What Business Expects of the Government
Mr Anthony Nightingale, Chairman of the Hong Kong General Chamber of Commerce, was the Foundation's guest speaker on 22 March 2004. Below is the full text of his speech.
I am delighted to be here to discuss with you our views, as the Hong Kong General Chamber on what business expects of Government. The topic is quite broad and in the interest of time, as I see that we have a 2 o'clock deadline and I don't want to eliminate question time, I will limit myself to our views of what we see as the two most important issues facing Hong Kong today:
First the budget deficit and secondly constitutional development.
Before I start, I want to comment that we read often in the newspapers that so and so, representing the business community, has this view or that about some important issue. We like to think that our Chamber with a good cross section of members from local, international and mainland organizations, comprising small medium and large companies, is fairly representative of Hong Kong business but we are careful not to represent ourselves as speaking on behalf of the entire business community, where there are of course many divergent views.
Therefore the views I offer today are ones which have been discussed and agreed upon within the Hong Kong General Chamber of Commerce.
Let me start with the deficit. As we all know, the economy is getting better. I expect the Chamber will soon be adjusting upwards our GDP growth forecast for this year from the less than four percent we predicted a few months ago. Indeed, Financial Secretary Henry Tang put out a forecast of six percent for the year just a couple of weeks ago. Businesses are busy taking advantage of the new opportunities, whether from better retail spending both locally and from tourists, from CEPA, or from new market developments.
But looming over our head is the fiscal imbalance and our uneasiness that there is resolve to follow through on a plan to deal with it, although I was personally encouraged earlier this month to see a firm set of target figures with milestone dates announced by the Financial Secretary. Hong Kong is just completing its 6th straight year of budget deficits, and while the size of the shortfall in the budget year soon to end is smaller than expected, it is still on the dangerous side of 4% of GDP.
There are a variety of issues involved in the deficit, including cyclical, structural and extraordinary factors such as SARS. Most commentators suggest a "three-legged stool" to address a budget deficit problem: that is, a combination of better economic growth, more revenue and less spending.
Over the past few years the business community as a whole has worried about Government's lack of determination in reducing spending, and the very fragile nature of our revenues. This budget year, after running up a record deficit, our recurrent spending actually increased by more than $5 billion. That was the fourth spending hike in four years, and unless we reverse this trend, we are going to get into even more trouble.
I know that the solutions aren't easy; if they were, we wouldn't be in this predicament. Earlier this month, the Financial Secretary laid out his view for restoring our fiscal health through a combination of faster economic growth, drawing down our fiscal reserves and, starting next year, a gradual reduction in spending. We were pleased to see that the budget includes milestones for reducing operating expenditure and the size of the civil service, and you can be sure that the Chamber will be "holding his feet to the fire" as we monitor progress that the government makes in reaching these milestones.
The biggest challenge will be actually to carry through with the plan in the face of complaints from those departments whose budgets will be cut and from those segments of society who will be asked to pay for the services they receive. And, as the nature of governments is such that every program or department has a champion, this won't be easy.
What is needed is a fundamental rethink of what services Hong Kong needs that can only be supplied by government, which services currently in government hands can be more efficiently and economically provided by the private sector, and how we are going to pay for these services. One aspect of this is more use of Public Private Partnerships and Government is planning to experiment more with these, after much urging.
One of the major structural issues we need to deal with is the rigidity of the civil service. The SAR government is over-staffed, and as several studies have shown, the civil service is paid much more generously than the private sector. Just over a year ago, the Chamber commissioned a human resource management consultancy firm to conduct a detailed job-by-job comparison of pay and benefits in the public and private sector. The results were astonishing; it found that average Civil Service pay is 17% higher than that of the upper quartile in the private sector, and when benefits are included, the differential is 40% in favour of the public sector. I will not dwell on the important and complex subject of civil service reform since I was told you will have another speaker specifically addressing this issue in a few weeks and I would not like to steal Mr. Apps' thunder.
