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Recession gives SAR chance to ease reliance on property, BEA says

David Evans

The Government should reform its fiscal system to make it less dependent on the property sector in the face of growing budget deficits this year and beyond, according to the Bank of East Asia (BEA).

In its monthly Economic Analysis, BEA said after many years of fiscal surpluses the SAR was expected to have a budget deficit of $40 billion in the year to March 31.

It blamed the deficit on the recession, which has reduced the Government's tax base and increased spending on social welfare.

'On the surface the situation may appear grim,' it said. 'However, we believe that the situation provides an opportunity for [Hong Kong] to reform its fiscal system.' BEA said in the near term, the Government could buy time, thanks to its healthy reserves and other assets. In the long term, it must do more, making it less dependent on the property sector, it said.

Prices in Hong Kong's once-buoyant property sector have slumped, with values diving by up to 50 per cent from their peak in mid-1997.

With the Government committed to spending more on welfare, infrastructure and cleaning up the environment, expenditure would outpace income available from the existing revenue base, the report said.

It called for a leaner and more efficient Government and urged it to consider privatisation of the management of some public services.

'A transparent and more equitable alternative to revenues, such as consumption tax, is worth considering in the long term,' it said, adding that a tax rate of 5 per cent would produce about $25 billion to $30 billion a year.

It called the reliance on property revenues a 'hidden form of compulsory consumption tax'.