Sharing the spoils
What to do with a bulging budget surplus? It is a critical question at a time when existing reserves are being devalued by the day because a high proportion are invested in US dollar paper, which is declining in terms of most other currencies - including every one in Asia. By the end of this financial year, fiscal reserves will be about HK$450 billion. The Monetary Authority Exchange Fund's surplus at the end of 2007 was another HK$617 billion, which comes to an auspicious HK$88,000 per man, woman and child. With these two surpluses, the government now holds financial assets, mostly invested out of Hong Kong, equal to 18 months' median annual income. This is public property, and some of it should be distributed to the owners.
It is important, too, because the government is supposedly trying to address already very wide and still widening income gaps. Almost all the tax proposals currently being bandied about - mostly by self-interested groups - will make matters worse by reducing taxes for upper-income earners and companies at a time when the surge in inflation is mostly being felt at lower income levels.
Corporate tax cuts would mainly reward not just those monopolists, like Hongkong Electric, that are allowed outrageous profit-to-income levels by an easily influenced bureaucracy. It would also reward the many companies, mainland and foreign, that elect to book profits and pay tax in Hong Kong - where it is much lower than at home. They are unlikely to leave Hong Kong because the existing level is too high - a lower rate might invite closer scrutiny by overseas tax authorities about the bona fide nature of Hong Kong-sourced profits.
Here are some ideas that take the discussion beyond its usual framework of tax cuts for those who are already prospering in a society with wide and worsening income gaps:
Distribute HK$50 billion to a fund to provide equal annuities to all currently over the age of 65 who have been resident for at least 30 years. These would be in addition to existing social security payments for the elderly and reflect the past contribution of all people to the current overall prosperity in which many, especially the old, do not share.
Distribute another HK$100 million to the Mandatory Provident Fund schemes, or other insurance equivalents, of the rest of the population over 30, on a sliding scale based on their years of residence, to reflect their contribution before the MPF scheme was set up. The sums distributed would partially compensate for the negative returns suffered by small savers through years of negative real interest. These have benefited banks and property developers at the expense of thrifty individuals and low- and middle-income families. These excess reserves belong to the population at large. They are not there for Monetary Authority bureaucrats to play politics with cash for dubious acquisitions like that of Hong Kong Exchanges and Clearing. Let the private sector manage them (on a competitive-cost basis), on behalf of those who own them.
The absurdly generous defined-benefit, inflation-proof, salary-linked pensions enjoyed by government officials must be replaced with a defined contribution system that is almost universal in the private sector. It makes the blood boil to hear of civil servants enjoying levels of benefits, including pensions, health care, education and parking, unheard of for others who complain about social welfare. Retired (even at 55!) senior civil servants are the biggest welfare scroungers in Hong Kong. The government should set aside enough assets, actuarially determined, from the reserves to meet the future liabilities already incurred, and put the whole of the civil service and related bodies onto the MPF. The budget would then provide for the employer contribution rather than, as now, simply reflecting annual cash payments to retirees.
Abolish betting duty, and end the Jockey Club monopoly. Tax does not discourage betting, it merely acts as a selective tax that falls most heavily on the poorer sections of the community, among whom such betting is more common. The abolition would end rampant illegal gambling - mostly used by high rollers. Hong Kong could become a legal centre for internet gambling, taking advantage of its other freedoms. The Jockey Club would benefit most from abolishing betting duty, which would more than compensate for its loss of monopoly. Unlike newcomers, it would not face a profits tax on gambling.
Cut tobacco tax, another impost that most hurts lower-income earners who are generally more frequent smokers. There are enough anti-smoking rules; such a selective tax cannot be justified, especially as the much greater public health dangers from air pollution are exempt from penalties, thanks to certain unhealthy relationships with the government.
Eliminate all child and parent income tax breaks and replace them with equal cash payments to families for child and elderly support. The very low birth rate (excluding mainland visitors) and rapidly ageing population make direct support rather than tax breaks a necessity. The total spent should be at least 50 per cent greater than the current cost of the tax allowances. Net losses to middle-income earners could be offset by adjusting the tax threshold and some marginal rates.
Impose a 25 per cent tax on all power and gas bills to discourage consumption and resultant pollution. The tax would hit everyone in proportion to their spending, but in particular the commercial premises - malls, hotels and offices. These are the biggest and most wasteful users of power yet, because power costs are still relatively low compared with rents, there is scant incentive to reduce consumption.
The revenue from this tax would not only be quite stable but allow a cut in stamp duties on shares and property, taxes which are highly unstable revenue earners. Tax on share trading discourages Hong Kong's development as a financial centre and tax on property transactions does nothing to reduce property price inflation.
Philip Bowring is a Hong Kong-based journalist and commentator