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Following is the transcript (English only) of the question and answer session following the speech given by the Financial Secretary, Mr Antony Leung, at the Joint Business Community Luncheon today (March 12):

Question: Mr Leung, you mentioned that the Government measures are fair, reasonable and affordable. Now the business community has accepted the 1.5 per cent increase in profit tax, and we are happy to pay one more per cent of salary tax. In fact, high-income earners like most of the people here would be happy to pay more.

Financial Secretary: Thank you. There will be four more years for us to introduce those measures.

Question: I just want to ask this question: When you say that the Government's measures are fair, reasonable and affordable, the government has succeeded only in cutting civil servants' pay, zero-three-three in two and a half years. And the Government had the gumption to cut the maid's pay by 10 per cent from April 1. Can you answer me, is this fair? Or can the Government also do the zero-three-three for the maids.

Financial Secretary: Well firstly, the community may see the cut in civil service pay as zero-three-three, but since we work on fiscal years, so we tend to look at it as a three-three. But nevertheless, we are pacing the reduction of the civil service salary with the desire that we will not hit the economy too hard because on the one hand I have to balance the book in the medium term, on the other hand I am mindful that measures that are too drastic may affect economic revival. And right now we are seeing some signs of economic revival, particularly in export sectors. On the other hand I believe that the decision was very much based on the belief that it is necessary to gain the support of the civil servants, because after all they are part of the community. And including the staff from the subvented organisations, we are talking about a very large segment of the community as well, so I hope that the business community, as well as the general public, will not look at the civil servants as the other side of the table, but really, we are all part of the community. And amid economic difficulties, it is important to maintain stability in the society.

Now, the reduction in the minimum wage of the maids is really part of the population policy and as you can see the levy on the foreign domestic helpers wasn't even featured in the Budget because it is indeed not a revenue measure. The levy will not even come into the general revenue. But we believe that in looking at the population policy of Hong Kong, to make sure that we have the right policy, adjusting the minimum wage would be the right thing to do. After all, we have adjusted more than 10 times upwards the minimum wage before. And in line with deflation, it would be just fair to adjust it downward. There are actually questions from various parts of the community, including from the business community, why we should have a minimum wage for this particular segment of the workforce. Why not just take it away? So there are always two sides to the argument.

Question: I understand that you have to take tough measures because of a very serious deficit in Hong Kong and a very tight Budget. And I also appreciate that you say we still have the freedom to express our views. I want to make use of this to talk to you instead of the gentleman who talked for the higher-income group who wants to pay more. I would like to speak for the lower-income group. The first thing is that we are also very tight in our budget in the lower-income group, and if I make a suggestion if you can take a brave step to suspend the MPF for, say, two years so the lower-income group immediately can have some exigent money to pay your tax and the extra money can be used to contribute to the community. And the second thing is that I agree with you that the increase in profits or salaries tax is not too much, but I make a suggestion that if you could defer the increase on the provisional tax so that we can have enough preparation. We pay what we earn first and not on the future. We don't know whether we have future in the lower-income group. And thirdly, I appreciate you have using many good traditional Chinese sayings about the songs . I want to just make one: The water from afar cannot put out a nearby fire. Yesterday I just came to Shau Kei Wan and I appreciated our firemen were very effective; they made use of nearby water and they put out a fire and saved a very old lady from the third floor. I hope you can take an example from these good firemen, and use the nearby water to save the community.

Financial Secretary: Well you can see that freedom of expression is kicking alive here. You clearly are among those that suggest we reduce the contribution to the Mandatory Provident Fund (MPF) to offset the tax increases. Now that may have a cash flow impact. On the other hand, the MPF was really established to help people plan for their retirement. Now that clearly would be very long term, but the money saved belongs to the citizens, so if we allowed them to suspend contributions to pay for the tax, in a way we are just deferring the problem. While I understand that the tax increase proposals will cause difficulties on some quarters of the community, hopefully people will understand that the increases, particularly for the lower-income people that have to pay tax, the effective tax rate is still very low. I have quoted in my Budget that for the income bracket $9,000 to $16,700 a month, while the tax increase seems high, the effective tax rate being proposed after the increase would be an increase from 0.8 - 1.4 per cent. So effectively it is very low for that particular income bracket. So I hope that, by and large, people can accept the proposals. And honestly, what I propose is to go back to the pre-adjustment period - the adjustments being made in 1998.

