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Submission on 2003/04 Budget

23 December 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,

We are writing with our submission on the 2003/04 Budget.

There is a crisis of confidence in Hong Kong’s financial position, as indicated for example by Standard and Poor’s downgrading of Hong Kong’s credit rating. The Central Government is also losing confidence, as shown by the comments of senior Chinese leaders, including Premier Zhu Rongji. It is a great pity that Hong Kong, supposedly an international financial centre, has come to such a pass. It will be crucial for the 2003/04 budget to show that Hong Kong’s finances are being brought under control. If this is not done convincingly, Hong Kong faces a downward spiral, the consequences of which may be calamitous.

Our recommendations are as follows:

1. Proper communication of Hong Kong’s true fiscal position.

For whatever reasons, a number of misperceptions about Hong Kong’s fiscal position have spread. One of these is that the month-by-month fiscal balance (at present a deficit) is a fair indicator of the likely year end position. This is of course not the case. In almost every year the Government’s finances are in deficit during the early and middle part of the year because major tax payments are only due towards the end of the year – profits tax, for example, being due in November. Another misperception is that the fiscal reserves represent the full amount of the Hong Kong government’s financial resources. This is again not the case. The Government has substantial other resources – shareholdings in government corporations and other assets – from which value can be realised through privatisation. And finally there is the retained earnings of the Hong Kong Monetary Authority, not all of which (arguably none of which) is needed to maintain the currency board mechanism. Hong Kong’s underlying financial strength needs to be better explained.

2. Cuts in spending.

The priority in dealing with the deficit should be to reduce spending. The main component of spending is the salaries of civil servants and of public sector employees whose pay is linked to civil service scales; these salaries are in many cases unreasonably high and should simply be cut by a large percentage. We recognise that the matter is not a simple one, that, for example, no review of comparability with private sector pay has been carried out for many years, and that the Basic Law may offer some ground to suppose that Civil Servants’ terms would not be reduced. However, the cut cannot wait until all these matters have been resolved, since this may take years. There must be a "down payment" on the deficit now. Such down payment should take the form of an immediate substantial cut this budget in Civil Service remuneration, followed by a further substantial cut the following year. Remuneration can be fine-tuned thereafter when the results of the pay comparability survey, etc., come in.

However, reducing the level of Civil Service remuneration alone is not sufficient. The number of civil servants must also be reduced. In some areas, such as the police and the widespread use of Government drivers, Hong Kong appears to be seriously over-resourced; these fatty areas should be cut at once. Secondly, the scope of government should be reduced. In general, the public sector in Hong Kong is involved in many activities that in other countries have long been hived off or contracted out to the private sector. Examples include the development and maintenance of housing for nearly half the population, the provision of 96% of hospital services, and water supply. Services for the Government’s own consumption, such as granting of licences, printing, property management, and architectural services, are too often provided by civil servants rather than sourced from the private sector. A fundamental review should be launched with the aim of moving as much as possible of this activity into the private sector, thus narrowing the scope – and reducing the cost – of government.

3. Accrual accounting.

The Government has already made a commitment to introduce accrual accounting. We urge that this initiative be pursued vigorously, with the aim of adopting full accrual accounts as soon as possible on the model adopted by the New Zealand. Without accrual accounting, no fair picture can be obtained at the macro level of the Government’s overall expenditure, commitments (such as pension liabilities) and financial position.

4. Performance management.

Cutting civil service salaries and asking all Departments to make flat 1.8% or 5% budget cuts alone are not sufficient. Such a simplistic approach is more likely to bring about unintended results, such as low civil service morale and economic contraction in a period of time when the public expenditure ought to be increased. It is also necessary to ensure that cuts are made in a rational manner, so that public money allocated to area with low added-value could be reallocated to areas where the public and the economy could benefit in real and substantial ways. As a practitioner in the performance management field, I know and I believe that efficiency at a micro level can be achieved by the introduction of a management methodology that systematically links resources to the results they are intended to achieve, for example: Balanced Scorecard and Activity-Based Costing. Introduction of IT that helps to automate work processes is also essential.

5. Privatisation

In 2 above we recommend hiving off or contracting out to the private sector many activities currently carried out within government. However, privatisation is itself a means of revenue-raising. There are many assets within the public sector which either in themselves or through some form of restructuring could become attractive businesses, the sale of which would provide useful revenues to help balance the budget. Privatisation in other countries has generally brought macro-economic benefits too, since the privatised entities usually become more efficient and offer better and more diverse services to the consumer. Examples of assets and operations that should be privatised include the remainder of the MTRC, the KCRC, the Airport Authority, the Post Office, water supply, and the assets of the Hospital Authority and the Housing Authority. We acknowledge that in most cases restructuring would be necessary to create viable commercial entities. Care also has to be taken where that in case of a monopoly operation either competition is facilitated or the operation is properly regulated. Nonetheless, these efforts are worthwhile since they will not only raise revenue but also contribute in the longer run to a more vital economy and more jobs.