One of the foundations of Henry Tang's first budget is strong economic growth this year, certainly stronger than we've had in quite some time, and I think he's probably not too far off the mark. But while it is true that a rising economy generates more tax revenues, we should remember the link between faster growth and higher revenues is a very loose one. And over the past 20 years, while our GDP increased in nominal terms by an average of about $50 billion a year, tax revenues rose by only an average of only $6 billion per year. At that rate, it is simply not feasible to expect to grow our way out of the deficit.
Our tax structure is not geared toward sustaining a balance through good times and bad. When the property market turns down, or simply doesn't rise, we lose revenue from land premiums, stamp duties and profits taxes. In total, about 25% of our revenues are dependent on a vibrant property market.
And so, we cannot continue to depend on property or equity bubbles to fund our operating expenditure. We must have more reliable income sources. That means broadening the tax base, so that a poor year in the markets won't send us plunging back into deep deficit. On this point, we are heartened by the strong support the FS gave to broadening the tax base by initiating a study on a Goods and Services Tax, and we should be assisting with education so that a rational and substantive debate over GST will take place after the internal committee submits its report to the Financial Secretary. It is also important of course that, if such a tax is introduced, it is done in the most effective manner to reduce unnecessary administrative costs and to handle any exemptions as efficiently as possible.
The simple truth is that restoring fiscal health will require sacrifices, from everyone. Business and salaries earners are already contributing more, through tax increases last year and, in the case of salaries, the second phase increase this year. We need to share this burden more broadly.
The fact is, Hong Kong has very few taxpayers. We have one of the narrowest tax bases in the developed world. Between 1997 and 2002, our population grew by 300,000 while our tax base shrank by about 40,000 people. Last year's rising unemployment and reduced salaries and bonuses narrowed the tax base by an estimated 45,000 people leaving some 1.25 million people paying taxes. No wonder our recurrent revenues have been declining for five straight years, even as our spending continues to rise.
Only around 17 to 18% of the population pay any salaries tax at all which is a very low figure compared to 50 percent in the UK and even higher figures in certain other European countries.
If we as a community wish, as we should, to continue to maintain funding for education, healthcare, social services, the environment and other public spending, we need to bring more people into the tax net. A GST is a good way to do so, although we as a community certainly have much to learn, and to decide, on how and when to implement it.
A question often asked is why the SAR government has not laid out a more convincing roadmap to address the budget deficit problem and why has it not addressed the long term problem of civil service restructuring, other than imposing a rather mild 0-3-3 civil service pay cut formula spread out over three years.
I believe the answer is the inability of the administration to tackle these major problems in an atmosphere of confrontation with Legco and poor public support and this takes me on to constitutional reform. This inability can be traced largely to the awkward political system which we have. Putting it bluntly, the current political system is not functioning well and cannot cope with the challenges of the future. This is why over 75% of those who responded to a Chamber survey last autumn said they wished consultations on political reform to start sooner rather than later. We must acknowledge that society appears to have aspirations on some movement in this direction.
We had high hopes in January when Donald Tsang was named to head the task force to discuss with Beijing the principles of such a political consultation. We sent in early February a Chamber submission, which can be viewed on our website (www.chamber.org.hk), which stresses patient and thorough consultation, focusing on institution building rather than on a target date or a specific result. Unfortunately, much of the discussion thus far has been focused precisely on what we consider as premature conclusions--a date and an outcome. Worse yet, the current discussion has often turned from being potentially useful to potentially or actually divisive.
It is disappointing when something as important as how we are going to choose our leaders becomes oversimplified and politicised. In Hong Kong, we have one side saying that nothing can be done for at least eight years and perhaps longer, while the other side is demanding the sun, the moon and the stars immediately, without any thought to the price, responsibility, or consequences of the outcome they desire. And it is sad to see the very noble but complex concept of "patriotism" discussed not in an educational and thought-provoking way, but in an "us vs. them" name-calling way. Nastiness and oversimplification seem to be flowing entirely too freely these days, and we all stand to lose if this continues.
