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Response to the 2004 Budget Speech

Speech by the Honourable Eric Li Ka-cheung 22-4-2004

Mr. Acting President,

This year’s budget speech was Financial Secretary Henry Tang’s maiden speech. But this was already my 13th budget debate speech since I joined the Legislative Council, and should also be my last. In fact, I had incessantly expressed my views on the budget speech on behalf of the Hong Kong Society of Accountants and in my capacity as the Vice Chairman of the Tax Committee of the Hong Kong General Chamber of Commerce during the mid 1980s. I was then called an “expert” by the media, but this has gradually changed to politician since I became a Legislative Councillor. A by-product of an increase in experience and exposure is the added element of practical consideration when we talk about ideals. At this point in time, it is not easy to be understood or to speak explicitly. In fact, many of the things that I have said in the Legislative Council would only be realised after many years. To cite an example, I started talking about the sales tax as early as 1984, but it was only after going through five to six financial secretaries that the government and the public finally saw the genuine need for such an introduction. In 2002, I raised the issue of the abolition of the estate duty, which Secretary Henry Tang might have heard of. I would not raise the issue again now as Councillors Philip Wong Yu-hong, James Tien pei-chun and Ambrose Lau Hon-chuen as well as many other Councillors would talk about it. Today, I will not bother to repeat the views that I have once expressed.

This year’s policy address focuses on “allowing the community to take a respite and build up its strength” – with which I fully agree. This is because I have taken three weeks’ leave and have in a way taken a respite and put on weight. As it is my wish that today’s budget debate could be conducted in a more light-hearted manner, be simpler and easier to comprehend, I have not prepared a formal speech as such.

New phase awaits as morning breaks

When I was on a cruise in Egypt during my vacation, I did not have much to do and I watched the sunrise and sunset every day. Sunrise and sunset in Africa presented a scenic view, and it made me understand a saying that has not crossed my mind before – “The night is always the darkest just before dawn”. Hong Kong’s economy has gone through five very dark years and has been battered by the Asian financial crisis and SARS. This, coupled with the opening of the Chinese cities to the outside world, has had structural impact on the Hong Kong economic system. These blows were abrupt and severe, and put many financial experts to the test. I believe everyone will still have vivid memories of this five-year nightmare. As Legislative Councillors, it would be very easy for us if we choose only to remember the past and to lash out criticisms. But we should wake up at dawn to face the new day. At this juncture where politics and the economy intersect, how many of our Councillors’ speeches today are visionary? And what will our days ahead be like?

Mr. Acting President, it is customary for me to either call or go to the website to check the weather of the day after I get up in the morning. This was especially so when I was in England where the weather is normally sunny with occasional clouds and showers. Talking about financial analysis, the government’s general comment is that there are opportunities and there are risks, and that cautious optimism is called for. As Hong Kong citizens, how should we prepare ourselves for the new day? Secretary Henry Tang was appointed on the verge of a crisis only several months ago. While I have been transformed from an expert to a politician within a span of 13 years, Secretary Tang’s position is the reverse – he was first involved in politics and suddenly had to become an expert in just a few months. How can he grasp the situation and immediately instigate a facelift, changing last year’s blueprint of the former Financial Secretary within a mere few months? I really don’t know how he can achieve that and I think that exerting such a demand on him is unfair.

Work in progress for final blueprint

Therefore, with regard to this budget speech, I will not be like other councillors in just criticizing Secretary Tang for not having any new initiatives. I would rather see if he is doing his job well and if his performance has reached some reasonably fair standards. The following three standards are mainly set by me. Firstly,  the delivery time of the policy address and the budget speech. Since this was changed two years ago, the time lapse between the two has tightened and the budget speech is required to adhere closely to the theme of the policy address. Since Chief Executive Tung Chee-hwa has explicitly talked about “a small government” and “allowing the community to take a respite and build up its strength” this year, it is my view that we should have known that we should not attach too great an expectation to this year’s budget speech.

