Surplus could be used to spur consumption

PUBLISHED : Monday, 14 December, 2009, 12:00am
UPDATED : Monday, 14 December, 2009, 12:00am

How to spend nearly two trillion yuan (HK$2.27 trillion) in the next three weeks? That question is likely to generate intense debate in mainland media and internet forums following the revelations over the weekend that the authorities need to rush to spend the budgeted money before the end of the year.

It is known to have been a long-standing practice that at the end of each year, the central and local governments rush to spend budgeted but unused money, leading to rampant misappropriation of taxpayers' money on projects that should not have been funded in the first place, enabling officials to benefit themselves in the forms of new office buildings, cars and cash bonuses.

There is little doubt that mainland financial officials will come out in the next few days and publicly obfuscate the issue, probably arguing that the amount of the money is overstated. Given the opaqueness of the government spending and budgeting process, mainland taxpayers have little clue about how their money is spent.

It is time for the Ministry of Finance to waste no time in giving taxpayers a proper and clear accounting for the two trillion yuan.

There are a million good ways to spend that money. The simplest way could be to divide two trillion yuan by 1.3 billion people to ensure every mainlander has some cash to welcome in the Year of the Tiger.

Seriously, that is what the mainland authorities should have done if they really wanted to boost domestic consumption. It need not be done by giving cash directly to the people, but in the form of raising salaries and cutting taxes.

Last week, the State Council released details of its economic stimulus package for next year, continuing to extend policies including subsidies on the purchases of cars and electrical home appliances, and tax breaks on properties.

The efforts are aimed at not only helping sustain the economic recovery, but also trying to rebalance the mainland economy towards consumption. Economists and officials from Western countries have argued that the mainland's current economic growth trajectory, led by exports and government spending, is unsustainable and leads only to increasing trade friction.

But those stimulus measures can help only in the short term. For the long run, the most effective ways to rebalance the mainland economy and stimulate private consumption are to raise salaries and cut taxes.

Indeed, if mainlanders do not have enough cash on hand, how can the government encourage them to spend?

According to state media, the wages' percentage of the mainland's gross domestic product fell to the lowest point in 2007, at 35.1 per cent. That is 9 percentage points lower than the wages' ratio in South Korea, 18 percentage points lower than in Japan and nearly 23 points lower than in the United States.

As the central government has tried to boost government spending, including its four trillion yuan stimulus package for this year and next year, the ratio looks set to go even lower.

Even the People's Daily, the mouthpiece of the Communist Party, recently published a series of articles questioning the folly of the government's plan to stimulate private consumption. One article raised the question of why ordinary mainlanders worked harder but make less, and another called for immediate reforms to raise salaries of ordinary workers so that their growth rate could match the rise in corporate profits.

The development of the private economy is also essential to stimulating consumption and creating jobs. But the progress has been painfully slow, although the central government has made noises for years about breaking up state controls over the highly profitable industries of finance, telecoms, energy, minerals, railways, aviation, education, medical care and culture. More importantly, the authorities must streamline their ridiculous personal-income-tax regime if they really want to stimulate domestic consumption.

The mainland, despite being a developing country, has adopted a progressive tax regime commonly seen in developed countries. It carries a maximum rate of 45 per cent and a very low tax exemption threshold of 2,000 yuan each month. This has seriously inhibited domestic consumption and the development of the middle class, as they are the main taxpayers.

This policy has earned the mainland the dubious honour of being the most miserable country in Asia in terms of corporate and personal income tax, according to the annual 'Tax Misery Index' compiled by Forbes magazine.

It has become quite obvious to anyone but mainland leaders that if they can raise the threshold to 10,000 yuan or more, and lower the tax rate to a maximum of 25 per cent, not only would it greatly stimulate private consumption, it would also boost tax receipts in the long run because a lower tax rate would encourage the rich to comply with the law and pay their fair share.

For now, most rich mainlanders pay very little tax because they have many ways of avoiding it, one being to draw a low salary and have most of their expenses buried in their corporate books.