals are based on the suggestions put forward by the political parties. In actual fact, the Financial Secretary has made the suggestions more unpalatable than originally intended, and he has done that without any further consultations. Obviously, the government intends to go it all alone and to ride roughshod over the Legislative Council. Such manoeuvres placed the Budget on shaky political grounds. If the Budgets of the past few years were not cautious and conservative enough in the control of expenditure, then this year’s Budget is politically reckless for its want of sensitivity towards public opinion.
Among the different sources from which the government could obtain funds, the fiscal reserves are completely free in terms of political cost, and are most popular among politicians. Next come the low-interest loans. The price can be paid in the future and the pain is delayed. However, its toll on the long-term economy is the heaviest, for it not only increases future interest expenditure but also offers little help to the basic problem of overspending. Some long-term high interest loans can even threaten the government’s financial stability. The Financial Secretary, by taking no such measures, shows his courage and determination to confront the problem of deficit head-on. He deserves our respect. However, a drastic increase of the taxes, even if it involves no financial costs, would stretch to the limits the goodwill of the public and impose on them such an excessive burden the government would end up paying a heavy political price.
Good citizenship means that in times of economic downturn, everyone should play a part to help alleviate the fiscal deficit. The people of Hong Kong generally endorse this notion. However, there are diverse views on who should take up the larger share. At a public forum on 14 December 2002, I proposed a “1-2-3 strategy” to deal with our $70 billion fiscal deficit. That is, if we are to spend one portion of our effort on seeking out new sources of income, then two portions must be spent on reviving our economy and three on cutting back on expenditure.
However, in this year’s Budget, the government has devised a “2-3-2 strategy”, with $20-billion coming from revenue-raising measures, $30-billion from economic revival and a mere $20-billion from the reduction of expenditure. A disappointing strategy, in that when compared to my suggestion, it is too aggressive in levying new taxes and relies optimistically on the power of economic revival when the prospect is still uncertain. In contrast, the measures to cut the huge expenditure within the government are way too feeble.
The 2003-04 Budget carries considerable “strategic risks” in its projections of financial income. It is dangerous to place faith in the supposition that economic revival can bring about a $30 billion drop in the fiscal deficit. I have repeatedly stressed that our tax system has long been out of touch with the real economic situation. With more and more of our commercial activities taking place outside Hong Kong, the correlation between the economic data and the tax system can no longer be assumed. Even if the growth of the local GDP is as satisfactory as the projected figures, it does not necessarily mean that our tax revenues will rise accordingly in the short term.
Secondly, the government believes that a 10 percent cut in civil service personnel will save the treasury $7 billion worth of expenditure each year. 8 out of that 10 percent is achieved by way of natural wastage (retirement) in the years 2003-04 to 2006-07; that is, 2 percent each year. However, natural wastage is by no means the best way to manage human resources. The government can cut back on expenditure, or “slim down” only by privatizing departments and outsourcing work processes and, in so doing, motivates the younger civil servants to leave their posts. The government’s current practice is a classic illustration of mismatch of human resources and I expect to see, for yet a few more years, this phenomenon of “throwing out the needed and retaining the unwanted”.
Thirdly, through cashing in high-return assets, the government hopes to achieve the target of a non-recurrent revenue of $100 billion, all of which will be thrown into its extravagant multi-billion-dollar scheme to build infrastructure. Setting aside the matter of whether such a projected income is over-optimistic, and even if the government, despite the turbulent financial market, manages to sell off its assets at a reasonable price within a very short time, I believe that the government still has to grapple with the problem of a gradual drop in investment income caused by the sale of such assets. By the year 2007-08, the recurrent investment income of our government would be down a minimum of $15 billion, and our next Financial Secretary would have to come up with more revenue-raising strategies to tackle the even tougher financial situation confronting Hong Kong.
Unfair Treatment of the Middle Class
The government expects to raise its income by $20 billion each year up to the year 2006-07. At present, revenues from profits tax alone account for around $50 billion, but revenues from salaries tax do not even reach $30 billion because of our narrow tax base. It is therefore virtually impossible to obtain that extra $20 billion, unless, of course, the government were to inflict the burden on our middle-to-high income families. But this would mean that just a little over a million of our population would be forced to fork out almost the entire $20 billion of extra tax burden. That would be most unfair.
Although the government in the end decided against proceeding immediately with plans to raise tax revenues by $20 billion, it has succeeded in instilling unrest in all walks of life with its $14-billion revenue-raising scheme. Its radical suggestions for new tax levies have triggered opposition even from the two party leaders who are themselves members of the Executive Council. They found the suggestions so unacceptable they were ready to brave criticisms and go against the ExCo spirit of collective responsibility by announcing in public that they are ready to amend the government’s proposals.
