Hold off on salaries tax rises
James Tien
25 March 2004 South China Morning Post
The Hong Kong government has always adopted a cautious approach to handling its finance. It is a good policy and one that has served us well in the past. However, there are occasions when it is necessary to be a little more wide-ranging in assessing the needs of the community.
At a time when the economy is recovering after an extended period of recession and people have faced long months of austerity, some thought should be given to easing the burden on taxpayers to boost confidence and consumption so that they can start spending again.
With this in mind, I proposed to Financial Secretary Henry Tang Ying-yen that he should consider scrapping the second phase of salaries tax rises, ranging from 0.5 per cent to 1.5 per cent this year - instigated last year due to a huge budget deficit - as I think most middle-income earners will find it hard to swallow.
Our economy is well on the way to recovery, thanks to the benefits from the Closer Economic Partnership Arrangement and the Individual Visit Scheme. At last, our property market is flourishing, the stock market is climbing and our consumption is rising, but it will be some time before these benefits reach the ordinary citizen.
Many of the middle class have not received any increase in salary for a year or more, or have even had a pay cut. They will have difficulty making ends meet if they have to face another tax increase on the same income.
Unfortunately, Mr Tang is not of a mind to agree to this suggestion because he is worried about the continuing deficit. He believes that without the tax increase, the government will lose $20 billion by 2008.
However, I am convinced that his concern is misplaced. The government estimates that the budget deficit will decrease this year, from October's $78 billion to $49 billion - a net saving of $29 billion in six months. My view is that the economic recovery is so rapid and so advanced that the decrease may be even greater than predicted, and as growth increases, the deficit will continue to shrink.
The estimated additional income from the 2003 salaries tax is only $3 billion. If our economy keeps growing, so will the tax income, as people will spend more as salaries rise. That would suggest the net loss from dropping this year's tax increase will be smaller than predicted.
Furthermore, the loss could also very possibly be made up, because the estimates of other incomes are extremely cautious. Look, for example, at the revenue from land sales, which the government forecasts will be $4.6 billion. This is quite obviously an underestimate.
Even if only eight or nine of the 17 areas in the application list are put to auction, the government could get up to $10 billion, according to property analysts.
That is a very graphic illustration of the government's over-conservative assessment. In reality, the actual revenue should be markedly higher.
Some legislators have been criticised for opposing the new broad-based taxes, the reduction of public expenditure and cutting the number of staff in public services, as their views are seen as harmful to the overall interest of Hong Kong.
I stress that the Liberal Party does not hold such a position, as citizens already know from our constant pressure on the authorities to reduce government expenses.
My party proposes dropping the second phase of tax increases because we are convinced the government has enough leeway, thanks to our continuing recovery, to take a more realistic view about revenue. We do not want to see an extra burden inflicted on the middle classes when the economy is recovering. That will only reduce their ability to invest and spend, and will rein in our progress to full recovery.
If the Liberal Party had been informed of the predicted budget deficit reduction from $78 billion to $49 billion when we met Mr Tang in December, we would have suggested that the government look into the whole question during preparations for the Budget.
However, the government can still change its mind. It can react to the actual situation, acknowledge that the economy is on the upswing and revenue will rise accordingly. By scrapping this year's salaries tax rise it will help to increase the tiny signs that a feel-good factor is returning among the people. People will be encouraged to get back into the shops and restaurants, and start helping the city to spend its way back to prosperity.