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Response to 1999/2000 Budget

12 May 1999

The Honourable Donald Y K Tsang, JP
Financial Secretary
Government Secretariat
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 jurisdiction.

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.

1. We appreciate your acknowledgement of the over-optimism in your previous Budget.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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 technology development.
• 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 economy.

7. 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.
8. 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.
9. 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 matter.
10. 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 enterprises.
11. 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?
12. Para 106, economic growth rate. The forecast of 3.5% growth in 1999/2000 and the three years thereafter appears optimistic.
13. Para 114. Taxation system. As stated above, we are disappointed that the opportunity was not taken for a fundamental review of the tax system.
14. 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.
15. 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.
16. 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.

Yours sincerely,

Alan LUNG Ka-lun
Chairman

Enclosure:

1. Submission to Hong Kong Monetary Authority on "Hong Kong Banking Sector Consultancy Study" dated 22 March 1999
2. Submission to Civil Service Bureau on "Civil Service Reform – Consultation Document" dated 12 May 1999