Secondly, the three targets set by the Financial Secretary to increase tax, cut expenditure and increase economic growth have not yet been reached to date (if they had been reached, then the budget would have been balanced). If we are to amend these three targets, I feel that at this point in time when the economy is starting to recover, we need to take into consideration the trend of the economic recovery, whether it is sustainable, the extent of its strength, and its depth as well as width. If we have not yet mastered these figures and amend the suggestions to increase tax and cut expenditure, I feel that it will lead to certain consequences, in particular inflation if we are to increase tax or cut expenditure during the economic recovery. Should that happen, it will again spark off criticisms. I think we should avoid any drastic amendments at this stage.

Thirdly, to avoid politicizing. In an open letter in March, I mentioned that this year is a year for politicizing. We have three elections, one in Taiwan, one in the US and one in Hong Kong, all of which are hotly contested. This, aggravated by the Middle East situation, is like a time bomb and it is not easy to see the situation thoroughly. To ask the society to come up with a consensus and to ask the economists to reach a consensus involve a high degree of difficulty. I’d rather treat this budget speech as a work in progress and wait for another year before we see the real blueprint of the Financial Secretary for the next few years. This, I believe, is a more appropriate way of handling this issue. This will allow Secretary Tang to gauge the situation thoroughly and is a more intelligent and self-restrained way of doing things.

Last year when I read the budget speech, I focused on the budget and whether there was any deficit. My grading for last year’s budget is not high because we are still far from the budget target and our deficit is enormous. Although this year’s budget is still not very ideal, witnessing a drop in deficit from close to HK$100 billion to HK$50 billion is still a cause for pleasant surprise. No matter who worked on the budget and no matter how this was reached, we do not need to analyse too much as the final outcome is still good. If a commercial firm announces such a business performance, its stock will certainly go up. From the perspective of a monitoring councillor, how can one ask for more from this year’s budget speech which does not impose a tax increase or a heavy expenditure cut? I also feel that it will be easy to forecast next year’s figures because after selling the available assets, the picture will definitely be rosier. Yet, whether the goal of deficit elimination can be reached in the next few years will really have to depend on Secretary Tang’s performance.

All to pay more when we gain more

I have also been enlightened on the philosophy of financial management. While I was in Egypt’s Edfu Temple (I don’t know how many people have been to that temple – a temple built 5,000 years ago), I found out that the tax collection method then was very simple. A secret passageway was built inside the temple to let the water from the River Nile flow in. The amount of tax to be collected depended on the water level of the Nile.  This was because that area was a desert and the more the water, the more fertile the soil. If the coming year was a year of abundant harvest, then the higher the tax. On the other hand, if it was a year of poor harvest, then the lower the tax. This was the practice 5,000 years ago.

When we talk about “the rich pay more” or even the anti-economic cycle method raised by Councillor Albert HO Chun-yan just now, my view is that they do embody some new definition. Many Councillors interpret “the rich pay more” as, those who can afford to pay more will pay more forever. I have a somewhat different interpretation, and that is if in a certain year we can all afford to pay more, then we will all pay more instead of having the same group of people paying more all the time. As regards the anti-economic cycle, Councillor Ho has only dealt with one part and that is if in the midst of a poor economy, the government will need to “spend money”. I agree with this, which is feasible in theory. But one must not forget that when the economy improves, who is willing to support a tax increase? If the overall political climate can trigger everyone to pay more tax during a favourable economic climate, and “spend” while it is not, then this is feasible. However, I feel that we will need to take into account practical considerations behind this financial management ideal.

The balanced budget as stipulated in the Basic Law, to draw a balance between income and expenditure, is very difficult to implement under today’s political structure and practical situation. Secretary Tang knows this well. Politically speaking, it is extremely difficult to proceed with expenditure cuts and tax increases under the current unfavourable economy. Rather, it is easy when the economy is favourable. But if we are to proceed with this measure, then a more flexible interpretation of the Basic Law is called for and extra caution will need to be in place when we discuss the financial reserves. This is because if we are really going to raise tax when the economy improves in order to strengthen the reserves and to make hay while the sun shines, then we will be able to use our reserves when the economy trends down. Under the present situation, it is very, very difficult to implement this. We even need to be extra careful and not to set a ceiling or a minimum for the reserves in order to take this measure. This may not be an ideal financial management situation, but to cope with the current political situation , this may not be an option for consideration. The political climate, however, is still difficult to grasp.

