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Speech by FS at Joint Business Community Luncheon (English only) (with photo)

Following is a speech (English only) by the Financial Secretary, Mr Henry Tang, at the Joint Business Community Luncheon on the 2006-07 Budget at the Hong Kong Convention and Exhibition Centre this afternoon (March 2):

Distinguished guests, ladies and gentlemen,

I am delighted to be here with you this afternoon.

Maintaining a small government. Spending within our means. Sharing wealth where we can. Investing in the future. These are all aspects of fiscal prudence. These are my pledges. And I am proud rather than apologetic to say so.

Prudent fiscal management is not an end in itself. It serves a number of purposes ˇV keeping our taxes low and simple, providing a safety net and saving for a rainy day.

Since the first day that I became Financial Secretary, I have faced perpetually conflicting demands: more parks, enhanced welfare, larger libraries, completely free school education and for more than nine years, fiscal surplus, on the one hand; and lower salary and profits taxes, higher tax allowances, innovative deductions, concessions in rates, reduced fees and charges, on the other. Each demand, on the face of it and on its own, may have merit. However, considering all of them together leads to a completely different conclusion. Let me be blunt and absolutely clear. Such demands are easy to make; impossible to deliver together. We need to prioritise, make a choice.

I could perhaps have earned a standing ovation last week had I proposed to increase welfare and cut taxes sharply at the same time. That would have been a most convenient way out. It would also have been a most irresponsible way out. Increasing welfare? Attractive. Cutting more taxes? Tempting. But where is the money going to come from?

As I said in my Budget, the biggest challenge in managing public finances is to keep taxes low while at the same time satisfying the needs of the community. My fiscal targets are to keep our accounts in balance and the share of public expenditure in GDP at 20% or below over the next few years. Let me spell out some facts. For 2006/ 07, the share in Hong Kong will be around 18%. That is much lower than many developed economies. Taking the OECD countries as an example, the corresponding ratio is on average nearly 40%. How can these countries manage? Because of their high tax regimes. Does our community accept their high tax rates? The answer is crystal clear: NO.

Some have argued in the past week or so, "Mr Tang, we have no dispute over the principle of prudence. But the Government has a "huge" (in quotes) operating surplus of $5.8 billion in 2005-06. When you have such a "huge" (again in quotes) surplus but have not reduced taxes to a similar extent, you are failing to keep your pledge of leaving wealth with the people. You are overly prudent. You are a Scrooge."

I can well understand why some people have such feelings. $5.8 billion sounds "huge" if we are talking about the wealth of an individual or the profits of a corporation. When you look at it in the context of public finances, however, the surplus is relatively small. We are talking about a government budget of $250 billion. We should also not forget the accumulated deficits over the past seven years, which are $190 billion in total or 46 times the consolidated surplus for 2005-06. Even if we could achieve the surpluses projected for the next five years, there would still be a shortfall of $100 billion.

I, of course, would have liked to provide more welfare if the Government had more resources. The fact is we don't have them. We can never be a welfare state. We should never be a welfare state. We therefore provide a basic safety net. But, even so, welfare expenditure alone accounts for around $36.2 billion, more or less the same as the revenue we receive from salaries tax. In the coming year, I will increase recurrent expenditure by around a further $100 million to help the disadvantaged groups by enhancing rehabilitation, family support, elderly and child development services. I will also earmark an additional $230 million in the next five years to strengthen employment assistance. New measures will include provision of a one-off incentive of $1,500 to long-term CSSA recipients to help them settle into their new jobs. In providing a safety net, what we have to do is to encourage self-reliance, not dependency.

As an open economy, we should not forget the challenges around us. I naturally do not wish to see an outbreak of bird flu. But the threat is real and imminent. We cannot pretend that the problem does not exist.

With our low taxes, we need to maintain a small government and a low level of expenditure. We need to be alert to the many challenges Hong Kong faces and save for any rainy days that lie ahead. The clear choice of the Government and my Budget therefore is prudence.

We are entitled to be quite proud of achieving all three fiscal targets by reining in expenditure and restoring fiscal balance successfully three years ahead of schedule. Those engaged in the public sector elsewhere in the world will know how difficult these tasks can be. We should recognise this as a great achievement not only with some pride but also with humility. Without the team effort of the civil service and the support of the community, this could not have been possible.

Now I come to my proposed tax concessions. Some have complained that the candies are not sweet enough. I realise everyone has a different understanding of what is "enough". It would perhaps be more objective to let the figures and facts speak for themselves and put things in the right perspective. And I invite you to draw your own conclusions after hearing the facts.

Fact: a typical middle class family earning $480,000 annually with one child and one dependent parent aged 66, currently paying monthly interest of around $3,300 on a mortgage will enjoy a tax saving of up to $9,400 or 30%. The effective tax rate of this family will be less than 5%. That is low by any developed economy's standards. When you work out the effective tax rate of nearly all the other tax payers in Hong Kong, they are also definitely low by the same standards.

Fact: As in my previous two Budgets, I have not proposed any new taxes. My proposed tax concessions this year will cost revenue some $2.7 billion next year, or nearly half of the operating surplus estimated for 2005-06. This will be the first time since 1998 that salaries tax rates have been reduced. It also represents the biggest concession in salaries tax in the last eight years. And it is not one-off.

Fact: Some have proposed that the tax bands and rates should revert to their 2002-03 levels, which will cost revenue some $7 billion. Letˇ¦s forget for the time being that this proposal would shrink our already narrow tax base further. If we were to accept it, the Budget for 2006-07 will immediately be in the red. The Basic Law stipulates that the Government should strive to avoid deficits. What do you think a responsible government should do in the circumstances?

