Letter to Donald Tsang Response to 1997/98 Budget
15 May 1997
The Honourable Donald Tsang, OBE JP
Lower Albert Road
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
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
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
3.2 Tax relief for housing. We support your decision not to
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
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
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
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
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.
Dr Patrick Shiu
|Policy Paper - page revised 23-09-2002
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