There are many ways to look at
a Government Budget. In the short space available here,
I shall attempt to analyse it from an accountant's viewpoint;
a political perspective and then also from the standpoint
of the middle income group.
True and fair view
Accountants take the 'true and fair view' concept
very seriously. We also try to make predictions and
forecasts as accurately as possible based on reasonable
assumptions. Being financial experts, an accountant
would always try to control expenditure in time before
heavy losses had been incurred. The outcome of the
2002/03 Budget completely blew its forecast, ended
up with an unacceptably high deficit of $70 billion
and failed in the control of the run-away public expenditure.
It is hard for an accountant to endorse a set of accounts
in this shape without the most sober qualifications.
In the Budget Debate of 1999, I have already foretold
that the Government was heading for a serious structural
deficit and urged the Administration to take steps
to control expenditure in way of public sector reforms.
I also warned the Financial Secretary in last year's
Budget Debate about the high systemic risks of his
forecasts with regard to the unconventional estimates
in the civil servants pay reduction, optimistic economic
growth and ambitious land and assets sales. When the
government pushed for the one-off legislation last
year to establish a one percent cut in civil services
pay, I urge them not to waste time but to embark straight
away on a fundamental review in pay levels. I advocated
the immediate consultation and legislation to establish
a fair mechanism on a permanent basis to enable the
adjustment of civil servants pay both downwards and
upwards. I can only hope that the Government has now
learnt a lesson from these past mistakes.
Not a 'true' political balance
In the last decade or so, the Government has succeeded
year after year to forge a broad political consensus
with major political parties in the formulation of
its Budget proposals. This year's Budget has clearly
deviated from this practice and is far more aggressive
than any proposal put on the table. It is clear that
the Government is taking some risks in trying to drive
this unpopular Budget through a very grudging LegCo.
If the past few Budgets can be described as financially
imprudent, then this year's Budget can be described
as politically heedless.
Although the Hong Kong community accepts that we
should all share some responsibilities in alleviating
the gigantic deficits, we all differ in our views
on who shall bear the greater burden. I was first
to propose, during a public forum organised by Ming
Pao in 14 December 2002, a 1:2:3 split in addressing
the $70 billion deficit by new revenue, economic recovery
and public expenditure cut respectively. The Government
now comes up with a 2:3:2 split. Therefore, it is
my view that the Budget levies too much new taxes;
relies too heavily on the fatalistic economic recovery
and is far too weak in the internal efforts to cut
its own towering expenditure.
The 2003/4 Budget is also taking risks in the financial
arena. In my view, it is unscientific and unsafe to
simply wish that $30 billion recurrent deficits would
disappear as the result of the natural process of
economic recovery. I have argued many times before
that the territorial based tax system is already outdated.
As more and more taxable economic activities are being
moved outside the territory, the economic recovery
in terms of GDP growth is unlikely to generate revenue
quickly. The Government also counts on $7 billion
in cost reduction through cuts of 10 per cent headcount
among civil servants. In this calculation, 8 per cent
(2 per cent per year from 2003/4 to 2006/7) of the
cut would come from natural wastage e.g. retirement.
However, natural wastage is not the best form of human
resources management. In any case, the outsourcing
and privatization exercises of the Government may
require a very different group of young civil servants
to lose jobs before savings can be realised. A mismatch
of manpower is therefore going to be a likely scenario
in the coming years. The third risk factor is the
ambitious plan to sell $100 billion income bearing
assets. Even if we managed to fetch such good prices
for these assets within such a short timeframe in
this weak financial market, I estimate that in the
year of 2007/08 the loss in the recurrent investment
income will be $15 billion or more each year. The
next Financial Secretary will again have to find more
ways to make up for this new income shortfall.
Not 'fair' to the middle class
The Government aims to raise $20 billion annually
from new revenue measures by 2006/07. When we compare
this to the existing base of about $50 billion in
profits tax and $30 billion in salaries tax, the size
of this additional $20 billion tax increase seems
an impossible extra burden on the existing narrow
tax base. It is so unfair to expect the slightly over
one million higher-middle income group to bear the
brunt of this incredible tax hike.
Although the Government has finally refrained from
announcing immediately a full $20 billion tax increase,
the first phase - a $14 billion new tax package is
already large enough to send shock waves through the
entire social stratum of the community. The aggressive
revenue measures also resulted in revolts amongst
the Government's own backbenchers. The two political
parties led by Executive Council members are planning
to modify the new tax measures in defiant of the collective
As for your LegCo representative, I have pledged
support to the extent that one sixth of the $70 billion
deficit could be met by new revenue measures i.e.
$11.7 billion. The present $14 billion package is
already in excess of what I consider as a fair share.
Noting that nearly half of the $14 billion tax increases
come from salaries tax, it is clearly the priority
area that I shall be looking at to see if some of
that burden can be reduced.
A better balance is possible
I believe a better balance can be achieved if the
Government does not bind itself to such unrealistically
rigid rules. I see no valid economic reason to set
2006/07 as the deadline for balancing the Budget.
I cannot understand how the Government can make a
promise not to involuntarily retire a single civil
servant. I believe that a fundamental reform of the
revenue base is necessary rather than simply piling
more tax onto the existing narrow tax base. I consider
it extremely important for the taxpayers to see hope
at the end of the tunnel before they are asked to
Stability and preservation of financial strength
If we put the Budget under the microscope, there are
many faults to be found in the details. However, it
has achieved perhaps the two most important objectives
of maintaining stability in our financial system and
preserving the financial strength of the Government.
Despite the grave rigidity of our dinosaur Civil
Service pay adjustment system. The Government has,
at long last, shown the will to start tackling the
problem. The Budget has also appeased the international
financial community and spared Hong Kong from a credit
downgrade. For the time being, we are also saved from
a speculative attack on the dollar link, which may
cause a serious systemic shock to our financial structures.
As a legislator, our power to change the Budget is
almost non-existence. It is a take it or leave it
approach. Under the circumstances, we might just have
to live with an imperfect solution and give it a chance