Raise wages, cut taxes to boost consumption

PUBLISHED : Monday, 17 December, 2007, 12:00am
UPDATED : Monday, 17 December, 2007, 12:00am

For the past few years, Beijing has vowed to boost domestic consumption as a key engine of economic growth but achieved little success. The economy is mainly powered by investments and exports, to the increasing dismay of Washington and Brussels.

This is likely to change next year, however, as the Beijing leadership will be under increasing pressure to find effective ways to encourage domestic consumption to ensure healthy economic growth. This is more urgent now as the United States, China's largest exporting destination, has a high chance of limping into a recession and Beijing is tightening up monetary policies to prevent investments from getting out of hand.

There are many reasons to explain the sluggish consumption, including the traditional high saving rates, the mainland's inadequate pension and medical coverage and high education fees. While those issues will take a long time to be addressed, the central government can boost consumption immediately by raising salaries and cutting taxes.

The mainland economy is the world's fourth largest and will soon overtake Germany as the third largest after the United States and Japan. But, the majority of mainlanders have not benefited as much as they should have from this boom which still relies on cheap labour and resources.

Even the elite force of civil servants is poorly paid and this contributes to the rampant official corruption.

Last year, President Hu Jintao announced greatly boosted salaries for civil servants and members of the military. This came into effect this year, with most officials paid by a formula called '3-5-8-1'. That means that the leading local officials with the rank of a government minister or vice-minister are paid a month salary of 10,000 yuan, department heads get 8,000 yuan, section chiefs 5,000 yuan and administrative officers get 3,000 yuan.

But that is still not much. The private sector can easily pay several times that for the equivalent skills and capabilities. In the early years of the People's Republic, a senior government official was paid around 300 yuan per month, which is equivalent to about 30,000 yuan now, after adjusting for inflation.

If officials are poorly paid, how can one expect them to take initiatives and formulate policies to boost consumption?

In addition to boosting officials' spending power, Beijing should further increase minimum wages for the tens of millions of migrant labourers who are exploited in the cities every day. More importantly, leaders should show political wisdom and the will to reform the complicated and complex tax regime by streamlining and cutting tax rates. For reasons beyond comprehension, the mainland has implemented the US-style progressive personal income tax rates which rise to as much as 45 per cent for monthly incomes of 100,000 yuan. This prohibitive tax regime has become one of the mainland's biggest economic follies.

First of all, it has led to massive tax evasion, particularly in the booming private sector in which businesspeople draw small or no salaries and run their expenses through corporate accounts.

Like the US, the mainland taxes its residents on a global basis but this rarely works. For instance, mainland officials who work at the Central Government Liaison Office in Hong Kong all breach the mainland laws technically as they pay only the local tax rate on their incomes and fail to declare their incomes to the mainland tax authorities.

Foreigners who live on the mainland for more than a cumulative 183 days have to declare their mainland income. This makes it difficult for authorities to attract international talent and encourage them to stay on and become consumers because many foreigners make sure they stay away from the mainland as they approach the magic number.