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Submission on 2002/2003 Budget

18 January 2002

The Honourable Antony Leung, GBS, JP
Financial Secretary
Government Secretariat
The Government of the HKSAR

12/F, Central Government Offices

West Wing, Lower Albert Road
Hong Kong

Dear Mr Leung,

SUBMISSION ON 2002/03 BUDGET

We are writing with our submission on the 2002/03 Budget.

We have written to you before in some detail giving our views on Hong Kong’s monetary and fiscal system. Therefore, we restrict ourselves to the key points we would like you to bear in mind as you finalise your first budget speech.

1. Controlling costs in the public sector. Government spending is at nearly 25% of GDP, far higher than the 18% targeted in recent years. The amount of Government spending is excessive in relation to the services provided by Government. We welcome the various initiatives that have been launched to review pay in the Civil Service and the public corporations. However, these reviews appear likely only to scratch the surface of the problem. Not only is pay very high but, more importantly, performance measures and accountability are rudimentary, especially in the public corporations. More important still, much of the activity currently carried out in Government and the public corporations should be greatly streamlined, or transferred to the private sector through privatisation and contracting out, or not carried out at all. A fundamental review is needed.
   
   
2. Over-concentration of resources in Government. We continue to believe that the most important financial issue confronting Hong Kong today is the over-concentration of financial resources in the Government – the fiscal reserves, the accumulated retained earnings of the Monetary Authority, and the various other investments and shareholdings. The accumulation of this wealth in Government creates various economic distortions which we have detailed elsewhere. It is a priority to return this wealth to the people and businesses of Hong Kong.
   
   
3. No new taxes or rises in tax rates. We strongly urge that no raising of tax rates or introduction of new taxes be considered until a fundamental review of value obtained from the public sector has been launched (i.e. point 1 above). Firstly, the forecast deficit of HK$60 billion for this year may well prove overstated; the Government’s forecasting record in this respect is poor. Secondly, if there should prove to be a deficit, a large element of it will be cyclical, since Hong Kong is in the middle of a recession. Thirdly, as stated in point 1 above, the Government has excessive reserves anyway, and at a pinch could easily afford years of deficits to run these down to a more reasonable level.
   
   
4. Rationalisation of the tax system. Historically, the fiscal system has been over-reliant on land-related taxes, which introduce economic and social distortions that we have detailed elsewhere. The reliance on land-related taxes should be reduced. At the same time, tax deductions for accommodation, eg rental paid by the employer and mortgage interest relief, which are also economically distorting, should be reduced and eventually eliminated. A further anomaly is that less than half the workforce pay tax. The excessive increases in personal allowances during the last decade should be reversed. However, this could be done in a revenue-neutral manner, for example by widening the bands and/or reducing the tax rates. Finally, if a sales tax is to be introduced at some point, the socially regressive effects of this should be considered carefully, and measures taken – not through the tax system, but elsewhere – to address the needs of the less well off members of our society.

We hope these few key points will be helpful to you.

Yours sincerely,

Alan Lung Ka-lun
Chairman