Now I must correct a misconception and that is the provisional tax. A lot of people have been telling me that why are you asking us to pay tax for income that we have not earned? Indeed the provisional tax is exactly to tax people in accordance with their income stream. The provisional tax is based on last year's income level, but projected that your income would stay put for this year and we are timing it exactly to this year's tax payment date, so it is concurrent, rather than paying in advance. Why do we have to use the future income to pay the current tax? Firstly, it is not true. Secondly, there is a very good future for Hong Kong because our economic position is as Asia's world city. We are the region's international financial and business hub and we serve an area, our hinterland, that will be growing at 7 per cent a year at least for the next two decades. This hinterland, the Mainland of China will be one of the economic superpowers of the world and to be able to act as its metropolis and the international financial centre for this hinterland and for the rest of Asia means we have a great future. You talk about the economic revival and budget deficit, talking about the measures whether they are kind of affecting us in near terms. As I have said in my Budget, we have run a lot of economic models. The combined effect of our proposals, both the expenditure cuts and the revenue increases, at least based on economic models would have minimal impact on the economy. It will reduce our real GPD growth by 0.14 per cent a year on average. It will have an impact on our prices by 0.21 per cent a year. So I believe the economic impact is acceptable. However, I hope that you can see in my Budget that I am not just thinking about balancing the book. I spent about a third of the paragraphs talking about economic revival and in a way, it supplements what the Chief Executive talked about in his policy address. The directions of "big markets, small government", meaning making full use of the private sector, the direction of making Hong Kong into a metropolis in the region, the direction of investing in human resources and infrastructure, the direction of helping industries to grow are all measures to help revive the economy and these are concrete measures. These are not pipedreams and we are already seeing some early results.

Question: Mr Leung, you cut the mortgage allowance from $150,000 to $100,000. This will impact home owners in Hong Kong. And yet you continue to allow huge tax benefits to people who rent in Hong Kong. Isn't it time that we level the playing field between those who rent and those who own property? The Government's goal is to encourage investment in the property market and to boost the property market, so why do we continue to allow huge tax benefits for those who rent and provide minimal deductions for those who own property?

Financial Secretary: Fiscal measures, fiscal proposals are always part of a balancing act. Tax deductions on mortgages have been granted in the past and right now we are not extending it, largely due to fiscal reasons. Yes, we would like more people to come to Hong Kong and invest in properties; that's why we introduced the investment immigrant schemes that would allow people to invest in real estate and stay in Hong Kong. However, whether the measures are right, depends on which angle you are looking from. We believe that what we have proposed is a balanced set of proposals, one that is fair and one that is affordable. So hopefully you will look at it from the total perspective. And as I said in the very beginning of my remarks, there will always be people looking from one angle saying that it is not enough and from another angle it may be a bit too much.

Question: Financial Secretary, there is a constant rise in bankruptcy rates. May I ask what are the specific measures Government is taking to reduce the bankruptcy cases?

Financial Secretary: Obviously we saw the rise in bankruptcies and hopefully we are seeing it stabilises, at least in the credit card delinquencies, which in a way is another proxy. We are beginning to see a drop in the credit card delinquencies. It is associated with the economic situation in Hong Kong, it is associated with deflation, it is associated with the declining nominal income of our people. The No. 1 measure to reduce bankruptcies is to promote economic revival and we have a number of measures, as I said, described in the policy address, in my budget speech. Hopefully, we see economic revival soon. And the other thing about containing credit card delinquencies is to set up a positive data sharing mechanism for banks to share the positive credit data amongst themselves so that they can avoid the higher-risk credit card applicants. Hopefully all these will help arrest the increase in the bankruptcy rate, but as I said the No. 1 measure really is to revive the economy.

Question: I was very pleased to hear of your efforts to promote tourism, build the public-private partnerships as well as continue to develop the infrastructure of Hong Kong. However, this does open the possibility of many conflicts in terms of what we can do in our community to create the infrastructure we need and not have it conflict with some of the tourist aspects we need. In this regard, I was pleased to see the creation finally of the Sustainable Development Council and I wondered if that council will have some kind of strategic oversight or provide strategic direction and oversight in the socio-economic and environmental balances in some of these projects. And if I may give an example, recently it was pointed out in the paper that the Government seems fairly determined to build a super-prison in Hei Ling Chau out of a number of other sites where it could possibly be located. This would require a bridge that would go across to Mui Wo, virtually destroying the coastline on the eastern part of Lantau Island, which is now a fairly reserved area, as opposed to the western side on which we have good infrastructure development and are continuing. My question would be, what is the Government going to do to look at the socio-economic balance? Will the Sustainable Development Council have a role in this and how are you going to prevent the development of areas where, for example, you could provide a casino or a tourist attraction or hotels on Hei Ling Chau where it is in within eyesight of Disney and the other tourist attractions on that side. Something needs to be done to balance this out.

Financial Secretary: You asked a very good question - how to reconcile the economic needs of Hong Kong and also the other factors, including environmental issues, social issues and all of these things? The Sustainable Development Council has not been put into operation yet, so it is a bit too early to tell you exactly how it will operate and how it will function in relation to the other policy areas and initiatives. But all along, this administration, when considering various proposals, various initiatives, will consider all of these issues, including environment, social and economic development. So whether it's a super-prison, whether it's development of various tourist initiatives in Lantau Island, or whether we are building bridges here and there, we will evaluate the various considerations very carefully. Very commonly, for very large projects like the one you have mentioned, we have task forces within the government with representation from the various policy bureaux which would discuss the merits of such an initiative, and clearly we also would consult widely, we would talk to the public and seek the public's opinion so that everybody can have a say in whether the right balance is being achieved. Now with the Sustainable Development Council, there may be a change in the modus operandi, but on the other hand rest assured, even before the council is in operation we are taking into account all development factors, not just economic development.

