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Following is the full text of "Letter to Hong Kong" delivered by the Secretary for the Treasury, Miss Denise Yue, at RTHK Radio 3 today (Sunday):

Many of you listening today will have enjoyed celebrating the arrival of the new Millennium with your loved ones. When doing so, our thoughts turn especially to those absent friends and relatives living overseas.

When those who have left Hong Kong for pastures new do return, I can guarantee one thing: they will complain long and loud about how much tax they have to pay in their adopted countries.

No doubt you will nod your head sympathetically. But will the message sink in? For we all take for granted the low level of taxation which we enjoy in Hong Kong. For example, less than 40% of the workforce pay any salaries tax, and only 10,000 people pay the maximum salaries tax rate of 15%. Companies pay profits tax at 16%, and only profits arising in Hong Kong are subject to tax.

Also we have no taxes on other income or capital gains, no sales or value-added taxes on what we buy, and duty is payable on very few commodities.

We have been able to enjoy a low tax system mainly because of the prudent management of our public finances. Successive Financial Secretaries have ensured that the Government lives within its means. They have kept strict control over the growth of government expenditure, ensuring that over time our expenditure grows no faster than the economy.

These sound practices are now enshrined in the Basic Law. So we are under a constitutional obligation to keep our finances in a healthy state. With a fiscal deficit last year, and a projected deficit this year and next year, the law and prudent financial management demand that we bring our finances back into the black in the near term. This would also have the added advantage of maintaining our fiscal reserves at the level necessary to help support the Hong Kong Dollar, an indisputable requirement given the events of 1998.

Besides prudent financial management, there are two other contributory factors which have allowed us to keep taxes low.

One factor is our adherence to the user pays principle for funding many of our government services.

For some services, such as the issue of passports, the users are expected to pay the full costs involved on the grounds that it is unfair for the general taxpayer to subsidise these services. There are other services, for instance medical services, for which the users pay a proportion of the costs involved, with the balance met through general taxation, on the grounds that the community should look after those who are sick and that nobody should be deprived of essential medical services because of the costs involved.

It has been our practice in the past to generally increase these fees and charges annually, in line with increases in the costs of providing the services involved. But because of our economic circumstances nearly all fees and charges have been frozen for two years. And because of the Legislature's reluctance to approve increases in charges in the past, water and sewage charges, for instance, have not been increased for 5 years.

In the meantime the increased costs involved have fallen on the general taxpayer and will continue to do so until these fees and charges are increased.

The other significant factor supporting our finances, in recent years, has been the high levels of revenue from land and property transactions. But as property prices stabilise, the huge windfalls are unlikely to recur in the future.

So, we see the seeds of a problem starting to grow. For constitutional, economic, fiscal and monetary reasons we need to restore the health of our public finances. In addition, there are other issues on the horizon that pose a threat to our revenue base.

The impact of illegal gambling and the rise of gambling through the Internet threaten to erode our income from betting tax.

The spread of e-commerce will have implications on all governments' abilities to assess and collect business-related taxes. For us, the impact will be further accentuated by the territorial-base of our taxation regime.

The acceleration in global stock market trading through the Internet will require us to consider whether the stamp duty we charge on stock transactions can be maintained at its present level, or whether by doing so we would impede the further development of the Hong Kong stock market.

There is no escape, as the economy restructures, our revenue base is inevitably also going through a similar process of restructuring.

So much for revenue, on the expenditure side, the community expects more and better public services. An ageing population will place increasing demands on our health and welfare services. The need to tackle pollution will bring substantial costs. We need to reconcile this need for additional spending with a contracting revenue base.

So we will certainly continue to strive to spend taxpayers money more effectively and economically. The Enhanced Productivity Programme, EPP, which should deliver annual savings of $5 billion by 2002-03, is a mark of our determination to give taxpayers the best value for their money.

Some have criticised our EPP target as too modest. But the realities are: about two-thirds of our spending is on staff costs, and much of the remainder is spent on financial assistance schemes for the needy.

When it comes to reducing staff costs, whether in terms of reducing headcount or cutting pay, the public sector clearly has much less room to manoeuvre than the private sector. It requires more than a balancing act to come up with reform measures that can meet with the approval of management, staff, politicians and the public at large.

For example, the Administration proposals to introduce new and lower starting salaries for new recruits to ensure that public sector salaries are in line with private sector pay were not approved by the Legislature earlier this week. Let us hope there is greater appreciation of a joint responsibility in tackling government spending.

Despite this setback, we will press ahead with our reform measures, and control the growth of government expenditure to a level which our economy can sustain.

But that said, we still need to raise sufficient revenue to pay for the services which we provide, and to maintain our fiscal reserves at an adequate level. This raises a number of issues which, as a community, we will need to face up to in this new Millennium.

One, we need to re-establish the user pays principle in setting government fees and charges.

Two, we need to address the implications of the re-structuring of our revenue base which may affect our revenue collections from established sources over the next few years.

Three, we need to consider whether our tax base has become too narrow and needs to be widened.

In responding to these challenges, we need to consider carefully the likely effects of any re-distribution of the overall tax burden on both businesses and individual tax payers. And we must not lose sight of the fact that our present low, simple and predictable tax structure is a major incentive for businesses seeking to establish themselves or expand their activities in Hong Kong.

If we are to introduce change, we will need the community to reach a consensus on the way forward.

So, the next time your overseas friends or relatives complain about the amount of tax they have to pay, by all means nod sympathetically. But reserve some of your sympathy for the governments of their adopted countries which face the unenviable task of trying to satisfy the demand for public services while at the same time balancing the books by raising the revenue needed to do so, in a way which is fair and just.

This is exactly the challenge we face in Hong Kong. Our response will shape the content of the Financial Secretary's Budgets in this and future years.

End/Sunday, January 16, 2000

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