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Hong Kong's budget leaves structural woes hanging

HONG KONG: Hong Kong's budget is politically prudent, but long-term revenue risks remain after Financial Secretary Donald Tsang left the tax system unchanged this week and put off tough decisions for another year.

"As an election budget, he has succeeded very well," legislator Christine Loh, chairwoman of the Citizens Party, told a business gathering on Thursday.

"But not much of a millennium budget though, was it? If they were trying to really get into some serious issues, serious policy...well, there was none," she said.

Hong Kong will hold polls for its 60-member legislature in September, only the second election since it returned to China in 1997 after more than 150 years of British rule. Legislators had been openly and vehemently against any new taxation.

Tsang unveiled a HK$6.2 billion ($797 million) deficit budget for the 2000/01 year beginning April 1, in a speech on Wednesday that was remarkable for its lack of surprises.

After weeks of talk of shrinking government revenues, the volatile nature of a narrow tax base, and dangerously excessive reliance on property-related income, all Tsang basically did was say the government was worried and would set up a committee to review the tax system.

He did not introduce a much-feared sales tax, nor even the less controversial departure tax for people exiting Hong Kong at its land border with mainland China.

Personal salaries tax and corporate profits tax rates were left unchanged at 15 percent and 16 percent, respectively, and there were only minor changes to other fees and charges.

MORE LIKE POLICY ADDRESS?

"With so little consideration given to financial matters, the budget speech in fact sounded very much like a policy address," said Morgan Stanley Dean Witter in a research report.

But most analysts applauded the laissez faire approach, saying no news was good news, as a simple and low tax system is one of Hong Kong's biggest strengths.

"This is one of the budgets that we cannot find any flaws in. Tsang did the right thing to just wait and see because the recovery is in a very preliminary stage," said Paul Tang, senior economist at Bank of East Asia.

Hong Kong's gross domestic product (GDP) rose a robust 2.9 percent in 1999, after contracting 5.1 percent in 1998 during the regional financial crisis.

Tsang forecast the economy would grow 5.0 percent in 2000.

However, analysts also noted there was no escape from revenue reform in light of the changing nature of the economy and the dangers which e-commerce brings to a source-based tax system.

Ernst & Young said, "...innovation is often achieved at the expense of simplicity and it is to be hoped that if innovative proposals are forthcoming they will not be dismissed on the basis of failing the simplicity condition alone."

Some analysts said Tsang might have bowed too much to public pressure leaving a politically tough decision to be made later when someone else might be at the fiscal helm.

This budget was Tsang's fifth and he had previously said five budgets would be enough for any financial secretary, though he made no reference to retiring in his speech on Wednesday.

UNPREDICTABLE INCOME

Even though the 1999/00 deficit turned out to be a mere HK$1.6 billion, versus the HK$36.5 billion deficit forecast last March, economists said this was just another indication of the volatile nature of government revenue.

Windfall gains in investment returns slashed the 1999/00 deficit, but Hong Kong Monetary Authority Chief Executive Joseph Yam had earlier stressed this was unlikely to be repeated.

Tsang himself forecast recurrent expenditure to exceed recurrent income through to 2002/03, which he said had never happened in the 50 years before 1998.

"Our public budgeting is sort of like the mark six (lottery)," Loh said.

"If you think you're going to get a small deficit and you end up with a huge surplus, then maybe you could have been more generous in spending...but you couldn't if you can't predict what's coming in," she added.-Reuters