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Following is a reply by the Financial Secretary, Mr Donald Tsang on the Motion Debate by the Hon CHAN Kam-lam

yesterday (Wednesday):

Madam President,

I wish to first of all thank Members for giving me the opportunity to take part in this motion debate which allows me to listen to your views on this very important issue. I feel that Members have spoken sincerely and frankly on the issue. I will also speak frankly and sincerely and hope that you will accept my views as I have accepted yours. On 22 June, the Chief Executive announced a package of special relief measures in respect of Hong Kong's economic adjustment. These measures underline the commitment of the Administration to help the community in the current economic adjustment. We understand the difficulties they face and will do all we can to help them tide over this difficult period.

When I explained in detail the package of measures, I pointed out that each and every measure is the result of very careful consideration after balancing all the pros and cons. Our decisions were based on the following three important criteria: first, we must uphold the principle of prudent financial management which we have always adhered to; secondly, we need to maintain the interest and confidence of investors and international organisations in investing in Hong Kong as a means to secure and increase local employment opportunities; thirdly, we need to ensure that the measures will not have any adverse effect on the linked exchange rate system. These three principles are crucial to protecting the long-term interests of Hong Kong.

I need to stress that all the measures are targetted at our present problems and are pragmatic. They will have immediate impact and will address the most pressing issues. I believe that Members would agree with me that under the present economic climate, simply throwing away large amounts of money does not necessarily mean that we could resolve all the problems. I hope that Members can share a common goal with us, which is, public money must be put to the right use in order that the public can really benefit.

Let me now express my views on the various proposals in the motion moved by the Hon. CHAN Kam-lam as amended by the Hon. Selina CHOW LIANG Shuk-yee.

First: Overall freeze on increases of public housing rents for one year

Public housing rents have all along been determined according to the tenants' ability to afford the same. The Housing Authority (HA) will go by this principle and take into account such factors as inflation, rates, operating costs, the age of individual housing estates and the locations, etc., in determining the rental levels. As such, I don't think Members need to worry that the tenants will find the adjustment in public housing rents unaffordable. In fact, the Housing (Amendment) Ordinance 1997 already provides that public housing rents may only be revised once every three years and that the median rent to income ratio shall not be greater than 10%. These are privileges unavailable to non-public housing residents.

The existing mechanism also provide the means to help the needy tenants to tide over. Any public housing tenants with short-term financial difficulty can apply to HA for reducing half of their rent through the "rent assistance scheme",.

The proposal for freezing public housing rents for one year is to be considered and decided by HA. I am sure that HA will consider the proposal very carefully by taking into account all the arguments that have been put forward.

Second: To reduce the rent of shops in public housing estates as well as Government-managed shops by 30%

We fully appreciate the difficulties encountered by businesses under the present economic environment. Neither the restaurants nor the shops in public housing estates can avoid the shocks of the economic turbulence. Therefore, various measures, including rental assessment are being adopted by the HA to tide over shop tenants of public housing estates. It appears to me that the HA and Members in fact share the same objective in reducing the rental and relieving the burden of the tenants.

In dealing with the rental issue, it will be up to the HA to make their own decision. Nevertheless, we may still comment on the issue from a rational angle. We consider that what the HA has done is a result of careful thought and is both fair and reasonable. As usual, the HA has adopted commercial principles in letting commercial units. As Members would understand, the Government cannot and should not make use of public money to subsidize the shop tenants. From a commercial point of view, we should also do our best to reduce the vacancy rate in shopping arcades, to maintain their competitiveness and to ensure that public housing residents continue to enjoy services provided by these shops. Therefore, we support the measures adopted by the HA.