Let me be direct. We are just recovering from a series of economic downturns that began with the Asian financial crisis. The operating account has just crept back into balance after many long years. This is a hard-won achievement. It would be reckless of me to introduce major tax concessions. Indeed, had I done so, I would be accused of buying popularity. The measures proposed in my Budget are meant to share wealth but stay within our means. Serving long-term interests always comes at a price: we need to have the courage to take the hard, but right, decisions.

We should not be shy of admitting that the current structure of public finances is less than healthy. The need for a Goods and Services Tax (GST) is clear. Existing revenue sources are limited and unstable. Whether we like it or not, land revenue is an important source of revenue for us. It is very volatile, swinging from 3% to 28% of our revenue over the past 10 years. Most other sources are also subject to economic fluctuations. No one wants more taxes. I am no exception. But, like it or not, it is a common belief in every civil society that contributing an affordable amount of taxes is the responsibility of every citizen. A righteous society is also based on civic duty, not only personal interests. The Government by itself cannot make public finances healthier. The community as a whole has to do this together. To address people's concerns over GST, I am suggesting a nine-month public consultation setting out our detailed proposals, including tax relief and compensatory measures. As a mature society and with a relatively lengthy consultation period, I am confident that Hong Kong people are capable of holding a rational discussion on GST.

As regards future directions for development, my Budget proposes that we should continue to move up the value chain and enhance our competitive advantages. The financial services industry is a fundamental pillar of Hong Kong's economy and will remain our focus for development. In terms of equity fundraising, we have overtaken Tokyo and are the leader in Asia. The turnover in shares of Mainland enterprises is also far higher in Hong Kong than in any other international financial market. Our competitive edge in financial services best complements the Mainland's economic development and financial reform.  My vision is this: Hong Kong should be the launchpad for Mainland enterprises to develop a global presence. And I am of the strong belief that this will create a win-win situation for both the Mainland and ourselves. Last year saw the abolition of our Estate Duty, and only yesterday the Legislative Council passed a Bill to exempt offshore funds from tax on trading profits. We will expand the scope of RMB business, set up the Financial Reporting Council, and reduce the levy on trading in securities, futures and options contracts by 20% this year.  

We will continue to facilitate the development of tourism by building on last year's record figures through promoting "Discover Hong Kong" in 2006, redeveloping existing and opening new facilities. For logistics, we will consider the provision of a concession in trade declaration charges for gold to support a proposed gold depository at Hong Kong International Airport.

Hong Kong has no natural resources other than its people. As I said in my Budget, economies which can attract the most talent will be the most successful in a globalised era. The significant improvement in the skills profile of our labour force has enabled our economy to transform itself successfully over time. To build on the success of the Admission Scheme for Mainland Talents and Professionals where more than 9,000 applications have been approved, we will further introduce in the first half of this year the Quality Migrant Admission Scheme to attract talent from outside Hong Kong. The main feature of the new scheme is that applicants do not need to secure a job beforehand. Separately, we will further enhance our tertiary education by providing an additional 1,800 hostel places at a cost of around $350 million to benefit both local and exchange students.

In pushing ahead with economic development, we should always practise the principles of a market economy and be mindful that the Government should only play a facilitating role. We should leave the market to lead. As the facilitator, the Government strives to provide the best business environment for our companies to thrive and grow. Cutting red tape. Streamlining procedures. Reducing compliance costs. These are our priorities, and to address them, I have set up a Business Facilitation Advisory Committee, comprising mostly businessmen who know where the problems lie. The focus of the Committee this year is to conduct in-depth reviews of land lease and planning procedures affecting the construction industry, and licensing regimes for food premises, including factory canteens and alfresco dining facilities.

Small and medium enterprises (SMEs) form the core of our business sector. Fair competition and an orderly market are the oxygen that SMEs need to flourish. The Competition Policy Review Committee is reviewing our competition policies and will submit a report in the middle of this year. We will study their recommendations and consider how best to enhance fair competition.

Apart from cutting red tape and promoting fair competition, the Government is determined to enhance our already world-class infrastructure further by committing to an average expenditure of $29 billion in the next five years. We will create about 14000 new construction jobs next year.

May I take this opportunity to make a heartfelt plea to the community. Investing in infrastructure not only promotes economic development and brings more job opportunities, but also makes our living environment more pleasant and enhances our competitiveness. We now have a number of big projects under planning, for example, the Kai Tak Development. I sincerely hope that an early consensus can be reached on these projects so that they can commence more quickly. As I said in my Budget, I am prepared, if necessary, to increase our estimates of expenditure on such infrastructure.

Ladies, gentlemen, I strongly believe that my Budget has struck the right balance. I have responded to the communityˇ¦s aspirations with due regard to our fiscal position. I have taken a principled approach by sharing wealth - to the extent that we can afford this - with the people. I will continue to invest in infrastructure in order to lay a solid foundation for the sustainable development of Hong Kong. I am planning to strengthen our public finances in the long-term interests of the community. And I am heartened by the findings of some independent surveys ˇV half of the respondents endorse my current Budget, representing the highest satisfaction rate ever in my three Budgets. Nearly 60% of the people support my prudent approach of managing public finances. Yes, I want people to feel better off in not just months' but years' time.  I strongly believe that we shall be able to make the best of the opportunities in front of us and that Hong Kong will emerge as a better and stronger international city.

Thank you.

Ends/Thursday, March 2, 2006
Issued at HKT 14:38