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Letter to Donald Tsang  Response to 1997/98 Budget

15 May 1997  

The Honourable Donald Tsang, OBE JP  
Financial Secretary  
Treasury Department  
Government Secretariat  
Lower Albert Road  
Hong Kong  

Dear Mr. Tsang  

RESPONSE TO 1997/98 BUDGET  
  
We are writing with our comments on the 1997/98 Budget delivered on 12 March 1997.  

Overall, we are disappointed that no attempt was made to deal with the fundamental problems of the tax system, namely the chronic surpluses and the concentration on revenues from land. We understand that it would have been difficult for you in the transition year to have taken radical steps to address these problems, but we hoped that at least you would flag them for the attention of the SAR Government. However, your speech went the other way, with the result that these problems will now continue to distort the economy without any prospect of relief in the foreseeable future.  

1.   Chronic surpluses  
      In previous submissions we have drawn attention to the problem of  
      persistent budgetary surpluses and, with HK$31.7 billion forecast for 
      1997/98, this problem is clearly getting worse. Not only has the 
      Government been achieving large surpluses on the general revenue account 
      in virtually every year, but it has in addition been accumulated additional 
      surpluses on land revenues which went into the Land Fund. The 1997/98 
      Budget surplus is therefore not "misleading" as you state in paragraph 85. 
      On the contrary, it is your comment that is misleading: for the first time the 
      budget shows the proper fiscal position.  

2.   Land Tax  
      On a number of occasions in the past we have drawn attention to the 
      Government's heavy reliance on land-related revenue. This problem is 
      likely to become worse with the advent of the 3% rent on New Territories 
      property. As it is now clear that Hong Kong is in a property crisis, with 
      prices at levels that are threatening not only business but social stability, it is 
      surely time to review the contribution the Government itself is making to 
      this crisis through its fiscal policies.  

      We contend that since the Government is the monopoly supplier of land, 
      like other monopolists it will seek to maximise its revenues by restricting 
      supply. Indeed, if it were not maximising revenues from the sale of Crown 
      assets in this manner, the Government would be failing in its duty as trustee 
      for the taxpayer. However, this objective, of revenue maximisation, 
      obviously conflicts with the Government's other objectives of ensuring the 
      availability of accommodation to Hong Kong people and businesses. So 
      the Government's reliance on land revenues bring it into a conflict of 
      interest.  
       
      The extremely high revenues the Government enjoys from land, the 
      extremely high reserves and the extremely high land prices, are all prima 
      facie evidence that the Government is resolving the conflict by preferring 
      revenue maximisation at the expense of accommodation needs. We urge 
      reconsideration of this policy which is clearly deleterious to the economy 
      and the stability of Hong Kong society.  

      We believe a fundamental review is needed of the role of land in taxation  
      There are many possible solutions, including releasing more land, but the 
      basic conflict will remain unless there is a separation between the body that 
      releases the land and the Government itself. Either the ownership of land 
      should be separated from the Government, perhaps into an independent 
      commission, or at least the long term land release policy should be set 
      without reference to fiscal objectives.  

3.   Other comments  

3.1 Land supply. We refer to our comments above on the subject of land tax. 
      However, we would also wish to express our reservations about the 
      Sandwich Class Housing Loan Scheme. The fact that the Government is 
      providing subsidies to families that earn up to HK$60,000 per month 
      suggests that something is seriously wrong with the entire policy          
      framework. We urge a fundamental review of the entire housing issue by       
      your taskforce.  

3.2 Tax relief for housing. We support your decision not to introduce tax 
      allowances for home owners, which, in the absence of any increase in 
      supply, would simply feed through into higher prices and greater frustration 
      among those who did not benefit from the scheme.  

3.3 Review of profits tax regime. We support this review, and hope that 
      opportunity will be found within it to address aspects of the fundamental 
      issues we draw attention to above.  

      We are also pleased to see that depreciation allowances are earmarked for 
      review, as we have long argued that the current system lacks logic and is 
      complicated to administer.  

3.4 On salaries tax, we feel that successive Budgets, including this one, have 
      raised the personal allowances to high. When only 1.4 million workers pay 
      tax, less than half the workforce, there is a danger of dividing society into 
      two classes, one class who pay tax and the other who do not but receive 
      generous benefits, especially public housing.  

      There is serious potential for conflict of interest between these two groups, 
      which could destabilise Hong Kong society. We do support the widening 
      of the bands, for which we have long argued, and are pleased to see this 
      measure put through.  

      The projected reserves of HK$418 billion by the year 2001 are vastly in 
      excess of what could be needed for unexpected events. The onus is really 
      on the Government to explain to the taxpayer what will be done with this 
      money.  

      The reference in paragraph 84 to a need to earmark a sum of around 
      HK$50 billion for the Railway Development Strategy is totally inadequate 
      to justify reserves of this magnitude. Firstly, the sum supposedly earmarked 
      is only one-eight of the projected reserves. Secondly, it is quite possible 
      that the railway could be financed to a great extent by debt, and that the 
      eventual contribution would be a lot smaller than HK$50 billion. Thirdly, a 
      contribution of this kind is properly a capital item. It is not proper 
      accounting to treat such expenditure on a par with revenue items: capital 
      expenditure should be capitalised to reflect the fact that it yields benefits for 
      a number of years.  

      The long-standing Government policy of matching growth in expenditure to 
      growth in GDP is flawed on two counts. Firstly, it assumes that the ratio 
      was optimal to start with, but this may not be the case. Secondly, even if 
      the ratio is optimal it is of limited significance if the Government raises 
      revenue at a ratio that is substantially higher, which has been the case for 
      many years. This policy should be reviewed.  

3.5 We are concerned at the continuing rises in Government fees and charges. 
      These are widely perceived in the community as a form of "double 
      taxation", in that in addition to paying general taxation people find that they 
      have to pay directly for Government services as well. The rationale for 
      Government charging has to be properly thought through. If it is practical 
      and reasonable to charge for Government services than in many cases 
      such services should not be in the Government at all but should be 
      privatised.  

I hope that this feedback on your budget is useful to you. May I conclude by urging again your early attention to the problems of overtaxation and excessive reliance on land-related revenues. Both of these issues are likely to give rise to increasing discontent among Hong Kong people if not addressed.  

Yours sincerely  

Dr Patrick Shiu  
Chairman