Many politicians in Hong Kong have seized the opportunity presented by public
debate about government expenditure in Hong Kong, especially the growing cost of
medical services, to win recognition and support. But they are merely reciting
tired old ideas that are neither illuminating nor useful.
Some of their opinions are downright naive. For instance, a prominent
politician recently suggested that the Hong Kong government's budgetary problems
could easily be solved by raising taxes.
He argued that Hong Kong people could be persuaded to accept a higher tax
rate, which is among the lowest in the world. To him and some other politicians,
the tax regime of Hong Kong should have the built-in flexibility to cover any
projected shortfall in government expenditure.
Such a suggestion is most irresponsible because it seeks to destroy the Hong
Kong government's long cherished fiscal discipline, an essential component of
the established economic principle that has been a cornerstone of Hong Kong's
success as an international financial centre. These politicians have
demonstrated a failure to understand that consistency in government policy is a
basic building block of Hong Kong's financial services industry.
We have to remember that Hong Kong is not a country. It does not have a large
domestic economy to support its financial services industry. A low and simple
tax system is one of the main attractions to the many foreign banks,
international stockbrokerages, fund management companies and other financial
institutions to establish their regional headquarters in Hong Kong.
It can be argued that raising the tax rate by a couple of percentage points
is not going to drive these institutions to seek refuge elsewhere. Hong Kong,
after all, has never sought to be known as a tax haven for anyone.
But the precedent set by the tax increase could be seen, rightly or wrongly,
as an indication of a fundamental change in the government's economic policy.
That would have the effect of undermining foreign investors' confidence in Hong
Kong as an international financial centre.
The government did change the tax rates on a number of occasions in the past.
But those changes were made to cover sudden shortfalls in revenue due to
unexpected sharp downturns in the economic cycle.
What some of our prominent politicians are suggesting now is to raise taxes
to cover projected government recurrent expenditure on essential social services
that are difficult to dismantle once they are instituted. An increase in taxes
under such circumstances would almost certainly set the precedent for future
increases because it would fuel ever greater public demand for better and more
available social services.
This is certainly not the way Hong Kong should be heading.
Instead, the Hong Kong government should try to exercise even greater fiscal
discipline to strengthen the confidence of the private sector at a time when
Hong Kong's position as a financial centre to service the needs of China's
economic development is seen to be facing increased challenges from various
mainland cities, particularly Shanghai.
Under Hong Kong's long-established economic policy, fiscal measures can never
be a means to achieve a fairer distribution of the wealth created by economic
growth. It is deemed undesirable for the government to get directly involved in
the distribution of wealth by taxing businesses and the rich to pay for benefits
to the poor; such a policy would have led to the eventual crowding out of the
private sector by a big and powerful public sector that sucks in the major share
of the available capital and labour resources.
Without tinkering with its existing economic policy, the government is trying
to help the less wealthy segment of the population indirectly by introducing a
number of key legislative changes that include the setting of a minimum wage and
maintaining fair competition to protect small businesses. This, I believe, is a
much more viable approach in the economic climate of Hong Kong to create a more
harmonious society, rather than raising taxes to pay for direct government
social services that are not necessarily efficient and equitable.
Email: jamesleung@chinadaily.com.cn
(China Daily 04/18/2006 page4)
