Response to 1999/2000 Budget
12 May 1999
The Honourable Donald Y K Tsang, JP
Lower Albert Road
Central, Hong Kong
Dear Mr Tsang,
RESPONSE TO 1999/2000 BUDGET
We are writing to give our response to your 1999/2000 Budget.
We welcome the tax rebate, which represents a start on the task of
returning the reserves to their rightful owners, the people and
businesses of Hong Kong. We are also pleased with the privatisation
initiative, on which we have corresponded with you and the Treasury
Department separately, although we urge that this be pursued much more
vigorously than envisaged in the Budget. We also support the idea of
civil service reform, although we are looking for a much more radical
approach than that so far proposed.
Our major disappointment is that the opportunity was not taken to
launch a fundamental review of the tax system. The system is too
reliant on land-related revenues, and the tax base is too narrow.
Government fees and charges in many cases remain too high, and should
not be merely frozen but actually cut. There should be the
introduction of full accrual accounting for Government operations.
Since the Government not only derives its main source of revenue
from land but is also the monopoly supplier of land, the incentive is
for the Government to maximise its revenue – and hence land prices
– by restricting land supply. The recent suspension of land sales
represents a continuation of this distorting and harmful policy, and
in turn has led to a premature revival of the property market,
hampering Hong Kong’s process of economic adjustment. If the burden
of Hong Kong’s land-related revenues, which are somewhat unusual by
international standards, were added to, say, profits tax, the profits
tax rate would have to more than double to achieve the required yield.
This gives the lie to the claim that Hong Kong is a low tax
We strongly disagree with your assertion that this is not the time
to review the system. During the boom years, no review was undertaken;
if none is undertaken in bad times either, when will the appropriate
time come? We urge that this decision be reconsidered.
Our more detailed comments are as follows.
- We appreciate your acknowledgement of the over-optimism in your
- Para 36, Exchange Fund. We support the reduction of the Exchange
Fund’s equity holdings. The excess should be sold right away.
The Exchange Fund should not be holding Hong Kong equities, since
they are not relevant to the administration of the linked rate.
Any equities held by the Government as part of the investment of
its reserves should be held in a separate vehicle fully
independent of the Exchange Fund. And such investment should be
made strictly in accordance with normal principles, and not to
manage the level of the stock market.
- Para 38, banking supervision. We support the proposals
mentioned, but believe that they are too modest. For details, see our separate submission to Hong Kong
Monetary Authority dated 22 March 1999.
- Para 46-51. We support the general thrust of the reforms of the
securities and futures markets, but question whether such
substantial reforms can be done properly within the short
timeframe mentioned. The risk is of a rush job that leaves the
fundamental problems of the market unaddressed.
- Para 55, attracting foreign investment. We suggest that a major
factor in the minds of many foreign company executives is the
quality of the environment in Hong Kong. Improving this, and
improving the quality of life generally in Hong Kong, would be
more conducive to foreign investment than the proposed promotion
and administrative reforms.
- Para 54-62, Technology industries. We have serious concerns with
the Cyberport project and with the whole idea of targeting high
tech industry for Hong Kong.
- Firstly, the grant of the land for the Cyberport to one
well-connected company, in haste and without the normal
tendering procedures, was an extremely serious error which has
damaged Hong Kong’s reputation and raised the spectre of
cronyism. This grant should be reconsidered immediately.
- Secondly, we do not believe that a property-based
development is a meaningful way to promote high technology
industrial development. The clustering of technology-related
industry does not depend on property; there are already small
scale clusters in areas of Hong Kong that have received no
special favour, for example, the Wellington Street area.
- Thirdly, the broader conditions for large-scale
technology-based industry in Hong Kong do not appear to be
present. We mention quality of life in point 5 above; Hong
Kong may not be attractive to software developers currently
living in California, for example. Standards of creativity, of
English, of technology expertise, of academic research are not
adequate for the purpose. Hong Kong also has no tradition of
- Fourthly, we believe in principle that Government should not
try to pick winners. Subsidies to one sector, as proposed in
your budget, represent a tax on other sectors, and will
distort and detract from the overall performance of the
- Para 63-70, reviving tourism. We support the establishment of a
Disney park in Hong Kong, but are surprised that such initiative
should be mentioned in your budget when it is still under
negotiation. While this and the various other initiatives to
improve facilities may be helpful, we believe the more important
factors in attracting and retaining tourists are quality of life
factors, such as the environment, the courtesy and honesty of
shopkeepers, and the availability of safe and secure pedestrian
areas and walkways through the city.
- Para 72, Enhanced Productivity Programme. We believe that this
programme, with its 5% target, is far too modest. Any target
should be much higher, for example 20 or 30%. But more
importantly, the question should first be answered of whether the
services should be provided by Government at all. In many cases we
believe the Government and its subvented agencies are providing
services which could, and in many overseas jurisdictions are,
provided by private firms operating under competitive contracts.
We urge that a much more fundamental review of the provision of
public services is undertaken.
- Para 75 Civil Service Reform. We believe that the reforms are
much too modest, and even as they stand appear unlikely to be
implemented in full. See our separate
letter to the Civil Service Bureau for our full views on this
- Para 84-94: Public services and privatisation. In our view these
are the most important initiatives in your budget, and we fully
support them. However, we feel that they could be taken much
further and progressed much more rapidly. It is a major drain on
Hong Kong’s competitiveness that so much of its economic
activity remains in the hands of Government and Government-related
- Para 97, Basic Law. It would be helpful to explain legally how
the current budget deficit, and the current growth of expenditure
by more than the GDP growth rate, can be reconciled legally with
Article 107 of the Basic Law. On the face of it, it appears that
the Government has breached the Basic Law. (The arguments
presented in para 107 do not seem to carry legal weight.) If this
were the case, what remedies would be available to, for example,
the aggrieved taxpayer?
- Para 106, economic growth rate. The forecast of 3.5% growth in
1999/2000 and the three years thereafter appears optimistic.
- Para 114. Taxation system. As stated above, we are disappointed
that the opportunity was not taken for a fundamental review of the
- Para 152, fuel duty. This concession was made in response to
special interests and was environmentally damaging. It should not
have been extended in the Budget.
- Para 159, double taxation. We draw attention to the risks of
double taxation treaties. On the one hand, since Hong Kong does
not tax overseas-sourced income it has little or nothing to
concede. On the other, much business in Hong Kong is based on
avoidance of taxation in other countries by individuals and
businesses. If the Hong Kong authorities provide information on
such persons to overseas authorities, as they may be required to
do under such treaties, there will be unintended adverse effects
on the Hong Kong economy.
- Para 168, betting duty. We are opposed to the present betting
monopoly granted to a single company. We strongly recommend that
this monopoly be abolished and other operators licensed in
accordance with proper regulation.
We hope that the above comments are helpful.
Alan LUNG Ka-lun
- Submission to Hong Kong Monetary Authority on "Hong Kong Banking Sector Consultancy
Study" dated 22 March 1999
- Submission to Civil Service Bureau on "Civil Service Reform – Consultation
Document" dated 12 May 1999
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