We understand that the proposed sale of a further tranche of MTR shares has been postponed pending more favourable stock market conditions. We submit that while stock market conditions have not been good, several large public offerings have nonetheless taken place in recent months, such as those of CNOOC and Standard Chartered. It would be better for the Government to raise a reasonable sum of money than none at all. Further, there are other policy benefits in distributing shares among the investing population at reasonable prices. Investors have a better chance of enjoying gains over time, and hence are more likely to support future privatisations.

Your budget speech should contain a firm commitment to the privatisation process, and as soon as possible a list of entities and operations to be privatised should be announced.

6. Land-related revenues

We very much regret the suspension of land sales announced recently. We believe that this is a retrograde step, hampering the natural adjustment of the economy to more reasonable price levels. It also has the unfortunate effect of cutting off an important source of government revenue.

We urge reconsideration of this policy. The suspension should be as short as possible, and land supply resumed. Further, the whole system of land allocation by the Government needs to be reformed. In the long term we would hope to see the privatisation of land – i.e. the conversion of the present leasehold system into freehold.

7. Reform of tax law

The Inland Revenue Ordinance has its roots in early twentieth century British colonial legislation. Many concepts need clarification, including the source concept for profits tax. Modern concepts such as the taxation of the service sector and of e-commerce, need to be considered. A fundamental overhaul of the ordinance is needed.

8. Tax increases a last resort

We believe that the priority in your budget speech should be to cut expenditure. Given the size of the Government’s reserves – i.e. not merely the fiscal reserves but its other financial assets including the retained earnings of the HKMA – we do not believe that there is any urgency to raise revenue. If nonetheless it is felt necessary to raise taxes, we have the following comments.

1. Reduction in personal allowances. Personal allowances were increased to unreasonable levels during the 1990s, to the point where less than half the workforce pays tax. Allowances should be reduced progressively. The top marginal rate of tax can be somewhat reduced as well if this would make the package more acceptable to the people.

2. Property-related allowances such as mortgage interest tax relief and deductions for rental payments should be abolished, with immediate effect.

3. We are aware that some commentators are advocating a small increase in the profits tax rate. We draw attention to the fact that Singapore’s profits tax rate is being reduced progressively to 20%. If Hong Kong raises its profits tax rate from the current level that will more or less put an end to Hong Kong’s claim to be the lowest tax jurisdiction in the region.

4. We are aware of discussion in the community of some form of sales tax. We believe that such a tax, being levied on consumption, is more economically efficient than taxes on earnings. However, we draw attention to the likely unpopularity of such a tax.

5. We deplore the proposal to levy a HK$500 a month tax on domestic helpers. In effect the helpers will pay the tax, thus penalising a weak segment of our society for very little gain.

As a final observation, we feel that the lack of a democratically elected legislature able to reflect and resolve the differing views and aspirations of the community makes it very difficult for the Government to devise a wise fiscal policy. We seem to see a succession of short term measures in reaction to pressure from particular interest groups – measures that seem to have no underlying strategy and even conflict with one another. For the sake of Hong Kong’s finances we earnestly hope that progress can be made soon towards a more democratic constitution.

We hope these comments are helpful to you in formulating your Budget.

Yours sincerely,

Alan LUNG Ka-lun
Chairman
Hong Kong Democratic Foundation

梁錦松財政司長

2003-4 預算案建議

民主促進會就閣下公佈2003-4預算案提出建議

最近國際評級公司標準普爾降低香港信貸評級,顯示香港財政狀況已出現信心危機。同時中央領導人例如朱榕基總理講話亦顯示中央政府對港府亦失信心。身為國際金融中心的香港淪落到此地步實令人遺憾。所以在2003-4年預算案必須顯示港府下決心控制財赤。假若港府不能堅決行事，港府面對向下漩渦，結果可能是災難性。

本會建議如下：

1. 正確公佈港府真正財政狀況

因為某些原因，社會對港府財政狀況出現誤解。其一是每月財政收支線（現是赤字）是代表年終財狀收支實況，這是一個誤解。多年來每年港府財政年初及年中收支皆為赤字，因為港府主要收入是在財政年底，例如利得稅在十一月收。另一個誤解就是財政儲備是代表港府所有財政資源。事實上不是，港府在其他方面有龐大資源，例如政府公司股份及其他資產　－　可以私人化提供現金。最後還有金管局的累積盈餘。這些盈餘並不需要全部用於維持聯系匯率（可以說完全不需要）。港府應更進一步向公眾解釋本身財政資源狀況。

2. 削減開支

處理赤字問題要優先削減開支。港府開支最大部份是公務員及公營機構薪金。公營機構薪酬是和公務員掛釣，這些薪酬在多方面都是不合理過高，應該以大百分比削減。本會明白削減人工並不是簡單事情，例如多年來政府都沒有為公營機構及私人機構薪酬進行調查。基本法亦表明公務員待遇受到保障，但我們不能等侯多年解決所有問題才實行減薪。港府必須立即先支付減薪“首期”。這“首期”應是在本財政年度以大百分比削減公務員薪酬。下一年度再實行另一大百分比減薪。之後薪酬可以根據薪酬比較調查結果實施微調。

