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Unity not divisiveness needed to get through the crisis

The alarm bells rang early for the Budget this year. Its no secret that the deficit has left a gaping wound of $70 billion or more in our public purse; the threat of tax and fee increases is real and imminent.

Every resident living in Hong Kong, both the rich and the poor, were bracing themselves for the knife to fall on Budget day. Already, the politicians and activists representing the vested interest groups, the rich, the poor and the middle classes were screaming pain before the knife fell! Few stop to think 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.

No escape

As a possible mean to escape its 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 It is, of course through no fault of their own that they have been offered such generous remuneration packages by an outdated salary adjustment system.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 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 settlements, that hope is now completely dashed.

In exchange for a quick and peaceful settlement with the vocal civil service unions, major political parties and some senior business leaders have forged a broad consensus that an instant cut of 6 per cent may be acceptable. That should help the budget to the tune of some $7 billions in a full year. But if we take the final package of only a modest 3 per cent cut starting from 1st January 2004, the savings this year will be a pitiful $800 million or so. Is it worth all the fuss for a political settlement of such little financial consequence? How can we convince the international financial community, which have a wealth of experience globally in dealing with wage bargaining, that a reasonable deal has been struck by two parties of equally strength? Assuming that the cut was originally planned for 1 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.

Growing liabilities

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 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 an 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 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.

Looming battle

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 is little economic evidence to make me optimism about a speedy recovery, as originally anticipated by the Government last year.

Even if I was bold enough to predict an early recovery by the end of this year; the benefit to the public coffers will arrive only gradually. 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 temper an unpalatable package by mixing in some one-off measures like the sale of railway shares for say, $10 billion. The business community has already braced itself for a one-percent tax cut. That should yield about $3 billion. The taxes on land departure and 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 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 was an opportunity lost to demonstrate the resolve and specific plans of the Government in tackling the problem. The credibility and trust of the Government will 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 bullies the meek and quiet and pampered the rich and noisy.

From my point of view, it is really not difficult to see what serious financial troubles our Government has got itself into. Whilst Hong Kongs political development remains in its infancy, 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.

Dr Eric Li is the LegCo Accountancy Functional Constituency Representative. For more information, refer to his website at http://www.ericli.org 

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