I should add that although the central government has taken a tough line on its role in the consultation process and over some behaviour of some of our legislators, it appears that it has not officially issued a position on the pace or a timetable of reform. One has to be careful to wade through all the rhetoric these days to sense "what is noise and what is voice." I think if you listen carefully to Premier Wen Jiabao's press conference statement on March 14, you will sense some moderation and some open mindedness there, or at least not the vitriolic tone conveyed by some of our local personalities who claim to have "close connections" to Beijing.
After we drop the name-calling and the polarizing actions, we must also drop the idea that certain things must - or must not - be done by 2007, 2008, or 2xxx. We must also stop setting up straw man outcomes of constitutional reform and criticizing them, when in reality whatever outcome should happen in a systemic reform setting and not in isolation.
For example, universal suffrage does not automatically lead to welfarism, but it can if the accompanying tasks, such as educating people on the price of such responsibility and implementing a broader tax base, are not carried out, or if governance still continues to be a problem. On the other hand, to throw in a whole slew of policy issues such as labour rights demands, as one of those Hong Kong gentlemen who testified in Washington DC did earlier this month, and equating that with universal suffrage not only scares away those in the business community who may be sympathetic to universal suffrage, but also mixes up "policy" with "system." These are all unhelpful at this stage, in my view. What we need to do now is to focus on getting the process right.
What do I mean by "getting the process right"? I think there are 5 key points. First, we have to ensure that both the consultation process and the end result do not undermine our prosperity and stability. For example, the budget deficit I mentioned above still needs to be addressed as we debate our political future. Hard work by all of us to boost the economy of Hong Kong needs to continue all through this process. And it is paramount that whatever result maintains Hong Kong's unique economic advantages and positioning.
Second, we must be appreciative of, and sensitive to, Beijing's interests at all times. As sovereign in the "One county, Two systems" arrangement, the Central government has definite views, and what is more, its concerns range beyond just Hong Kong. Of course, underlying this process is the Basic Law. There are parts of the Basic Law that permit some small adjustments in the number of seats in LegCo or other areas. However, all of the substantive changes that have been mentioned recently, such as directly electing the Chief Executive or creating a fully geographic LegCo, have been determined by our own Chamber's Legal Committee to require the approval of the Standing Committee of the National People's Congress. Not only that, it has been made abundantly clear by Beijing that it would like to be involved in the process every step of the way. We must be realistic and not underestimate Beijing's reservations on too quick a pace.
Third, the community must understand the price of democracy and start discussing the institution building requirements: more substantive think tanks, more developed political parties, improvement of the relationship between Legco and the executive-led government, development of a tax base that is broad enough to make people aware of the responsibility they have, and civic education to the young, etc. Then we can talk about what system to put in place.
Fourth, while we need to take the time to get it right, we also need to show progress. Most indicators suggest the people are at large want some change. We have to build a consensus, which certainly is not going to be achieved over night. At the same time, we also have to show that we are moving forward on consultation, both with the Central People's Government and here at home. I am convinced that constructive and reasonable progress will satisfy many in Hong Kong and is in the interest of the whole of China.
Finally, as we move through this process, we should work to ensure that the exercise is one that puts all sides - Hong Kong government, the Central government, and the community - in a good light. We are failing that test right now. We need to handle the matter with dignity and unity, we need to be less partisan, and we need to be realistic. We need to encourage dialogue between those of opposing views.
In conclusion, now that issues of principle are fairly clear between Beijing and Hong Kong, the best thing we can do now is to funnel the discussion back through Donald Tsang's task force, and put the focus back on a constructive, consultative process, not on a target date or on an outcome. A feasible date and a desired outcome will become clear and evolve naturally, as we start identifying and building the necessary institutions. The Chief Secretary was very sensible the other day at the Legco when he cautioned us to be patient and to be constructive and be moderate. We fully support that, and with his task force leading the process, we have a better chance of accomplishing the objectives I laid out above.
Hong Kong is a great place to live and work, to raise a family and to build a business. We have challenges ahead of us, but that's nothing new. When we've faced obstacles in the past, we managed to find a way through. So, in closing, just let me say that economically things look bright, financially we need to meet the challenges head-on, and politically we need to work more constructively together. That is how Hong Kong will pull through once again.
The above does not necessarily represent the views of the Foundation.