Question: Honourable Mr Leung, we seem to forget the history of Hong Kong. This is the first time that I recall Hong Kong is facing this dire situation. We have a structural deficit and this is the time we have to increase our taxes to pay for the deficit. The majority of the proposals you have made, I must say, are bearable by the population of Hong Kong. I support your proposals, sir, and I urge that all the members of the respective chambers and the population at large give their support through this most difficult time in the history of Hong Kong.

Financial Secretary: Thank you very much for your support. I certainly hope that business chambers and the business community can support the Budget. I understand as I said in my remarks that you may want us to control the expenditure much better. We can give you our assurance that we are going to look at all these issues, particularly on the expenditure side. We are going to reprioritise, reorganise, re-engineer and make full use of the market to ensure that the resources that we get from you are being well used.

Question: (in Chinese)

Financial Secretary: Briefly, the question is that I have proposed a profits tax increase of 1.5 percent and by and large the business community will accept it, but on the other hand, these increases in tax may reduce the attractiveness of Hong Kong as a place for investment, particularly to foreign investors. Also, there is a chance that fees and charges will be increased, and if so the economy would suffer because people would be spending less, such that the revenue the government could collect would be less rather than more. Also the revenue coming in from land sales would also be reduced because of the tax measures. So the question is: are you actually getting less instead of more? I hope that roughly is what you have asked.

As I have said many, many times, nobody, including the Financial Secretary, likes to increase tax or cut expenditures and everybody agrees, including the Financial Secretary, that the number one role of the Government is to revive the economy. If the economy grows faster, then in turn it will help the budget deficit. However, unlike many other economies in the world, our fiscal deficit is at a very high level. Last year, the consolidated accounts deficit stood at 5.5 percent of GDP. Now that may not actually be the most worrying number. The most worrying number is the deficit at the operating account level, because the operating account is very structural, it is very difficult to change. Our operating account has been running a deficit since 1998. If we exclude the investment income, the operating account suffered an imbalance of $32 billion in 1998 and has been going up since then. The operating account deficit last year exceeded 5 percent of GDP. Now you recall that in the EU they have a ceiling that suggests that the member nations would somehow restrict their budget deficits to 3 percent of GDP. The United States is now predicting a record-breaking deficit in the coming years and that would still be less than 3 percent of GDP. However, our operating account deficit is already above 5 percent and if we don't do anything, I am sure that the investment community around the world will say that this situation is not sustainable. So while on the one hand I said that economic revival is our number one goal, on the other hand we have to make sure that we address the budget deficit so that it will not become an obstacle to economic revival itself. Hence, the very difficult decision to increase tax and cut expenditure. But I hope that you also observe that while we have proposed a plan to reduce the budget deficit and to go back to balance by 2006/07, we are staggering the measures so that the actual economic impact will not be hitting the economy in the near term. That's why the tax increases, the tax receipts coming into the Government are being staged over the next four years, increasing every year, not being introduced in the first year, and so are the expenditure cuts. Hopefully through this we can on the one hand revive the economy and on the other hand make sure that everybody, including people in Hong Kong, including overseas investors, including the overseas speculators, is convinced that we can balance the books over this period and avoid possible financial instability.

Question: This is a constructive suggestion as to how Hong Kong can increase tax without everybody being unhappy and that also touches on many of the themes you just raised, such as how to make sure Hong Kong can remain competitive around the region and how Hong Kong can maintain a "big economy, small government" system. In this year's budget, we didn't have anything that touched on the wine aspect. Hong Kong is at present taxing the duty at 80 percent. What I'm proposing is changing the duty to a fixed duty rate, for example a certain amount for a bottle. This is what many countries are doing, for example Singapore. At the moment, China is going to be reducing the duty on wine to 14 percent only. So Hong Kong 80 percent, China is only 14 percent - many tourists are not going to spend on wine in Hong Kong, so Hong Kong cannot raise revenue on this. And also the Customs people, they have no clue what wine, what year how to tax, what's the value of the wine. According to industry research, the average each bottle we are only taxing 20 some dollars. And 20 some dollars doesn't really make sense because say $50 a bottle, it will be $40 already on the tax and that is really, really not good wine. Supposedly you get $40 per bottle, but our average is only 20 some dollars. So Hong Kong can just say each bottle $30 and the revenue will boom immediately.

Financial Secretary: Thank you for the suggestion. Every year we review every possible tax suggestion. So we will look at it next year and see whether we will make changes. Thank you.

End/Wednesday, March 12, 2003

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