Plan for tomorrow

SCMP February 20, 2006

As financial secretary, Donald Tsang Yam-kuen was responsible for narrowing the taxbase and promoting the interests of property developers and upper-middle-income earners. With Henry Tang Ying-yen in direct charge of finances, can Mr Tsang, as chief executive, show some guts and some forward thinking when it comes to budgeting? We will know tomorrow.

First, he needs to ignore the siren calls of bipartisan politicians (except the Article 45 Concern Group) for tax cuts just because he may be reporting a surplus. The surplus is partly due to a surge in land premium revenue and the earnings on the fiscal reserves. Both are very erratic. The land revenue rise is the result of manipulation of supply to benefit existing holders at the expense of newcomers to the market. As for the reserves' earnings, since 1998 they have been counted for in a manner - by using changes in asset prices rather than cash income - which makes them appear more volatile than they are.

The calls for income tax reductions appear especially ill-advised. There are only two consequences. If the threshold is raised, the tax base will be further narrowed. If the bands are adjusted, the most likely beneficiaries are not the "middle class", which so many in the Legislative Council claim to represent, but the top 15 per cent or so of households.

If he was really brave and had the interests of the majority, and the economy, at heart, Mr Tang would phase out tax relief on mortgage interest.

Tax cuts to benefit the poor would include the regressive tobacco and betting taxes, but the first will not happen thanks to the well-paid moralisers in Legco and academia, and the latter will happen only if the Jockey Club influence through the likes of former steward Rafael Hui Si-yan is felt.

The most useful immediate things that Mr Tang could do in the budget are to restore cuts in welfare payments to the old and disabled. Mean attitudes to the disadvantaged have been a major contributor to any budget surplus. Falling unemployment also provides scope for more generous benefits to the vast majority who do not get the index-linked pensions of the pampered civil service, and to shore up hospital finances. On the revenue side, various fees and charges held down for political reasons should be raised.

But Mr Tang must also look at the longer term, especially, as the International Monetary Fund has reminded us, of Hong Kong's awful demographics and its impact on the economy, and on pension and health costs. It is inevitable that recurrent spending as a percentage of gross domestic product must rise as the population ages.

To face this, the government should first tax energy use, which would be a fair way to broaden the tax base and help address our dire pollution problems. It would be simpler to implement than a goods and services tax which the government still claims to be planning to introduce.

Second, there should be a birth bounty. At 0.9, Hong Kong has the world's lowest birth rate and it is less than half the 2.1 level required. Instead of increasing child income-tax allowances, which disproportionately benefit high income earners, why not give parents who are permanent residents $100,000 per child born in Hong Kong? Not only would that be a real incentive, it would also help young couples save towards a deposit on a flat. The cost would be $4.5 billion a year.

Add in $1 billion a year in nursery school funding to enable more working women to have children, and you have an annual $5.5 billion investment in improved demographics. It is the initiative that a government with vision would take. Even if the birth bounty did not have the desired result, it would be a better way of using taxpayers' money than giving away billions in mortgage tax breaks to the well-off.





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