但是單削減公務員薪酬並不足夠，公務員編制人數也必須減少。有些部門例如警察及司機實在是過份冗腫。這些冗員應立刻清除。第二，政府工作涉及範圍應該縮減。香港很多公營服務在其他國家經已交給私人機構經營，例如港府仍然為香港一半居民發展及保養公屋，香港96%醫療服務是公營，自來水等等。港府自身內部很多服務例如發牌，印刷，物業管理，建築服務很多情況下由公務員提供，而非由私人機構提供。應該立即進行基本評估，盡量把這些服務移交由私人機構處理，以減少政府服務的範圍及成本。

3. 累積會計制度

港府經已承諾實施累積會計制度，本會建議港府更加積極推行，以新西蘭為樣本，全面引入累積會計制度，沒有累積會計制度我們無從在宏觀方面全面評估港府收支、承諾（例如長俸負債）及財政狀況。

4. 表現管理

單單削減公務員人工及要求所有部門節省開支1.8%或5%是否足夠，這種簡單方案很大機會帶來預料不到後果，例如公務員士氣低沉，在應該增加公共開支來刺激經濟時來收縮經濟。同時應要保證以合理方法減開支，將低增值資源分配到公眾及經濟可以得到真正及顯著效益。本人是表現管理實行者，清楚明暸引入一些管理方法例如平衡計分表，活動成本法都會導致在微觀方面提升效率，引入資訊科技及工序自動化亦是十分重要。

5. 私有化

在上述第二段我們建議將多項政府服務分析或外判給私人機構，私有化本身就是政府收入來源之一。公共服務之內很多資產本身或經過重整後可以成為有吸引力的業務，出售這些資產可為港府帶來收入及平衡財政預算。私有化在實行國家一般都帶來宏觀經濟效益。私有化機構一般都能更有效率經營更提供更多元化服務。可以私有化的資產包括餘下的地鐵、九廣鐵路、機管局、郵政局、水務局、房協及房委的資產。我們知道在大部份情況下需要進行資產重整來洐生有經濟效益的商業機構。在私有化專利業務時更加要小心推廣有效競爭或有效監管，我們明白因為股市低迷，暫時擱置進一步出售地鐵股份，但從最近大公司例如渣打銀行及中海油上市集資成功情況看，港府態夠取得部份收入也比較完全沒有為好。再者以合理價格出售股份給投資者有其他政策優點，投資者可以得到長線盈利，亦會更為支持港府私有化。

閣下預算應包括堅定承諾實行私有化，並盡快公佈私有化公司或服務名單。

6. 有關土地收入

我們對最近暫停賣地措施表示遺憾，我們認為是一個退步，影響到經濟自動將地價調整到合理價格，同時亦截止港府一項主要收入來源。

我們建議港府重新考慮這政策，停止賣地期應該越短越好，重新供應土地。再者港府要重新改革整個土地分配政策，長遠而言，現有租約批地應改為永久業權。

7. 稅務法律改革

現有稅務條例源於廿世紀初英國殖民法例。很多觀念需要澄清，包括利得稅來源觀念，現代觀念例如服務業及電子貿易稅制需加以考慮，整條法例需要基本上重新制定。

8. 加稅是最後方案

本會覺得閣下預算案首要任務是削減開支。考慮港府仍有龐大儲備　－　不單只財政儲備或包括其他資源金管局累積盈餘　－　本會認為並不急需增加收入，但若必須加稅，我們有以下提議：

(a) 減少個人免稅額。在90年代，個人免稅額提高到不合理水平，少於一半在業人士交入息稅。免稅額可以累進削減，最高邊際稅率可以減少，使其令市民更容易接受。

(b) 物業有關免稅額例如按揭利息括免及租屋扣稅應立即取消。

(c) 本會覺察有些人士主張輕微增加利得稅，但亦指出新加坡政府將利得稅逐漸調減到20%。如果港府增加利得稅可能會失去地區最低稅率地區的美譽。

(d) 社會中有人提到銷售稅。我們認為銷售稅比利得稅更有經濟效益，但應該注意銷售稅是並不受市民歡迎。

(e) 我們反對向外傭每月徵收五百元稅。事實上這稅款會從外傭人工扣除。徵罰社會最弱一層,而達不到很大效益。

最後我們觀察到,缺乏一個普選產生立法會來調解社會不同意見,港府亦因此難以制訂一個完善財政政策。港府往往因壓力團體制訂一系列短線措施，這些措施缺乏方向及有時互相矛盾，為香港財政著想，我們希望香港能在民主政制方面有所進步。

希望我們意見有助閣下制訂下年度預算案。

香港民主促進會

主席龍家麟謹啟

二零零二年十二月二十三日