Yes to bonds, no to a sales tax

Deferring the deadline for balancing the books is a pragmatic approach for Hong Kong to deal with the budget deficit. So is issuing bonds of up to $20 billion and selling $17 billion worth of assets in 2004-2005. Giving people a respite is the order of the day, now that the economy is turning the corner.

The Democratic Party has called for deferring the deadline for balancing the books to 2009-2010 amid the economic downturn. Financial Secretary Henry Tang Ying-yen's decision to defer the deadline to 2008-2009 is a step in the right direction.

In the past two years, the Democratic Party has been advocating the issuing of government bonds to relieve financial pressures. Issuing bonds makes sense given the present low-interest environment. It also gives the government flexibility in managing its programme of selling and securitising assets.

The government has set the target for raising bonds worth up to $20 billion to fund capital spending. According to government estimates, capital expenditure will be about $100 billion in the next five years. Issuing bonds will help finance infrastructure plans, such as the plan to develop Lantau island into a tourist resort, build a logistics park and other tourist attractions.

The government's decision to issue bonds may also help boost the bond market in Hong Kong. Though Hong Kong is a major international financial centre, individual investments in bonds have not been spectacular. One of the reasons for this has been the lack of government initiative.

Experience in Singapore and Australia has shown that government initiatives in the bond market can stimulate significant growth. For that market to thrive, the government should study the feasibility of developing a variety of bond products, such as fixed-interest bonds and variable-interest bonds. Government participation in the bond market would attract individual investors and enhance the image of the Hong Kong bond market.

As for the tax proposals, Mr Tang hinted at the introduction of a goods and services tax in a few years. Many argue the government needs the steady source of revenue a GST would provide - but I beg to differ.

The introduction of a GST would retard economic growth by making consumers curb spending at a time when the economy is beginning to rebound. It would create uncertainties for potential investors whose confidence in the economy is slowly recovering. Should economic growth be retarded because of the introduction of the tax, the government would lose more than it gains due to a loss in revenue.

Second, the anticipated annual income from a 3 per cent GST would be $18 billion. It would be highly undesirable if the introduction of a GST weakened government incentives to curb wasteful spending and enhance efficiency. A third objection is the regressive nature of the tax. Unlike income tax, GST is levied against private consumption regardless of how much the taxpayer earns. Hong Kong is experiencing a jobless economic recovery, and a GST would seriously jeopardise the well-being of the unemployed and badly affect the disposable income of low-income earners. It would make the tax system less equitable.

Had the government been sincere about giving people a respite, it would have postponed next month's increase and broadening of the salaries tax. More people will be brought into the tax net, and lower-middle income earners will bear the brunt of the tax increase. Now that the budget deficit turns out to be much less than expected, taxpayers should be given breathing space.

The 0.1 per cent decrease in education spending may appear to be modest, but the devil is in the details. The 10 per cent expenditure cut in tertiary education in 2004-2005 has already put at risk the quality of our university education. Should there be further cuts in the run-up to 2008-2009, the competitiveness of Hong Kong in the long run will be jeopardised. In social welfare, the 2.9 per cent increase in spending signals only an increase in the number of Comprehensive Social Security Assistance (CSSA) and Old Age Allowance (OAA) cases, and not an increase in government commitment to social welfare provision. Putting aside CSSA and OAA expenditure, there is a nearly 3 per cent cut in social welfare provision. In the years to come, cuts in social welfare spending will badly affect the poor and the needy. And at a time when communicable diseases pose significant threats to our lives and health, the $1.4 billion expenditure cut in medical spending is worrying, as it might affect preventive measures against communicable diseases and rising demands from an ageing population.

Hong Kong is still on the way to economic recovery. Strengthening the economic fundamentals, boosting Hong Kong as an international financial centre by issuing government bonds, as well as balancing the books, are prudent and necessary steps to strengthen the economy. Any drastic tax proposals are bound to create uncertainties in the business environment, and may bode ill for a recovering economy.

Government officials should be serious when saying they are giving people a respite. They should show their sincerity through commitments to education, medical services and social welfare. They should refrain from spending cuts in these areas, postpone the tax increase, and exercise caution in introducing a GST - especially at a time when the economy is just turning the corner.

Yeung Sum is chairman of the Democratic Party and a directly elected legislative councillor