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Comments on 2000/2001 Budget

4 May 2000

The Honourable Y K Tsang, JP
Financial Secretary
Government Secretariat
Central Government Offices
Lower Albert Road
Hong Kong

Dear Mr Tsang,

We are writing with our comments on your 2000-01 Budget.
(http://www.info.gov.hk/fb/budget2000-01/english/efile.htm#Estimates for 2000-01)

It has been the Foundation's position for many years that a fundamental review of the tax system, and of the whole system by which Government is operated and funded, is needed. We therefore welcome those parts of your Budget that seek to move in this direction. However, we must express our overall disappointment at the slow pace and incremental nature of the steps taken. The distortions in the present system are a burden on Hong Kong's economy and society that should not be tolerated any longer. We refer you to our letter to you of 21 February 2000, a copy of which is attached for your convenient reference, for a statement of the problems we see in the current system.

We are particularly concerned at the proposal to increase fees and charges. And we are disappointed at the modesty of the proposals to reform the Civil Service.

Intervention and Financial Market Reform

Paras 6 and 7. We note the tone with which the Cyberport and market intervention initiatives are described and hope that these will indeed remain "extraordinary" and exceptional items that will not recur.

8, etc. We agree that the economic crisis opened a window of opportunity for financial system reform. We are therefore disappointed that the reforms have mostly been of such modest scope, much less than those of most if not all of our neighbours. We are concerned that Hong Kong will pay for this complacency in the years to come.

15 to 19. We note and agree with the principles and analysis set out in these paragraphs. It is indeed true that none of the past successful transformations of the Hong Kong economy was the result of government planning or directing the economy. We hope that this wisdom will guide government policy-making in the future.

25. The quoted rationale for government "intervention" put forward by Sir Philip Haddon Cave is almost meaningless. It amounts to no more than saying that Government should intervene when it likes to; in other words, it is no principle at all. It is too coarse an analysis to characterise acts such as the establishment of the linked rate system as "interventionism". Such acts are better regarded as constituting or framing, rather than "intervening in", the economy. It is surely the Government's task to establish the framework within which the economy operates. We would reserve the word "intervention" for when the government departs from its framemaking role and enters the economy as a player alongside other players – as the Government did during the August 1998 stock market intervention. In this latter, and truer, meaning of the word intervention, Government should not intervene in the economy at all. We refer you to our website [http://www.hkdf.org/newsletters/9909/0999_4.htm] for a recent paper we have done on the role of government in the economy.

67. We query the claim that Hong Kong is the leading market for global shares in the Asian time zone. Very few foreign stocks are listed on the stock exchange. NASDAQ has alliances not only with Hong Kong but also with other exchanges and entities in the region, for example Australia and Japan.

69. We would support the goal of attracting foreign entities to issue debt in Hong Kong. However, it is the policy of the Hong Kong Monetary Authority to discourage certain categories of debt issue because of concerns about the use of the proceeds of swap transactions. The HKMA's policy is inconsistent with the aspiration to develop Hong Kong as an international financial centre and should be reviewed.

70. We are surprised at your proposal to introduce bank deposit insurance. A similar proposal was dismissed after extensive study in the early 1990s (see our website [http://www.hkdf.org/papers/920517deposit.htm] for detail). We are not aware of any proper statement of why the reasons for dismissing the proposal then are not still valid.

77. We agree that the standard of corporate governance in Hong Kong needs improvement. We are therefore surprised that your budget appears to make no reference to the review of the Companies Ordinance which we would have thought could make an important contribution to such improvement. We would also prefer the proposed review of corporate governance to be undertaken by parties independent of the Secretary for Financial Services and the Standing Committee on Company Law Reform.

103 to 109. We agree with the "Vision/Mission" on human resources. However, we would like to draw your attention that the practical measure implemented in Hong Kong are not "market driven", nor are not conducive to the effective implementation of such a vision. We urge you to review the effectiveness on the structure and organisation charged with the implementation of the stated vision.

111. The 5% target for public sector productivity improvements is far too modest. The review should rather be zero-based: each activity currently undertaken by Government should be reviewed to see whether it is necessary, and if so, whether it could be done better by the private sector. Only those government activities not caught by these two tests should remain in government. And these should be subject to a much higher productivity improvement target, for example 30 or 40%.

115. The proposal to cut pay for new entrants to the Civil Service is simply inadequate to deal with the problem. Pay at all levels should be reviewed.

127. We would like to see the supporting figures for the claimed earnings on fiscal reserves of HK$44 billion. There is a lack of transparency in the accounting here.

139. While government expenditure growth should be linked to economic growth, at present this simply ties Hong Kong to an arbitrary, historically-determined relationship. There should be a review of the services the community needs, what portion of those services needs to be provided by government, and what the government-provided services cost. The resultant figure should then be used as the basis for the expenditure: GDP calculation. Such figure, if properly calculated, might be substantially different from the ratio today.

155-159. The chart gives the lie to the caution expressed in these paragraphs since it shows the immense size of the surplus earned in 1997/98, only two years ago. The fact is that Hong Kong has immense reserves and a revenue raising system that is capable, over the economic cycle, of yielding substantial surpluses that further increase the already-excessive reserves.

193. We totally reject the argument that fees and charges have to rise. The starting point - the existing charging base - is flawed and unacceptable. The entire system of charging should be reviewed. In many cases where a service can be charged for it should not be provided by the Government at all but should be contracted out or privatised.

203. We disagree with the defence of current government expenditure. The majority of this expenditure is on civil service or subvented organisation salaries. There is no basis to say that these services are efficiently delivered, or, in many cases, whether they are even needed. There should be a complete and fundamental review of the services to be provided by Government. In any event, the vast reserves mean that even if no change in made to the expenditure side, Hong Kong is far from facing a fiscal problem.

206. We welcome the initiative to study whether there is a fundamental shift in the revenue base. Such study is long overdue. However, we would prefer independent input in to the review.

207. We are not satisfied with the proposed committee to review the possible introduction of new taxes. Firstly, this committee consists of a narrow technical constituency; what is needed is a review by the whole community of what services it want from Government and how it is prepared to pay for them. Secondly, the scope - looking into the introduction of new taxes - is too narrow; the review should rather be of the revenue-raising system as a whole.

We hope that the above comments are useful to you.

Yours sincerely,

Alan Lung Ka-lun
Chairman

Encl.