As the representative of the accounting sector, I have expressed my willingness to support the new tax levies earlier on. Using my “1-2-3” strategy as the formula for calculation, such levies should account to about $11.7 billion, or one-sixth of the $70-billion fiscal deficit. However, the suggested $14-billion revenue-raising scheme exceeds my bottom line especially since one-half of that amount comes from salaries tax. Therefore, my primary concern now is to find ways of alleviating the terrible tax burden of this unfortunate middle-class group.
A Better Balance for the Budget
I believe if the government had not “shut its doors” on public opinion and worked out its projected tax balances “behind closed doors”, the Budget would have come out much better. The government insists on attaining a balanced account by the year 2006-07 – on what economic grounds? What justifications does it have for promising not to lay off the civil servants and letting them hang on to their cushy jobs till retirement? Why must the government limit itself to a narrow tax base and squeeze dry a minority of its tax-payers? Why does it refuse flatly to consider levying consumption taxes? Why must it do all these when there are alternatives solutions, solutions such as a complete renovation of the tax system to raise public revenues in a fair manner? The government must remember one important point. Before starting to ask for more taxes, the government must allow our taxpayers a glimmer of hope, must enable them to see a bright exit at the end of the dark tunnel!
Maintaining Stability and Conserving Financial Solidity
A careful examination of the Budget will show that there are numerous imperfections and loopholes in the details. Despite this, the Budget may yet achieve two significant goals: maintaining the stability of our financial system and conserving the government’s financial solidity.
Our civil service pay review mechanism is clumsy, inflexible and behind times, a dinosaur of sort; it is also a “panda” – lovable in a certain way, but unable to keep pace with the process of evolution. And let us not forget that by the laws of nature, dinosaurs are bound to die out and pandas are destined to go extinct. That is why on the matter of civil service restructuring, I have, in the 1998 Budget Speech, already argued openly for reforms. Advocators of reforms are not trying to divide the society. For if reforms carried out in the private enterprises are racing ahead like a hare, and those in the public organizations are moving at a tortoise’s pace, the discrepancy would reflect badly on the civil servants, who would be perceived as being “at odds with” general public opinion. The consequent feelings of resentment towards the civil servants are thus quite natural and not the doings of rumourmongers. Our society, with its constantly changing pace, does not subscribe to the ethos of “stability above all else”. For Hong Kong prides herself on a style of management characterized by flexibility and quickness of response, by fortitude and the spirit of resilience. The public service sector should speed up its pace of reform. Otherwise, society would become more and more divisive, in which case government leaders must be blamed for their failings in management, and leaders of the civil service unions for their short-sightedness, their unwillingness to shoulder social responsibilities, and their over-zealousness in protecting their own interests.
Right now the government is beginning to show signs of determination in tackling the problem. The Budget has also been well-received by international financial institutions as it has prevented further lowering of the credit ratings of Hong Kong. In addition, external shocks on our linked exchange rate have eased for the time being, thus allowing our financial structure to remain intact and our administration to conserve her strength.
The Budget has its good points too. The Financial Secretary is very supportive of the ideas – advocated by myself and a number of independent councillors – of involving the private sector in infrastructure projects and in the provision of public services. He has also promised to examine the viability of imposing sales taxes and this should lay the foundation for the broadening of our tax base, thus offering us some hope that in the long run, salaries tax rates will drop. As for policies on the industrialization and opening up of Hong Kong’s education services, the Budget has taken an important first step by setting up a subsidiary foundation fund of $1 billion. On tax issues, the Budget has accepted what the accounting sector has been proposing for the past few years: to raise tax deductions for charity donations by 25 percent. The Financial Secretary should be given credit for that.
Keep a Watchful Eye of the Overall Situation, Avoid Petty Squabbling
Under an executive-led administration, we members of the Legislative Council have little power to make precision modifications to the Budget; as far as the administration is concerned, we can either “take it or leave it”. In face of the gravity of the situation Hong Kong is in, I believe that the only sensible thing for this council to do is to support this Budget – flawed and imperfect as it is – rather than resorting to the usual tactic of objecting for the sake of objection and creating an unnecessary constitutional crisis.
In Mainland China there is a saying, roughly translated as “keep a watchful eye of the overall situation, avoid petty squabbling”. For the Mainland, the past five years have not been easy; it had been through a lot, not least the Asian financial crisis, and a series of natural disasters. However, the Central Government and the whole nation were able to weather the hardship in a composed, unruffled manner, and by pressing ahead in the direction set down by the major policies, finally achieved an economic miracle unmatched anywhere in the world. Shouldn’t we focus our minds too, on helping Hong Kong recover from her present predicament rather than wasting our energy on petty policies and internal squabble? This Budget, with its emphasis on reducing expenditure and raising revenues, points to the right direction. I believe we should at least give it a chance to succeed.