However, the proposal to introduce a flat 30% reduction of rents made by some Members goes against the principle of fairness. The reason is that shop tenants in public housing estates carry on all kinds of trades and that the extents to which they are affected in this economic downturn vary. Furthermore, as different shop tenants signed the tenancy agreements with the HA at different times, the differences between the rents paid by them and the market rent also vary. At present, some shop tenants may be paying rents 30% higher than the market rent while others are paying rents lower than the market rent. If the HA makes an "across-the-board" adjustment to shop rents, it's unfair either to the HA or to some shop tenants. This also goes against the law of market operation. Moreover, the HA has committed to complete the revaluation work within four weeks upon application. We certainly have to take exceptional steps in exceptional times but it does not mean that we should easily give up our principles.

We have already considered in detail Members' suggestion that the Government should introduce 30% rent reduction for all its shop tenants including wholesale food markets. Unlike the estate shop rental, the rental of Government wholesale markets is not set by reference to the rental levels in the private sector. Moreover, we have already frozen their rental adjustment this year. We believe that a reduction of the wholesale market rental will have minimal impact on the wholesale prices and will bring little benefit to the ultimate consumers.

Here I would like to express my regret for the strike staged yesterday by a small number of shop tenants. Hong Kong is a society which abides by the rule of law and reason. I would like to urge those shop tenants to keep calm and not to cause any inconvenience to the residents of public housing estates. After all, it is a time for us to overcome the difficulties together. To "ride out the storm", each of us has to contribute our efforts.

Third: To reduce duty on fuel by 30%

The vast majority of commercial vehicles, including taxis, public light buses and lorries, use diesel oil as fuel. The reduction of duty on diesel oil can lower the operating cost of these vehicles and all sectors in terms of transportation costs. With this consideration, we have reduced duty on diesel oil by 30% up to 31 March 1999. The aim of this adjustment is in line with our overall objective to provide relief in times of economic difficulty.

As for petrol, most of the vehicles using petrol as fuel are private cars. Reduction of duty on petrol cannot directly relieve the operating difficulties encountered by all sectors. We also know that the present rate of duty on petrol is maintained at the March 1997 level. Moreover, people driving private cars can use public transport instead. On the other hand, the cost of the proposal is estimated to be $650 million a year. Since the proposal will not provide a direct relief during the present economic adjustment and will reduce Government revenue substantially, we find it unacceptable after careful deliberation.

Fourth: A 20% rebate on Salaries Tax and Profits Tax paid for 1996/97

In respect of the proposal for a partial rebate on Salaries Tax and Profits Tax, we have carefully taken this into consideration when formulating the relief measures. Our consideration is that we have put forward very favourable concessions on Salaries Tax and Profits Tax in the 1998-99 Budget. With regard to Salaries Tax, we have widened the marginal tax bands and reduced the incremental steps of the marginal tax bands; we have substantially increased various allowances and deductions. We have introduced three new deductions for home mortgage interest payments, elderly residential care expenses and contributions to retirement schemes respectively. 99% of the salaries taxpayers will benefit from these concessionary measures. With regard to Profits Tax, we have reduced the profits tax rate to 16% and introduced various concessions on deductions. These concessions on Salaries Tax and Profits Tax will cost the revenue $9.6 billion in 1998-99, and to a total of $76.7 billion up to 2001-02.

We consider that it is not appropriate to implement other measures relating to Salaries Tax and Profits Tax before these measures have been proved effective. Besides, we think that the proposal of tax rebate may not necessarily benefit those who are in genuine need.

As Hong Kong practises a low tax policy, our tax rate in general is among the lowest around the world and the taxes paid by most taxpayers are relatively low. An across-the-board tax rebate will only bring exceptional benefits to those taxpayers who do not need such a relief.

Though the Government has decided against a tax rebate, we have considered measures which can bring benefits to most people to relieve the present economic pressures. Among the various kinds of tax levied by the Government, rates is the one that every household and all businesses have to pay. Therefore, we have decided to rebate the rates in respect of the first quarter of the year 1998-99. The measure will benefit owners of over 1.93 million residential units and 0.34 million non-residential units.

