Financial gifts that just add to the inequality

SCMP March 5 2007

The plaudits that Henry Tang Ying-yen has received for his budget are ill-deserved. Tax cuts make good headlines, but the implications of the financial secretary's budget deserve rather closer scrutiny than they have generally received. The cuts are massively regressive, and the lack of forward thinking should be viewed as an alarming commentary on a leadership trapped in convenient slogans, self-interest and 1970s concepts of progress.

One of the government's priorities is supposed to be trying to do something about the rapid growth of income inequality in recent years. That is not easily done, but the budget is one of the few mechanisms the government has to influence income redistribution. This budget adds significantly to inequality. By far the biggest beneficiaries are the upper-middle income groups, while those in the bottom 60 per cent or so get very little.

This will not be a political problem for Chief Executive Donald Tsang Yam-kuen. The Democrats and Civic Party have their own, non-poor constituencies to guard. The Democratic Alliance for the Betterment and Progress of Hong Kong - supposedly the party closest to the interests of the lower 50 per cent - is, in practice, in cahoots with any wealthy interests that meet Beijing's approval.

There are three major components to the tax cuts: first, a permanent adjustment of salaries tax rates, bands and allowances that will cost the government HK$4.9 billion a year. The other two are handouts: an across-the-board salaries tax concession of 50 per cent, up to HK$15,000, costing HK$8.1 billion; and a rates waiver that will cost HK$5.2 billion.

The permanent salaries tax cut is the most regressive measure. The tax savings look impressive as a percentage of current tax payable. A married couple with two children earning HK$300,000 - close to the median household income - will leave the tax net altogether. But their gain is only HK$400 a year, while a family earning HK$720,000 will gain HK$12,200.

The salaries tax concession supposedly benefits 1.35 million taxpayers but, of course, those outside the direct tax net get nothing. Of the beneficiaries, 447,000 will get an average of only HK$770, so almost 60 per cent of the handout will go to the top 900,000 earners. Only the rates rebate is reasonably even-handed - though the cut, albeit only temporary, offends against supposed principles of taxation: that it should be fair, easy to collect and neutral in its economic impact.

Against these massive giveaways - mainly to the top 20 per cent of earners - there is a derisory extra HK$1.2 billion for the 1 million or so (mostly old) recipients of social security assistance, and HK$900 million for assorted schemes for poverty alleviation. Of this, HK$300 million will go to a child development fund, which sounds a good idea given the low birth rate and poor prospects for children of the poor. But it's tiny compared with the increased tax allowances for children and newborn babies for better-off groups.

Self-reliance is important, and the social security crutch should be sparingly used, but the mean-mindedness of Mr Tsang, Mr Tang and Co is astonishing. Some in his cabinet inherited such vast wealth that they have never had to worry about money, or even salaries tax; most of the rest worked in a bureaucracy that offers the cosiest of taxpayer-funded socialist systems - inflation-proof pensions, retirement at 60, and free medical attention, for example.

Cutting government expenditure as a percentage of the gross domestic product should not be an end in itself. Higher levels than now prevailed when Hong Kong needed huge infrastructure spending to house a rapidly growing population and economy. Now it needs less physical infrastructure but more spending on health, as the population ages, and vastly more on the environment.

But instead of serious efforts to modernise Hong Kong, Mr Tang remains beholden to vested interests in the power and construction sectors, and obsessed with accumulating reserves then used to underpin pensions for Americans.

Mr Tang delights in penny pinching while adding to income disparities and spending on yesterday's infrastructure demands - urban highways - not to mention the Tamar monument to arrogance. He justifies these not on the grounds of good investments, but of job creation! He may be a nice man. But what a muddled mind.

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