Hong Kong Chief Executive Tung Chee-hwa's plan to raise taxes to plug a record budget deficit may damage the city's image as a business center and do more harm than good to the economy, analysts said.
Tung said in his annual policy address yesterday that tax increases, which he didn't specify, are needed because the deficit will rise by at least a 10th to a record HK$70 billion (US$9 billion) in the year to March 31. The announcement came a day after rival Singapore announced fresh tax breaks for businesses.
"Increasing taxes will reduce Hong Kong's competitiveness," said Daniel Chan, the economist at Dao Heng Bank. "Singapore is cutting taxes."
Hong Kong competes with Singapore as a financial center for Asian companies to raise money and as a location for multinationals' regional headquarters. Higher taxes may make Hong Kong less attractive to overseas companies and sap consumer spending in an economy less than a year out of its second recession since the 1997-1998 Asian financial crisis.
Foreign investment in Hong Kong slid 38 percent in the first nine months of last year from a year earlier, compared with a 23 percent gain in China. The Hang Seng slid 18 percent last year.