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Following is a speech (English only) by the Financial Secretary, Mr Henry Tang, at the Joint Business Community Luncheon on the 2005-06 Budget at the Hong Kong Convention and Exhibition Centre this (March 23) afternoon:
Distinguished guests, ladies and gentlemen,
It is a great pleasure to be with you this afternoon. I have worked closely with many of you for years, so I know just how disappointed some of you are when I propose no change to the wine duty.
A Difficult Budget
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This Budget was not an easy one to draw up. With the economy and government finances gradually improving, it's understandable that some people would think the Government should substantially reduce taxes or increase spending.
The easy choice, of course, would be to cut major taxes like salaries and profits tax, jack up Government spending across a number of key areas, and freeze all Government fees and charges. If I were to do that, I can imagine that after I delivered the Budget Speech, I could just sit back, relax and wait for a big round of applause.
I have, however, chosen the harder way. I didn't relax the Government's expenditure control or substantially reduce taxes. Yes, our economy is improving and so are the Government's finances. However, we still expect the deficit to continue, albeit on a lesser scale. Even though we received good news this week with a decline in the jobless rate to 6.1 per cent, we still face structural unemployment. The outlook for our economy, though much better than it was a year ago, is still subject to external risks like movements in oil prices and US interest rates. As the Financial Secretary, I have to stay focused on the longer-term needs of Hong Kong's economic development. The priority now should be to consolidate our recovery, help business create more wealth and more jobs, thereby helping to alleviate the unemployment problem among our less-educated and less-skilled workers. The Government needs to continue to tighten its belt to eliminate the deficit. At the same time, I did not propose any major tax reductions except for those that will bring long-term benefit to Hong Kong as a whole.
Philosophy
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Some commentators have suggested that this Budget does not say much about my fiscal and economic philosophies. I do not intend to engage in a discourse with Plato, so I will leave that judgement to you. Just let me say this. I think there are some time-honoured, basic economic tenets that the people of Hong Kong share. We believe in "Big Market, Small Government". That means we have to keep Government expenditure and the size of the civil service under control. This will allow more room for the private sector and lessen the burden on taxpayers. We also believe in the principle of "Market Leads, Government Facilitates". That means we must press ahead with providing an even more business-friendly environment and helping our business people secure foreign market access, thereby making Hong Kong a preferred business platform for both local and overseas companies. And we believe in "leaving wealth with people". We are therefore steadfast followers of a low and simple tax regime. Finally, Hong Kong has benefited from a long tradition of being a caring society, and we will continue to engage the community, including the business sector, to help those in need.
These basic principles make up the core philosophy that shaped this year's Budget. Its theme can be summarised as: to promote the social stability and economic development of Hong Kong.
Big Market, Small Government
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When I first became the Financial Secretary and held consultations for my first Budget, one message that came out loud and clear was that we must control the trend of ever-growing public expenditures. Indeed, despite the fact that people's incomes decreased and deflation persisted in the wake of the Asian financial crisis, the Government's operating expenditures continued to soar. I took it upon myself that my foremost priority was to control the Government's expenditure. I knew that both the Government's and my own credibility was on the line; and I also knew that we should demonstrate to the public that we had the ways and the means to achieve the objective.
One year later, I am glad to report that we have succeeded in checking the rising trend of our operating expenditure. Indeed, this is the first time in over 50 years, barring two special accounting arrangements with the former municipal councils, that our operating expenditure has actually dropped. What we promised, we deliver.
The reduction in expenditure shows that the various control measures taken by the Government are gradually producing results. For instance, the civil service establishment has come down by 4,600 over the past year to about 166,000 at present, and will be further reduced to about 163,300 by March next year.
I assure you that this achievement will not be a flash in the pan. Our efforts to control Government expenditure are not yet over. Our forecast indicates that our Operating Account will not regain balance until 2008-09. It would be very short-sighted of me to substantially reduce taxes and raise spending now, because it would only prolong the timetable to eliminate deficits and hurt our economic fundamentals. We cannot relax our fiscal discipline just because of a single good year. Instead, we will continue to manage our public finances prudently, keep expenditure within revenue limits, and strive to achieve a fiscal balance.
I also pledged to keep public expenditures at 20% of GDP or below. We are moving towards this target. In 2004-05, we expect the share of public expenditure in GDP to decline to 20.7%. This brings us back to the level of 1998-99, when the percentage was 20.8%. Barring unforeseen circumstances, we project that the share of public expenditure will drop to below 20% of GDP in 2006-07, two years ahead of our target date.
Such a result could not have been possible without the support of bureau directors and the efforts of the entire civil service and the gradual change in the civil service culture. We have pressed ahead with the much needed reprioritisation, while maintaining quality services with reduced resources. In short, we are now doing much more with much less.
Market Leads, Government Facilitates
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Having said that, it is not enough to focus only on Government finances. The economy grows if the market thrives. When the market thrives, more jobs are created. The Government's role therefore is to provide the best environment for our businesses to excel, so as to help reinforce the strengths of our economy. We will continue to uphold the principle of "Market Leads, Government Facilitates".
