12 March 2000

Prudent and Politically-Correct Budget
loses golden opportunity for widening tax bases
("Letter to Hong Kong")

(Keywords: Budget, taxation system, government charges, civil service)

          There were sighs of relief as the Financial Secretary concluded his fifth Budget Speech. Yes, there will be no tax increase, and no new tax. To the businessmen, the corporate tax remains at 16%, the lowest in the Region. To those who frequent the Mainland and back, they will enjoy yet another year, at least, without land departure tax. To the ordinary people and our very much needed tourists, Hong Kong remains to be a next to tax-free shopping haven with no introduction of sales tax.

A Prudent and Politically Correct Budget

          Much of all these are to be applauded. Looking at it from another angle, what else can the Financial Secretary do? With Hong Kong just coming out of the economic slump, any obvious move to dig into people's pocket could have devastating effect. With LegCo elections some six months away, legislators, at least most of them, would turn their thumbs down on the Appropriation Bill should there be any mention of tax increase, to secure their very much needed votes.

          In short, the Budget named "Scaling New Heights" is prudent and politically correct!

          Yet, all that glitter may not be gold. It would thus be more prudent to closely examine the budget under the microscope, and to read between the lines, before Hong Kong could put in its seal of approval. Two questions are blatantly obvious:

(1) What has the Financial Secretary hide up his sleeves?

(2) How may the game the Financial Secretary played affect Hong Kong in the long term?

          Few would doubt the Financial Secretary's superb understanding of and his mastery art in the application of psychology. For months, Hong Kong people were led to continually bite their nails on the fear of possible tax increase. The final announcement that such is not going to be will, and have, guarantee a complete round of applause.

"Sticks" not far away from "carrots"

          Yes, there were no "sticks" but have there been any "carrots"? A scan of the Budget Speech could only identify minimal perks -- the concession to reduce diesel duty will be temporarily extended to 31 December of this year; exemption of first registration tax for electric vehicles for another three years and reduction of stamp duty on stocks transaction. Most of these do not add much to the common people's pockets. Yet people are still "happy".

          But are there really no "sticks"? Whilst there is no tax increase, the Budget proposes to defreeze government fees and charges and the "user pay" principle be restored, though on a step by step basis. To the low income group, in particular those below the tax net, there is no joy in the year to come. More will be extract from their pockets through fees and charges.

          Similarly, vehicle owners or the soon-to-be vehicle owners must also take heed. For whilst superficially, there may be no increase in first registration tax, the method on which such tax is calculated would be altered. Currently, first registration tax is calculated by charging an ad valorem rate on the published retail price, instead of its cost insurance and freight. Certain items are exempted when calculating taxable value such as air-conditioner, anti-theft device, distributor's warrantees and audio equipment. Many are essential items for today's motor cars. These exemptions could well be withdrawn in the course of time.

Loss of Golden Opportunity to widen tax base

          Nor should the public be complacent and rejoice to the fact that Government will not be digging deeper into their wallet through tax increase in the years to come. Strong hints are obvious in the Budget Speech that "big movements" are on the way in the near future. This is of course not a bad thing. In fact, it is a reality that Hong Kong cannot forever be living in its low tax and narrow tax bases honeymoon. We have to wake up to the fact that we cannot depend forever on ad hoc measures and windfalls like the Tracker Fund, the occasional perks of the stock market etc to keep our financial reserve continuously afloat.

          Admittedly, any form of tax increase is never a popular issue. Yet, can Hong Kong continue to survive on a recurrent revenue coming from a standard rate of 16% in the profit of the corporate companies, and then only from profits originated from Hong Kong? And from only 40% of our working population; even then a mere 0.3% of the entire working population pay the maximum standard rate of 15%?

          What then is the right time to shock the population? As a start, there can never be an optimum timing. When we are in the economic slump, it must be said: Government should never add that straw to break the camel's back by increasing tax. When there is an economic boom when fiscal reserve is plentiful, the public would query the justification for Government to extract more out of their pockets. Perhaps the best time would be when Hong Kong has just emerged from the economic low, when the public has suffered the possible danger of a deficit budget, yet just ready to contribute a bit more.

          If this is true, then the Financial Secretary's Budget of 2000-

          01 has lost the golden opportunity to widen the tax base to assure that there will be a regular income and not depending on ad hoc hat tricks!

Trimming Civil Service a welcoming move

          Much of the Budget Speech has been devoted on civil service revamp -- efficiency productivity programme, trimming the civil service size. This must be a welcoming move that many, in particular the private sector, will endorse. Yet, how effective will it be? A reduction of 10,000-strong seems to be a sizable number; but not really so taking into account the already considerable vacant posts and the projected natural wastage. More, what is the total expenditure needed for those who opt for the voluntary retirement scheme, or golden handshake, to make up the expected trimming?

          Yes, trimming fat, decreasing spending is an essential and effective way to contain the budget. But there could only be that much fat that could be trimmed and unless and until there are also measures to increase revenue, the effectiveness of the exercise will not be long lasting.

Over-stretched health sector can hardly face trimming

          Having said that, there are areas of public services where there will be inevitable surge in demand due to population increase or increasing unemployment or economic downturn. Medical and welfare are two obvious areas. Any "enhanced productivity" measures in these fields must be done without harming the public's well being. More, "privatisation" of certain public services should never provide room for government to shed its very much needed monitoring responsibility.

          It is thus disappointing that very little has been hinted in the Budget Speech on how Government is to take the very much over-

          stretched health care budget forward in the light of a never ending increase in workload. Much emphasis is again placed on the forever awaiting health financing green paper. Yet, when will this "gospel" be forthcoming? Furthermore, any possible proposal, though miraculous that it may be, will only take effect after a period of time. What are the solutions for the present when our public hospitals are now returning to the days of camp beds and our staff are working with inhumane borrowed hours?

Looking forward to overall review

          It may well be said that with the wisdom of the expert teams behind the Financial Bureau and the prudent vision of the man in helm, these and other problems must have been obvious and seriously considered, and that solutions could well be in the pipeline.

          With this in mind, perhaps the 2000-01 budget "Scaling New Heights" where the main thrust is on "capping government spending" could be considered as the Financial Secretary's part one of his two-part financial blueprint for Hong Kong's future. If that be the case, Hong Kong would be eagerly looking forward for the part two which hopefully would be prudent decisions for increasing revenue in the future.

          But before that, it would be most important for the Government to keep up with the heat of the discussion, conduct extensive public debate and consultation and come out with ways and means of widening our tax base that could be acceptable, though invariably with needed concession from many, both from the billionaires to the ordinary man-on-the-street, from the bosses to the tea-ladies.

          Yes, extracting that extra dollar is not easy, and it would be up to our Government to show its determination and wit!

(Radio Television Hong Kong)