Budget defies sound planning

SCMP February 5 2012

By the evidence of the budgets over the past few years, Hong Kong's strong fiscal position owes nothing to the wisdom of our financial secretary and chief executive. Yet again, John Tsang Chun-wah has produced a budget which is contrary to the principles of sound medium-term fiscal planning and exacerbates Hong Kong's two most pressing problems - the income gap and air pollution.

A series of one-off giveaways may be temporarily popular when the economy is still performing satisfactorily. But what happens next year if growth really is only 1per cent, as tentatively forecast? How easy will it be to take back those rates holidays, and end those electricity subsidies and tax concessions?

Tsang's budget goes against the principles, so often enunciated and almost always ignored, of making the tax base broader and more stable. Salaries tax, which should reflect rising incomes across the whole spectrum, has now been narrowed so much that it will constitute just 12.6per cent of forecast revenue in the coming year.

Worse still, the increases in allowances for children, other dependents and the extension of mortgage relief will largely benefit the top 20per cent of earners, adding to the income gap. It is obvious that the biggest poverty problems lie with the old and with low-income households with children. These can be more easily and fairly addressed through direct payments, not tax breaks.

Overall, the major temporary tax breaks and one-off payments amount to over HK$30 billion, not far short of the total projected revenue from salaries tax - HK$49billion. Salaries tax is now so modest that it might be done away with altogether, except that that would upset the supposed unity of the tax system where salaries, profits and property income are all supposedly taxed at the same top rate. But that unity has been undermined anyway by all kinds of concessions, including the latest one of waiving 75per cent of tax up to HK$12,000 on profits.

Thanks to its own policies, the government has become increasingly dependent on the most unstable of income sources - land sales, which rose to HK$83billion in the current year, and stamp duties, running at around HK$40billion - almost as much as salaries tax. This dependence partly explains why it is so keen to keep land prices rising faster than growth in nominal gross domestic product, even though this increases wealth disparities and hands easy profits to the land-bank holders.

Although Tsang has promised more land and a boost to public housing, it remains to be seen whether these commitments will be sustained if housing prices take a big hit. Land and housing policy continues to lurch from one extreme to another rather than setting medium-term goals and sticking to them.

Tsang's comment on the construction industry is a classic example of confused government thinking. First, he boasts of the unemployment fall in the industry, a reflection of the job creation benefits claimed for various concrete-pouring projects. Then, in the next paragraph, he boasts of earmarking HK$220million 'to support the Construction Industry Council in enhancing manpower training' - that's after spending HK$100million to 'attract more people to join the construction industry'. No prizes for guessing which companies and projects will benefit from these handouts to build economically unviable monuments to the vanity of officials.

The further retreat from stable revenue sources is particularly remarkable given the failed attempt to introduce a goods and services tax in 2006. GST was a flawed idea for Hong Kong, but that does not take away from the fact that tax on some consumption is badly needed. Rates is one such tax, as it falls - or should do - in roughly equal measure on all sectors of the economy according to their size and value of space. A similarly fair one would be a tax on electricity. It would also be environmentally friendly.

But, for reasons which can only be guessed at, a government that is spending tens of billions on projects that add to pollution and have no economic justification to do so is unable to find a few billion in one-off spending to clean up the buses, trucks, ferries and other big polluters. The lack of any significant new spending on the environment demonstrates the contempt with which officials view public health, even in the face of dire statistics.

And instead of a permanent and meaningful cut in profits tax, we are offered a series of measures which make the private sector more than ever beholden to bureaucratic decision and largesse. One is the HK$100billion loan guarantee scheme for loans to small and medium-sized enterprises - as much a gift to the banks as the SMEs. The fact that Tsang is making a loan-loss provision of HK$10billion - 10per cent of the guarantee! - shows either absurdly conservative budgeting or recognition that lots of dud loans are to be dumped in the taxpayer's lap.

Hong Kong's fiscal success owes nothing to the policies of recent years but to fortuitous external circumstances and the HK$100billion a year it collects in profits tax, a large chunk of which derives from the laundering of profits through Hong Kong to avoid higher taxes on the mainland and elsewhere. It's time to stop boasting and devise (or just go back to) fiscal policies that are simple, fair and sustainable, and investment led by the private sector, not by public-sector boondoggles.