Align politics with economy, Impose self-added value

I would like to give credit to the HKSAR government for their contribution to making possible CEPA and the individual mainland visitors scheme implemented by mainland China this year. I have once said that from a unilateral point of view, these policies appeared to be beneficial only to Hong Kong. I think Hong Kong need not be too modest. If we keep saying that Hong Kong is the beneficiary, this will make Hong Kong people feel shameful and central government officials look down on us. When Hong Kong talks about politics, very often we talk about the “heart” and not “money”. But China definitely talks about both the heart and the money. It is my view that when we fight for our share of rewards, we should not forget to align politics with the economy. (Regrettably, sometimes Hong Kong people seem likely to do the reverse.) In my opinion, Hong Kong has a lot of value and can discuss with mainland authorities issues of varied nature. I think that Secretary Tang should lead Hong Kong’s economy to add value so that we can further enhance our value to mainland China in other areas and when we fight for our share of rewards, we do not have to be either humble or disrespectful”.

In raising these key views and data, we need not make a humble estimate of our abilities. Of course, these matters should not be placed only in the hands of the SAR government – Hong Kong’s “small government”. Very often, they should be handled by the business and professional sectors. China’s system varies from Hong Kong’s. Politics and the economy go hand in hand in the Chinese government. Many a time when we are faced with China’s fight for their share of rewards, we need to be very restrained. All those who are involved in politics should lend a hand to the government. We should not be provocative or confrontational, otherwise it will bring about adverse effects, causing Hong Kong’s economy to slide until one day, Hong Kong becomes a negative asset on the political stage or on China’s international political stage. Should that really happen, then our remaining economic value may not serve as insurance for “one country, two systems”.

I have spoken quite substantially on Public Sector Reform. I have also spoken at the Government Efficiency Unit and I will not repeat my words today. That day, I spoke on a lot of issues such as joint ventures with private enterprises, stock listing and the salary review. I later discovered that many civil servants (I was then addressing several hundreds of civil servants) have given positive feedback. This proved that many leaders of our civil service have an open mind and are genuine in doing good for Hong Kong. The only thing that we fail to see is the political determination of the government and the councillors on this issue. I wish to say a few words on this to the Legislative Council and to Secretary Tang.

“Relax” the system to solve budget deficit

Some 20 to 30 years ago, several financial secretaries made drastic expenditure cuts when the economy was in an adverse condition and attracted substantial praise. These included John Bremridge and Philip Haddon-Cave. However, some 20-odd years later, the government structure is even more overlapping and the rigidity of the system is even more deep-rooted. If we do not make the system flexible, it would be like last year when the Secretaries were suddenly given a knife on the one hand and were restrained with the system on the other. They were then asked to make a cut and they did not know where to cut. If they were to make an internal cut, then the cut would be inflicted on their flesh; if they were to make an external cut, then the cut would be inflicted on their partners and that would spark off public rage. That was a difficult dilemma. I think that to solve the structural deficit, we must not only turn to the sales tax, which I have long discussed, and solve the revenue problem, equally important we must resolve why our expenditure has grown easily but been difficult to constrain.

Let me turn to Egypt again. In the ancient city of Memphis, most of the pharaohs then were ambassadors dispatched from Greece. I am tracing back to events that occurred more than 5,000 years ago. Of course they did not need to go through election. But every year, the pharaohs needed to demonstrate to the public their physical strength in a vast square in front of the temple. They would be chased by a wild bull and if the pharaohs could escape the attack of the bull within a circle, they would show to the public that they were healthy, macho, alert and had the ability to lead the people in the coming year. (But whether they did anything to the wild bull, I am not sure.) This was an act of tremendous difficulty. What Secretary Tang has to face is of course not a wild bull, but 60 very hard-to-handle Councillors. It is indeed not easy to get the support of the Legislative Council every year.

Harmonious political and human relationships, Sustainable economy

I have spoken many times and on many different topics at the Legislative Council. On a final note, I would only wish that Secretary Tang would continue his harmonious political and human relationships; that the clouds and rains over Hong Kong’s economy would clear and the structural deficit would become a history of the past; that the unemployment problem would be solved as soon as possible without having to wait till Secretary Tang steps down; that the economy would be sustained without witnessing any slump. I wish all the more that he can trigger Hong Kong’s economy to advance so that the status of Hong Kong as an international financial centre can be further enhanced.

With these remarks, I support the motion.


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