Budget set on the right path
Updated: 2013-03-05 06:30
By Li Kui-Wai(HK Edition)
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The change of Hong Kong's Chief Executive gives the financial secretary a chance to re-orientate the direction of the budget for the new fiscal year. Despite the constant, consistent and continuous call to help the poor and improve income inequality, coupled with the Chief Executive's intention to introduce more social welfare, there seems to have been a change of direction - from a short-term, demand-driven approach to a long-term, supply-led policy.
First of all, the amount of niceties or "candies" handed out in previous years has remained more or less the same, such as electricity subsidies and waiving of rates payment for property owners. But there is no drastic expansion in dishing out subsidies to firms and households. This is seen as appropriate in the situation that the economy is not facing an imminent crisis and the mild but steady economic growth would not require unneeded government spending, or else rapid inflation would appear and result in overheating. On the other hand, with a rather stable economic environment this year, it would be best for the government to engage in promoting long-term economic capacity, so that more jobs are created in the first instance, and more high-paid jobs will subsequently be available in future. Instead of Hong Kong being geared mostly to solving immediate economic difficulties as in the past decade, it's time to promote and raise economic capabilities to allow the people to move forward.
Indeed, it is through the restructuring of Hong Kong's economy and increases in jobs that poverty could be alleviated and income inequality narrowed in the long-run. The various measures set in the budget to lift Hong Kong's economy include offering more vocational and job training, infrastructure development, enriching small and medium-sized enterprises, strengthening various aspects in the insurance and financial sectors, and providing incentives to different sectors for development. These are positive aspects that can help Hong Kong's sustainability and competitiveness.
However, there are two possible areas of weakness. Although there will be an increase in land supply for residential development, efforts to rezone land usage and land provision for industrial redevelopment is lacking. It's surprising that given the overheated property market, the government has adopted only a piecemeal approach by raising taxes, without a systematic approach to disaggregating property into a user market and a speculator/investor market. The new property taxes introduced recently do penalize new home buyers, though many of them could be speculators. But speculators holding multiple properties would not be affected by the new taxes. Indeed, instead of encouraging more new property owners in the user market, the reduction in rates in the 2013-14 Budget would have provided extra advantage to multiple property holders. To kill speculation, the government could have done something to the contrary by encouraging more first-time buyers, but charge progressive rates on those owning multiple properties, as these people are more likely to be speculating.
Singapore's latest budget focuses on tax incentives for research and development activities. It's true that manufacturing industries still play a major role in Singapore's economy, while Hong Kong concentrates more on business services and finance. To widen the economic structure, another long-term aspect is to revitalize the industrial sector. Providing more land geared to industrial development will be the first step. It would be a mistake to think that Hong Kong has no future in industries. First, industrial jobs tend to be skill-oriented, and wages will be higher than low-skilled service jobs. Second, Hong Kong needs to expand its domestic exports once industries are revitalized. One should not be thinking of labor-intensive industries, but skill-intensive, knowledge-based industrial jobs can be promoted if new industries are attracted to Hong Kong. For example, the Closer Economic Partnership Arrangement offers tariff-free concessions for more than 1,700 export items to the mainland. Given the potential competition from the region's economies, it would be wise for the government to revitalize Hong Kong's industries.
The budget surplus tends to reduce the need to widen the tax base in Hong Kong. Statistics shows a T-shape salary tax structure in the city, implying that about half a million workers are shouldering about 95 percent of the salaries tax revenue. Before 1994 when tax exemption was lower, salaries tax was more evenly spread among indifferent income groups. Hong Kong then enjoyed a more stable, wide-based V-shape salaries tax structure. It would be too sensitive to raise taxes with surpluses, but the various benefits dished out in previous annual budgets could have been better structured. Instead of providing tax rebate and electricity subsidies, it would be a more clear-cut advantage if the government cuts the salaries tax rate of half a percentage point. This would allow greater financial relief for individuals, especially the middle-class who have been complaining about a lack of benefits for them. The overall financial impact on the government would be the same, but a lower salaries tax will make Hong Kong look more competitive. The same argument can apply to the business community.
There is no such a thing as a "perfect budget". Equally, there is no single budget that can solve all our economic problems, and not every person can benefit from every budget. On the whole, the 2013-14 Budget has been progressive and is an improvement on previous ones. At least, it focuses more on long-term development and competition, and suits the current economic environment by re-orientating the economy away from solving immediate ills to future capacity promotion. While it will take some years for the results to materialize, it has at least set the economy on the right path. Furthermore, Hong Kong's financial performance does have an implication on regional economies. For example, the pursuit of a budget surplus would be an experience for the mainland's provinces.
The author is an associate professor at the City University of Hong Kong's Department of Economics and Finance.
(HK Edition 03/05/2013 page1)