Fifth: Social Welfare Services Development Fund

Madam President, the motion proposes the establishment of a Social Welfare Services Development Fund by the Government in order to meet our commitment on social welfare services and to increase employment. In fact, the Government has allocated substantial resources to the provision of social welfare services in the past five years. In 1998-99, recurrent expenditure on social welfare amounts to some $24.9 billion, a more than threefold increase over the $7.6 billion in 1992-93. The percentage of the total recurrent public expenditure it accounts for has increased from 8.3% in 1992-93 to over 12.5% this year. Similar growth rates also apply to direct subvention expenditure which has increased significantly from $1.8 billion in 1992-93 to $5.3 billion in the current financial year.

We appreciate that as the economy of Hong Kong develops, the public become more concerned towards the vulnerable and disadvantaged sector in the community. As a result, public spending for social services continues to adjust upwards. In the past few years, there has been significant growth in all social welfare services to meet this demand. For example, the residential places in care and attention homes have been increased from 4 400 in 1992-93 to the present 10 000. An additional 7 200 residential and day care places for the disabled have also been provided, representing an increase of more than 100%. Family case workers have also increased from 400 to the present 700 and school social workers from 150 to 300.

Moreover, the Government is committed to fund the many iniatives under the strategic policy objective on "care for the elderly" and to enhance our services to disabled persons, needy families and young people. For example, we already have plans to purchase an additional 2 400 residential care places in private homes for the elderly in the next three years. The supply of subvented residential care places in care and attention homes for the aged will rise by 3 300 in the next few years. On top of that, we will provide an additional 1 000 infirmary beds in the coming five years. We have also secured resources to provide 870 additional places in various kinds of rehabilitation services centres next year and a further 3 800 places in the following five years.

In the next 18 months, the provision of a wide spectrum of services as those described above will create around 3 300 new posts in the Social Welfare Department and non-governmental organizations. Of these posts, about 800 are at professional or managerial level and the remaining 2 500 at the clerical/support level.

I do share Members' views that in the next few years, we shall have to keep up our efforts in the development of social welfare services. I would also like to point out that we already have a well-established Lotteries Fund for the purpose of financing social welfare services. However, we should not forget that there are also some strong strong voices in the community against the substantial increase in public spending in this area, in particular the increase in the CSSA payment. The establishment of a Social Services Development Fund also goes against the prudent fiscal policy we have adhered to so far.

The target-based management process, introduced since the establishment of the Special Administrative Region Government, will enable us to lay down long-term directions for growth and plan for the necessary resource allocation. On the effective implementation of this management approach, we could be more forward looking in the longer term provision of quality welfare services to the public within the availability of resources.

Sixth: To formulate a long-term industrial policy

Madam President, during the debate, the Hon CHAN Kam-lam and other Members have put forth many comments and arguments in respect of the Government's long-term industrial policy. We thank the Members for their attention given to the local industrial policy.

For a long time, the Government's policy on industry has been very clear cut, i.e. to create a business friendly environment under a free market principle in order to provide the strongest support to various businesses so that they could be best developed. It is clear from the past economic development of Hong Kong that to ensure that individuals and enterprises would make the best possible commercial decision and to quest for the maximum space for development and the greatest profits, it is necessary to have a fair and free market system. And it is this market system that provided a sound basis for economic development to Hong Kong in the past. Though Hong Kong cannot be immuned from the recent Asian financial turmoil, it has suffered less compared with many other neighbouring economies. One of the main reasons is that we have adhered strictly to the free market principle for years.

However, I must reiterate that while we observe the free market principle, it does not mean that we can shirk our responsibility as far as giving support to industrial development is concerned. On the contrary, the Government has been well aware of the responsibility that we should shoulder in industrial development and that we should provide the best business environment and the greatest support to the commercial and industrial sectors. For example, our simple and low tax regime, rule of law, fair market system, long-term educational and manpower training programmes, and massive infrastructural investment together provide a world-class business environment and the best development opportunity for our industry and commerce. Of course, we know that a business-friendly environment alone is not enough. We have therefore introduced a series of support measures for industry through the Industry Department and various industry supporting bodies. Moreover, we have developed plans which are beneficial to the overall industrial development in Hong Kong and provided direct financial assistance to industries.