I have set out in this year's Budget a number of Government measures to reinforce the key strengths of our economy. These include pressing ahead with CEPA; improving the regulatory environment of our financial sector; exploring the possibility of further expanding renminbi business in Hong Kong; removing regulatory red tape in general and reviewing our competition policy in particular; boosting tourism development; helping to promote our logistics services; and supporting our SMEs. This list might sound familiar to you, but this is exactly what we should do. Indeed, a recent opinion poll suggests over 70% of the people support the principle of "Market Leads, Government Facilitates" set out in the Budget. It takes courage to resist the temptation to meddle in the economy just for the sake of making changes. Coming from the business sector myself, I understand what you want us to do most is to maintain social stability, to build the proper hard and soft infrastructure, to nurture a business-friendly environment, to promote a level playfield, and then to leave you alone. That's exactly what we do.
Longer-term View
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I do not want to repeat here what I said in my Budget Speech. However, I would like to talk a bit more about two measures that I think are of long-term importance to Hong Kong and on which some of you expressed a strong opinion during the Budget consultation.
Some people asked why I propose abolishing estate duty while not giving more direct tax relief to the middle class. And, they ask, why abolish the duty if the Government is still running a deficit? I want to reiterate that the abolition of estate duty is not a simple tax concession per se. Instead, the forgone revenue is an investment in the future competitiveness of Hong Kong. We are an international financial centre, and the asset management business is a strong growth area. Just look at the growth in private banking here. By removing a negative factor to the development of the market, Hong Kong can become an even more attractive wealth management centre. As with the $500 million set aside for tourism promotion, we believe this investment will bring a multi-fold return and go a long way to further consolidating our status as a premier financial centre. The abolition of estate duty will also help SMEs, which otherwise may run into operational difficulty if their assets are frozen during the estate duty assessment period. The benefits will go not only to family members of SMEs' owners, but also to the people employed by these SMEs, who might otherwise lose their jobs.
As the Financial Secretary, my paramount concern is the longer-term competitiveness of Hong Kong. There are times we have to take bold moves before it is too late, and I have accepted the challenge and proposed to abolish estate duty. I welcome the continued support of the chambers for the abolition when we submit the proposed legislation to LegCo for consideration.
That brings me to another important subject: the goods and service tax (GST). Some say that I have tried to avoid a thorny issue by delaying the consideration of GST. Well, I think my decision not to give substantial tax reductions and my proposal to abolish estate duty illustrate how shallow such a criticism is. In reality, GST will have a far-reaching impact on our tax regime and the Government's financial health. So it is only prudent of me to hold off the public consultation until after July, when the new Chief Executive will be elected. In any case, overseas experience has demonstrated that it takes about three years from deciding to introduce GST to actual implementation. Hence, taking a few more months to prepare for public consultation will not have a significant effect on the overall timetable of the consideration of GST.
Nobody likes more taxes. That includes me. But as a responsible Government official, I have a duty to set out in clear terms the reality of the Government's finances. Despite improvements in the economy and the Government's financial position over the past year, there remains the problem of too narrow a tax base and an over-reliance on volatile revenue. Roughly, only one out of every three working people needed to pay tax in 2004-05. And among those taxpayers, 57% of salaries tax was paid by the top 100,000 taxpayers. Our revenue base is too narrow and subject to too much cyclical effect. It really is time for us to take a hard look before the next economic downturn hits us and damages our fiscal positions. More importantly, an improved economy could give us a window of opportunity to consider and implement long-term tax reform.
Since we shall have ample time to consider GST, there is no need for anyone to jump to a conclusion. I would encourage the chambers and the public to hold in-depth, thorough and constructive discussions on the subject.
Conclusion
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As you know, since the announcement of this year's Budget last Wednesday, I have attended various phone-in programmes and public forums. I understand that there are a number of people who hoped to see more substantial tax reductions. But I am sure they understand the need to control Government expenditure, especially while we are consolidating our recovery. It is gratifying to learn that apart from criticisms from some quarters, the majority are satisfied with this Budget and appreciate the consistency and prudence in my approach.
Hong Kong people are generally pragmatic. They know that we have to bring Government finances back to a healthier state for the long-term good of our economy. They want to see the Government stand firm on cutting expenditure while giving maximum support to strengthening Hong Kong's economic development.
Ladies and gentlemen, I hope this year's Budget has struck the right balance. I have resisted the temptation of giving more substantial tax reductions while we are still not ready for them. I have taken some strategic decisions for the longer-term good of Hong Kong. I have also laid out in clear terms what challenges Hong Kong is facing and our need to remain pragmatic and prudent in moving forward. By reinforcing our strengths, I am sure Hong Kong will grow even stronger and more prosperous in the years to come.
Thank you very much. I will be happy to take questions.
Ends/Wednesday, March 23, 2005
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