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Screaming Pain before it Hurts

(Letter to Hong Kong - 2003.2.23)

The bells are tolling loud and early for the Budget this year. With no secret kept that the deficit will leave a gaping wound of $70 billion or more to our public purse, the threat of tax and fee increases of ample proportion is real and imminent. Every resident living in Hong Kong, both the rich and the poor, are all braising themselves for the knife to fall on Budget day a week from now. Already, the politicians and activists representing the vested interest groups, the rich, the poor and the middle classes are all screaming pain before it begins to hurt! Few would remember that it is also us, the demanding consumers of such a wide range of well delivered public services like good public order, cheap roads, low costs housing, education and medical care, who must eventually find a way to settle the bills.

As a possible mean to escape from one's own inescapable social responsibilities of shouldering more taxes. The attention of the public has been focussed heavily on the relatively high pay of the civil servants. It is, of course through no fault of their own that they have been offered such generous remuneration packages by an outdated salary adjustment system. However, both inside and outside the Government circles, too much hope has already been placed on alleviating the budget deficits through sizeable civil service pay cuts. In the light of the recent theatrical round of wage settlement, that hope is now completely dashed.

In exchange for a quick and peaceful settlement with the vocal unions of civil servants, major political parties and some senior business leaders have forged a broad consensus that an instant cut of 6% in quick successions may be acceptable. That should help the budget by the tune of some $7 billions in a full year. But if we take the final package of only a modest 3% cut starting from 1st January 2004, the savings this year is only going to be a pitiful $800 million or so. Is it then really worth all the fuss for a political settlement of such little financial consequence? How can we convince the international financial community, who have a wealth of experience globally in dealing with wage bargaining, that it is a reasonable deal out of a situation where the Government has at least a equally strong hand? Assuming that the cut was originally planned for the 1st October this year, then where would the Government find the additional $1 billion expenditure cut to compensate for the anticipated savings in this year and the next? What additional services will the Government axe? What type of subventions and subsidies are now going to be withdrawn? What future plans must the Government now put on hold?

The Government has already set the broad parameters for the reduction of its public expenditure by $20 billion on or before the year 2006-07. In real terms that will mean a cut much steeper than $20 billion as some open-ended commitments cannot be capped notwithstanding the trend of continuing deflation. For example, the pension liabilities of the Civil Servants are still quietly ballooning at an unabated rate; CSSA payments for the growing number of elderly, new immigrants and the unemployed, if left completely unchecked, will outpace any imaginable rate of economic recovery in the next few years. Additional savings on top of the $20 billion target will need to be found to compensate for these growing financial commitments. The pressure to find ways to save is high. However, what we know now is that unless the Government steps up its plan for reduction of head counts, the modest wage settlement will be translated into greater service cuts. I believe that the Government now owes a detailed explanation to the public before legislating for the wage change on the exact trade-off that they have given away on our behalf.

The art of procuring revenue to help balance the budget is not any easier outside the public sector. Assuming that the Government eventually managed the $20 billion cut in expenditure, there still leaves a budgetary shortfall of over $50 billion on a recurrent basis to fill. The Financial Secretary is expected to meet this target by raising additional revenue. He can proposes to do this by a combination of new revenue measures, forecasted growth of revenue from existing sources and some temporary measures like sale of assets or loans. A further viable option in the short term will be to tolerate a small deficit of more manageable size. Let me first turn to economic recovery.

The threat of war in Iraq cast a very dark cloud over the all-important oil prices and international trade. Financial markets globally are still fragile and nervous after recent scandals causing a general loss in confidence. Locally, we have not quite broken free from the downward spiral of price level and assets devaluation. There are little economic grounds for optimism to expect a speedy recovery as originally anticipated by the Government last year.

Even if we are to predict an early recovery by the end of this year. The process is likely to be slow and gradual. New businesses and investments generated will take at least two to three years to translate into serious tax dollars given the process of producing the profits, accounting, making assessments and tax collection. In reality, the main contributions that we can count on before the year 2006-2007 would come only from resumed land sales and the improved return from investing our reserves. However, the property market is still going to be vastly over supplied in the next two years and the global equity markets riddled with problems of poor investments and bad debts. In my view, the Financial Secretary will be doing a good job if he manages to convince the shrewd international financial community that he will yield $20 billion more from the existing revenue sources on account of economic recovery. He will be pushing his luck if he tries to push for a figure of $30 billion or more. Unless the Government can back up its claim by credible prediction models and valid economic assumptions, an over optimistic forecast is likely to meet with scepticism.

By contrast, new revenue measures are much more certain and tangible provided that these measures would obtain the necessary approval from the community and the Legislative Council. Despite this obvious advantage, the remaining target of about $20 billion seems quite unattainable at first glance.

I am sure that the Financial Secretary may not wish to immediately aim for such an impossible figure in the first year. He will try to tamper the unpalatable package by mixing in some one-off measures like the sale of railway shares for say, $10 billion. The business community has already braised themselves for a one- percent tax cut. That should yield about $3 billion. The taxes on land departure, foreign domestic workers should yield another $2 billion, leaving at least $5 billion and more to come in the next few years to be raised from salaries tax, rates and other fees and charges. Unfortunately, this will have to mean that an even greater portion of tax burden is likely to fall on heads of the upper-middle income group from the existing narrow tax base.

The Policy Address has been an opportunity loss to demonstrate the resolve and specific plans of the Government in tackling the problem. Expectation is high for the coming budget where giving out greater details seem unavoidable. The credibilty and trust of the Government will also be tested to see it is doing a fair job in balancing the different interests within the community. Its credibility and trust will be lost if it bully the meek and quiet and pampered the rich and noisy.

From our point of view, it is really not difficult to see what serious financial troubles that our Government has got itself into. Whilst Hong Kong is still in its infancy of political development, we may all wish to clutch to our toys (income/personal possessions) and scream like babies when someone else (Government/Inland Revenue) tries to take them away. We can also show a bit more maturity by accepting that we pay for the services we enjoy. At times of difficulty only unity, not division and in fighting, will get us out of the hole. I say this not just to help the Government but to urge the people of HK to help ourselves.

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