Letter to Hong Kong – Playing the “Returning Wealth" Game

RTHK Radio3  2008-01-27

Our Financial Secretary Mr. John Tsang is a lucky man. He has a one hundred billions dollars question to answer. Thanks largely to the booming stock market, which is bringing in about 200 million dollars a day in stamp duties, this year ’ s fiscal surplus is expected to surge beyond 100 billion dollars, exceeding the 87 billion dollars recorded in the Financial Year 1997 – 98.

Chief Executive Donald Tsang Yam-kuen started the “ returning wealth to the people ” game when he announced in his Policy Address last October tax cuts for the super rich and big business, which would cost the Treasury about 5 billion dollars each year. Political parties and pressure groups immediately followed suit. Items on their long and ever growing budget wish lists include waiving rates, rebating salaries tax, widening the tax band, lowering marginal tax rates, and increasing welfare expenses for the elderly and the poor.
Partly because of government ’ s expectations management tactics and partly because of government ’ s ultra conservative fiscal management philosophy, Financial Secretary John Tsang Chun-wah has hinted that the surplus would be used for one-off measures rather than long-tem policies, which could become long-term burdens. If the budget is a political statement expressing the government ’ s visions, it ’ s fair to conclude from the finance chief ’ s comments that the Tsang Administration is short-sighted and will lead Hong Kong to nowhere.
Hong Kong is no doubt in the midst of a robust economic rebound and fiscal boom. Yet the news is not good for all. A casual walk through the pages of the city ’ s newspapers suggests a split experience for Hong Kong people. On the one hand we see many stories heralding people receiving fat bonuses arising from soaring stock and property markets. On the other, we increasingly see stories about people struggling to make ends meet. In the coming Budget, we will be faced with a critical decision. Do we use our strong financial position to extend a helping hand to those who need help the most? Or do we return to the old ways of comforting the comfortable? If you agree we should fix the roof while the sun is still shining and use our prosperity to benefit the majority of Hong Kong people, then you will be in favour of the following three budget proposals.
First, a tax credit for all working people. With a record high budget surplus expected this financial year, it would only be fair for the government to hand back some wealth to taxpayers through one-off tax rebates. Yet such concessions are too much geared towards the relatively better-off, who also benefit from the boom times. Tax-cut measures do not benefit low income people who do not fall into the tax net anyway. I therefore suggest the government to grant a tax credit to all working people. People who fill in their tax returns to the Inland Revenue will receive a tax credit worth (say) 10 thousand dollars. If you do not fall into the tax net, you will receive a check amounted 10 thousand dollars. If the tax you paid is under 10 thousand dollars, you will receive the difference. Other top-earners may receive a full rebate, subject to a cap of say 15 thousand dollars. The money low income people received could be used to make ends meet amid soaring inflation. They may also put the money to their Mandatory Provident Fund accounts for better retirement preparations. Or they may simply save the money for a rainy day.
The tax credit proposed above would cost the Treasury about 30 billion dollars. It would not only benefit all working people, but also serve as a pilot for implementing an income support scheme, like the Earned Income Tax Credit in the United States, which has been proved the most effective policy tool to give a lift to the working poor.
Second, a surge in recurrent spending. Recent years ’ budget surpluses are partly attributable to government ’ s conservative spending policies. Total government expenditure in Financial Year 2006 – 07 is under 230 billion dollars, a drop of nearly 8% from the peak recorded in 2003 – 04. Government outlay ’ s share of GDP also dropped from 20.1% to 15.6%, among the lowest in all advanced economies.
The government ’ s spending cut has taken its toll. The four social pillars – education, housing, social welfare and public health – once championed by the colonial government are starved of funds. As a result, public services such as public hospitals and welfare facilities are strained and fast deteriorating. I therefore propose to increase this year ’ s recurrent expenditure by 15 billion dollars (that is about 1% of GDP), on top of the original spending plan announced in the last budget.
To give the poor and the disadvantaged a better life requires recurrent spending by the public sector. With the money in hand, the government may increase old age allowances, provide enough caring homes for the elderly, extend the opportunity to high school education or equivalent to all adults, and pour more resources to deprived districts such as Tin Shui Wai. We clearly have the means to address these pressing needs and concerns in the city. The larger question is whether the government is willing to step up to the plate.
Third, the setting up of a social investment fund. Days ago, the Monetary Authority chief executive Joseph Yam Chi-kwong announced the Exchange Fund ’ s record earnings of 142 billion dollars for last year. The total assets of the Fund now reach 1,400 billion dollars, with an accumulated surplus of nearly 620 billion dollars.
The appropriate level of foreign reserve has been debated for a long time. While it is not an exact science, one is safe to conclude that 1,300 billion or 1,400 billion dollars makes no significant difference in maintaining the stability of Hong Kong dollars. Yet, the money locked in the Exchange Fund has its opportunity cost. If the 100 billions dollars is used to invest in Hong Kong ’ s social infrastructure, it will have a big impact. Keep the Fund accumulating at an ever higher level will forsake the opportunity of using the money in a more effective way. I therefore propose to transfer a small part of the Exchange Fund, say 100 billion dollars, to set up a social investment fund.
The newly available money is not intended to fund government ’ s recurrent spending, and it will not undermine our fiscal prudence. It could be used to tackle child poverty by implementing a matching savings programme for needy families. It could be used to improve our competitiveness by upgrading the skills of the working population. It could also be used to remove the political obstacles to introduce the much belated health care financing scheme by providing top-up contributions to low income people and financial incentives for the sandwich class to buy additional insurance. In short, the returns by investing the money in our social infrastructure could well exceed the financial returns of the Exchange Fund.
Social expenses and investments I mentioned above are crucial to a harmonious society, a theme of Donald Tsang ’ s administration. But we all know social harmony does not come cheap. The finance chief should take advantage of recent fiscal boom and address social issues that have been neglected for years. The last thing he should do in the coming Budget is handing out sweets cheaply.