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Start Again from Levels of 1997

(Article to China Daily - 2003.3.5)

With no secret kept that the 2002-03 Budget deficit will leave a gaping wound of $70 billion or more to our public purse, the Government of Hong Kong has recently shown unprecedented resolve to tackle the budgetary problems and to return to a balanced Budget as quickly as possible. Targets for cutting $20 billion from recurrent public expenditures and more than 10% head-counts of civil servants were set early and now, at long last, actions are truly being implemented in full swing.

In fact, the momentous efforts of the Government can be made much more effective, if we are to ride on the tide of an economic recovery. However, as an externally orientated economy, Hong Kong is particularly susceptible to the influences of the uncertain outside world. At present, the threat of war in Iraq casts a very dark cloud over the all-important oil prices and the flow of international trade. Financial markets globally are still fragile and nervous after successive corporate scandals causing a general loss in confidence. Locally, we have not quite yet broken free from the downward spiral of price level and assets devaluation.

However, at home our Government and the business sector have not been sitting idly. Through great efforts of consolidation and policy adjustments, there are already some early signs of economic rebounds. The recent policy corrections made by the Government on the property sector had helped to calm the nerves of developers and investors alike. Given some time for the market to absorb its temporary over-supply in a rational manner, the deflationary trend of Hong Kong should be arrested and a healthy properties market will no doubt emerge again in the not too distant future. Our manufacturing industry, import and export trades, tourism industry and the financial support services sector are all adapting fast to the new economy of China. Some of our leaders are already turning in good profits contributing to help Hong Kong's economy to return to growth. I am certain that a re-structured, re-positioned and re-focussed Hong Kong will emerge long before the end of the decade.

Notwithstanding these positive signs and our Government efforts, the road to recovery is invariably 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 2006-07 would come only from the limited resumption of land sales and a possible better rate of return from investing our fiscal reserves. 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. Unless the Government can back up its claim by credible prediction models and valid economic assumptions, the Financial Secretary will be pushing his luck if he tries for a figure of $30 billion or more. An over optimistic forecast at this time is likely to be met 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. It is by far the best way to demonstrate instantly to the international financial community of our ability to keep our own house in order. Despite these obvious advantages, the remaining target of raising new revenues to the tune of some $20 billion seems quite unattainable at first glance.

In order to achieve this target and at the same time not hiking up any particular tax source to an unacceptably high rate. A wide range of measures must be implemented instantaneously placing burden on almost every citizen, rich or poor. As all of us are bracing for the knife to fall on Budget day, the politicians and activists representing the vested interest groups, the rich, the poor and the middle classes are already 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. The very moderate deal means that salary cuts from the civil servants would not help the deficit much in this year and the next when it is in its most critical stages and that public confidence will be at the lowest. Savings will have to be found elsewhere first through significant cuts in a variety of public services.

The art of procuring revenue to help balance the budget outside the public sector is even more complex and politically treacherous. I am sure that the Financial Secretary will try to tamper the unpalatable package this year by mixing in some one-off measures like the sale of railway shares and accepting a moderate deficit at an acceptable level. The business community is already bracing itself for a 'one to two' percent profits tax cut. That should yield about $4 billion. The taxes on land departure, foreign domestic workers should yield another $2 billion, leaving about $14 billion to be raised in the next few years 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 the heads of the upper-middle income group from the existing narrow tax base.

The community has now called into questions our Government's credibility and trust. The politically inert middle class has become judgmental and vocal in demanding that the Government to fairly balance the different interests of the community. Its credibility and trust will be under serious tests if it bullies the meek and quiet and pampers the rich and noisy.

I believe that the middle income group of Hong Kong have been the most reasonable and tolerant people on earth and that attribute truly deserves careful protection and preservation in our long-term interests. They will not find it difficult to see what serious financial troubles that Hong Kong has got itself into. It will also be in their vested interest to maintain currency stability and a low interest rates environment in order to manage their financial affairs with certainty. A higher tax bill to pay, if need be, is warranted as the price for this stability. However, such tax increases must be affordable and fair. They would expect the Government to demonstrate that actions are already at hand to cut its own expenditure in earnest. They might question why a target to balance the Budget has to be set in the year 2006-07 if it means many possible downside effects on our competitiveness and economic recovery. And most important of all, what are our prospects in the next few years if we are to bite the bullet now!

In my view, rather than for the Government to argue on the rates, the amounts and the pace of levying different taxes on individuals and corporations, an alternate measurement may be to ask everyone to look back in time to the happier days of 1997. Some adjustments are still obviously necessary to take account of changing circumstances but the broad balance struck prior to the financial turmoil may be a good place to start in treating everybody fairly. If we can settle on this issue quickly, then the energy of the Government, the business sector and the community will be devoted to build on the efforts that has already been started to drive Hong Kong out of the doldrums and in fine tuning our future goals.

I would also urge the Government to treat the 2003-04 budget as a temporary solution only. In a way, existing taxpayers are now being forced to accept a sharp tax increase without a proper review of the structural problems associated with the major shift of public revenue. I believe that a better balance should be found in the longer term to share this fiscal burden more evenly without compromising our external competitiveness. Hong Kong's position must not be weakened for too long and we must keep pace soon with the global trend of reducing taxes.

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 instead by accepting that we pay for the services we enjoy. At times of difficulty only unity, not divisiveness and in fighting, that will get us out of the doldrums. I say this not just to help the Government but to urge the people of Hong Kong to help ourselves.

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