Ayear ago, Financial Secretary Henry Tang Ying-yen announced a series of modest giveaways in his annual budget speech. They included a reduction of salaries tax marginal rates by 1 percentage point, a three-year extension for the home-loan interest allowance, more funding for public hospitals and more help in finding work for the unemployed. No one seemed to be satisfied with these measures, and Mr Tang was called a miser. This was because there had been a lot of talk about the rapid rebound of Hong Kong's economy and the government's expected huge surplus. Everybody thought the financial secretary should have been much more generous. A week before the budget speech, the Legislative Council had passed a motion calling for a return to the lower salaries tax rates of 2002-2003, raising the hopes of many middle-class families. People were disappointed when the budget measures fell short of their expectations. Mr Tang is due to announce the budget for the next financial year tomorrow. Again, the public has been hearing a lot about what the government can and should do with its copious revenues. Speculation includes lower marginal tax rates and broader tax bands, a rates exemption for one or two quarters of the year, higher child allowances and a substantial reduction in the wine duty. If anything, expectations are running even higher than last year. So the question is: will Mr Tang disappoint everyone again? He said a lot last year in defence of his prudent approach. He reminded people of the size of the annual budget and the deficits that had accumulated over the previous seven years. A yearly surplus of a few billion dollars was nothing to feel smug about, he pointed out. Mr Tang also stressed that public spending had to be kept at a low level because Hongkongers would never accept the high tax rates found in most other developed economies. He said he was proud rather than apologetic about pledging allegiance to the principles of fiscal prudence. Will prudence continue to guide Mr Tang away from giving out too many goodies this year, or does he have reasons to be more generous in meeting people's expectations? Of course, generosity is always more welcome than stringency, and therefore easier to explain. And if estimates are correct, this year's surplus will be much larger than last year's, so the government can afford to do more by way of returning wealth to the people. But the chief executive election is coming up shortly, and if Mr Tang is seen to be over-generous, critics will be quick to accuse him of abandoning the principles of fiscal prudence to win popularity for his boss. Mr Tang is faced with a new problem. How can he reconcile his new budget with election promises made by Chief Executive Donald Tsang Yam-kuen, who is running for another term? Mr Tsang has promised that, if re-elected, he will lower the standard salaries and profits tax rates to 15 per cent. On the spending side, his election promises include expanding the health-care budget, speeding up infrastructure projects and providing more government backing for low-income families by stepping up support for parents and young people. Lower taxes and more spending on social welfare and public services are common items in election promises but, as Mr Tang astutely asked last year: 'Where will the money come from?' If Mr Tang continues to preach fiscal restraint tomorrow, his words will be used to cast doubt on Mr Tsang's pledges in the coming election debates. On the other hand, if Mr Tang is to ensure that Mr Tsang's election promises will be fulfilled, he will have to look for ways to raise new revenue and cut spending: otherwise, the government will not be able to maintain a fiscal balance in the coming years. But no one would listen to arguments for raising taxes or spending less on public services. Last year, Mr Tang called for broadening the tax base and floated the idea of introducing a goods and services tax. Opposition to the GST was so great that the government's consultation exercise on the new tax was aborted. Although many seem to agree that our tax base is narrow, no one has come up with any acceptable proposal to broaden it. The tax base issue is not likely to feature prominently, if at all, in Mr Tang's address tomorrow. It is equally impossible to talk of cutting spending in any area, at a time when the government is seen to be swimming in money. Mr Tang asked this question when he presented last year's budget: As Hong Kong moves towards democracy, can we still maintain our low-tax system and spend within our means? Perhaps he should pose this question to the public again, tomorrow. Tsang Yok-sing is a directly elected legislator for Kowloon West
