The alarm bells rang early for
the Budget this year. It¡¦s 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
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packages by an outdated salary adjustment system.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going to be withdrawn?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.
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.
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
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 Kong¡¦s 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.