Hong Kong is facing a crisis – how to fund an increasing budget deficit at a time of almost unprecedented economic downturn.
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Shenzhen: might lure more shoppers if Hong Kong levies a sales tax |
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Unemployment, already high, is predicted to reach new records, economic growth forecasts are falling by the month, and none of the magic bullets that served in the past, such as windfalls from high land prices or exports of manufactures, is in the portfolio of measures available to solve the problem.
Now a high-powered government committee has caused controversy by proposing that it is time to consider new taxes. In particular, it suggests a 3% sales or consumption tax. For good measure the committee – the advisory committee on new broad-based taxes – adds several other taxation measures that might be considered. These include a departure tax of HK$18 (US$2.30) on the millions of people crossing the land border to mainland China. That would yield HK$900 million a year. Other proposals include a poll tax of HK$200, to bring in HK$1 billion; a tax on mobile telephones, to raise HK$460 million; a 1% pay roll and social security tax, to fetch HK$5.6 billion; a tax on dividends, which would bring “insignificant” revenue; and a tax on interest, which might yield HK$1 billion, mainly from businesses.
The committee adds that raising the existing profits tax from 16% to 17% would bring in an extra HK$2.6 billion a year. A slightly smaller sum, HK$ 2.2 billion, would be raised by increasing the tax on salaries from 15% to 16%. Reduction of various allowances could help raise more revenue, with a 50% cut netting the government as much as HK$14 billion.
But with impeccable logic, the committee clearly plumped for a sales tax as the way both to broaden the tax base and to give the government a good lump sum. KPMG, which did a consultancy report for the committee, complains that the tax base in Hong Kong is too narrow. The territory relies on taxation from corporate profits for 32% of government revenue, far higher than the 9% average of countries in the OECD or even than the 29% average in the Asia-Pacific region.
A 3% sales levy would raise HK$18 billion a year, the committee estimates. Supporters of the sales tax say that Hong Kong has been slower than other places to tap consumption spending. Even Singapore levied such a tax a few years ago, and compared with taxes in other countries 3% is so small that it would hardly affect competitiveness.
But if the reasoning behind the tax was impeccable, the timing was lousy. Financial secretary Antony Leung Kam-chung had already said that now was not the time to introduce new taxes. Economists were forthright in predicting damage to an already weak economy. Tim Congdon of ING Barings says: “If you add taxes, then you reduce the incentives for people to work and invest in Hong Kong, things that have made Hong Kong the success story that it is.”
George Leung of HSBC points out: “Higher taxes are counter-productive as many countries are now trying to lower their taxes to improve competitiveness. All it will do is possibly encourage multinational companies to leave Hong Kong.”
A tax of 3% may not seem much, another economist adds, but it would just encourage still more people to go across the border to do their shopping in Shenzhen in China where there is no tax and a whole range of goods are already cheaper than in Hong Kong. “If this government had to face an election, it would be dead in the water,” adds a respected economist who says: “I cannot allow my name to be used on such a touchy subject as democracy, or I will risk joining the ranks of the unemployed.”
Unemployment in Hong Kong is currently 4.7%, but the consensus is that it will go to 5% or more as the economy continues to weaken. Hopes of 4% growth this year are now fading fast. Many economists expect that Hong Kong will be lucky to achieve 2%, and the Economist Intelligence Unit this month cut its forecast for Hong Kong from 2.4% to 0.7%.
The EIU also says that it expects Hong Kong to slip from third place in its 1996-2000 Global Business Environment Rankings to tenth place in the 2001-05 period. The EIU predicts that Hong Kong will be “the only country [sic] where
the business environment is expected to deteriorate in absolute as well as in relative terms.” Financial secretary Leung called that forecast “unduly pessimistic”.
But Hong Kong does face a problem in making ends meet. Ian Perkin, chief economist with the Hong Kong General Chamber of Commerce, says that the government’s hopes of a budget deficit of only HK$2.97 billion after last year’s HK$7.81 billion – when real growth was an inflation-adjusted 10.5% thanks to 7% deflation – were not going to be fulfilled. “Revenues were HK$23 billion down in the first quarter,” he pointed out.
Most manufacturers have decamped across the border to China where land and labour are cheaper and more plentiful. The only hopeful sign, says Perkin, is that “China’s economy continues to bubble along nicely.” The problem for Hong Kong may be that it will get increasingly less benefit from that Chinese growth as the mainland builds independent links with the rest of the world.