Madam President, I believe that most Members will agree that industries in Hong Kong are heading towards the road of high technology with emphasis on high added value. We should be forward-looking and should set long-term targets and procedures for achieving them. For these reasons, the Chief Executive appointed in March this year 14 persons as members of the "Chief Executive's Commission on Innovation and Technology" to advise him on the necessary measures to drive forward innovation and technological development for Hong Kong.

The objectives of the Commission are to promote product and process innovation among manufacturing and service industries, as well as to encourage and support high value added industries and businesses in Hong Kong, so as to enhance their competitiveness in the global market. The Commission has so far convened four meetings.

The Commission has also conducted two seminars and one public consultation exercise in order to solicit public opinions on the promotion of innovation and technological development in Hong Kong for its consideration and reference. We expect the Commission to submit its first report to the Chief Executive before October this year and to complete all its work in the following twelve months. The Commission's recommendations will have important implications on the future development of Hong Kong's industries, including manufacturing and service industries.

Apart from helping industries in Hong Kong to become innovative and high value added, the Government also fully recognizes the need to provide effective assistance to small and medium enterprises. Such enterprises account for 98% of the companies in Hong Kong and play an important role both in promoting Hong Kong's economic growth and in providing employment opportunities. Therefore, the Government has introduced many support services in recent years to suit the special needs of small and medium enterprises. For example, the Small and Medium Enterprises Committee was set up in 1996 to advise the Government on ways to enhance support services for those enterprises. In response to the suggestion made by the Committee, the Government has launched in June a pilot credit guarantee scheme costing $500 million to help small and medium enterprises to obtain bank loans more easily. In the package of economy relief measures recently announced by the Chief Executive, we have also suggested allocating $2 billion for the purpose of alleviating the credit crunch problems faced by those enterprises. We are expediting the preparation work and hope to be able to come to the Finance Committee for funding approval within this month for the establishment of the scheme in August. Moreover, with the assistance of Industry Department and other industrial support bodies, we have provided a range of "tailor-made" services for the enterprises. We are now actively studying ways to strengthen and improve these services with an aim to providing the best support for the small and medium enterprises.

I hope Members can understand that the Government has all along been implementing a clear and effective industry policy in accordance with the principles of free market. While the measures under this policy must go abreast of our times, proposals from the community, your valuable opinions, economic changes and the experience of different areas all provide new insights incessantly so that we may continue to fine-tune established measures as well as introduce new ones. Yet, to strive to maintain an excellent business environment crucial to the success of Hong Kong, to allow industries to develop on their normal paths and to continue to give impetus to the long-term economic prosperity of Hong Kong, is our fundamental policy and guiding principle that should be able to withstand challenges.

Conclusion

Madam President, I agree with Members' consensus that now is the time to return the wealth to the community. However, we must do it with results and with good reasons. As I explained on 22 June, the SAR Government has already exhausted its remaining capability in 1998-99 in both revenue and expenditure to come up with those relief measures to address our economic difficulties. As a result, we will have a deficit budget this year and we will have to make use of our reserve. But in practice, a full economic revival would depend on many factors. One cannot simply look to the Government to introduce initiatives after initiatives to shield Hong Kong from the impact of the financial turmoil which has swept the entire region. I believe that the various measures put forward by the Government should effectively provide relief to the most pressing problems in the near future without contravening the principle of prudent fiscal management, hence delaying our economic recovery. They also would not depart from our long term market-led industrial policy and raise doubts amongst international investors, nor will they affect the flexibility of our economic structure and long term competitiveness. I am confident that what the Government is doing will be recognised and supported by our industries and the majority of the public.

Thank you Madam President.

End/Thursday, July 9, 1998

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