Hong Kong must broaden tax base or lose prosperity

With a ballooning fiscal debt threatening to harm investor confidence in an already uncertain market, Hong Kong is being warned by economists that it must introduce concrete measures and broaden its tax base if it is to fulfill ambitious growth forecasts.

The introduction of a controversial Goods and Sales Tax (GST) will help ease the problem, but a multi-pronged approach, including firm plans to slash public spending would be essential to restoring fiscal balance by 2008 to 2009, they added.

Financial Secretary Henry Tang (唐英年) said Wednesday the government had raised its economic growth forecast to 3 percent from 2 percent in light of economic recovery in the wake of the SARS virus.

However, it had pushed back its target of balancing the budget by two years to fiscal year 2008 to 2009 from the original 2006 to 2007.

The government will commit to cutting its spending by an aggregate 11 percent in the next five years to meet the deadline, he added.

However, Standard and Poor's director of sovereign ratings, Ping Chew (周彬), said Tang's package of fiscal measures to tackle the structural deficit problem was at best "modest."

"The package is still short of concrete strategies to restructure the government's revenue mix to address the deficit issue. We still think that the government's revenue mix is not correct in meeting its spending. That's why you see the deficit keeps on increasing," he said.

Tang, who took office in August, said the fiscal deficit for the current financial year would rise to HK$78 billion (US$10.01 billion) from the previous estimate of HK$67.8 billion.

Chew said the international ratings agency considered the revenue measures proposed by Tang as being too reliant on the prospect of economic recovery.

He also warned that if Hong Kong's rich fiscal reserves continued to deplete "and no coherent revenue strategy is in place, the ratings will be affected. That is why we still maintain a negative outlook on Hong Kong's local currency rating."

Hong Kong's tax base was still too narrow "making it vulnerable to economic cycles", he added.

While acknowledging the introduction of new taxes would be unpopular, Chew said the introduction of a GST was an "equitable way to implement new taxes."

Former financial secretary Antony Leung (梁錦松) said in March that a sales tax was still on the government's agenda and could be introduced before 2006.

But Tang stressed Wednesday the government had no plans to impose a new sales tax as long as deflation, which has been prevalent since the 1997 Asian financial crisis, prevails.

Hong Kong Chamber of Commerce chief economist David O'Rear also warned the tax base was too narrow and needed to be corrected swiftly.

The government has estimated some three percent of the workforce paid 60 percent of total salary tax, while about 1 percent of corporations in the territory accounted for 60 percent of companies tax, he said.

"That is far too narrow and obviously needs to be addressed. If they don't, then the credit agencies will obviously start to reverse their opinions on Hong Kong resulting in possible downgrades which could lead to a threat to the Hong Kong dollars peg with the US [dollar]," he said.

Hang Seng Bank economist, Vincent Kwan, said the government needed to adopt a "three-prong" approach to balance the budget.