Hong Kong's economy should be radically overhauled through measures including a massive tax rebate, the introduction of a consumption tax and an aggressive upgrading of the workforce's skill base, according to Morgan Stanley Dean Witter. In a report released yesterday, the investment bank's greater China economist, Andy Xie Guoshong, said restructuring was the answer to alleviating pressure on the currency's link to the US dollar and making Hong Kong competitive again. Mr Xie said the strategy of simply waiting for asset prices to adjust could take too long and consequently have a destructive impact on the economy. 'Declines in asset prices alone do not resolve all Hong Kong's structural problems,' he said. In order to achieve restructuring, Hong Kong had to absorb deflation, introduce new tax measures and enhance its role as a service centre for the mainland and the region. The old social contract leaned heavily on high property prices, inadequate housing and low income tax. 'The new one should consist of a massive tax rebate to pay off existing debts, plentiful housing at a low price and the introduction of a value-added tax,' Mr Xie said. A tax rebate could be funded by running down Hong Kong's $458 billion in fiscal reserves and selling off government-owned assets. This would help reduce outstanding mortgage loans by 50 per cent or $499 billion. 'The rebate should be proportional to the past contribution to government revenue,' Mr Xie said. To offset the erosion of the tax base, the government should simultaneously introduce a value added tax (VAT), the level of which he did not specify. Mr Xie argued tax revenue was highly dependent on the property sector, with direct tax accounting for 40 per cent of the government's total revenue. This had worked well for Hong Kong, he said, while the property market was rising faster than total economic growth, because the government owned all the land. 'To improve Hong Kong's competitiveness, property prices have to be comparable with those in other cities and the human resources base has to be upgraded to fit the information age.' Hong Kong also needed to evolve further as an information and service centre for China and the rest of the region. This demanded a greater emphasis on human resources and an aggressive upgrading of the labour force's skill base, said Mr Xie. 'To have a living standard that is 37 times that of the mainland, Hong Kong has to develop a labour force.'