'More needs to be done' to avert HK crisis

Hong Kong's Financial Secretary John Tsang delivering his budget speech at the Legislative Council in Hong Kong February 26, 2014.

HONG KONG - Financial Secretary John Tsang quoted a line from his favourite song at the end of his budget speech on Wednesday.

"Believe in opportunity, not fate," he trilled, adding that this is the innate mindset of Hong Kongers.

Certainly, the lyrics from rousing ballad Crossroads sung by local rocker Danny Summer could well apply to the government, which seized the initiative to commission some projections on the city's long-term public finances - and made them public to get a conversation going.

But opportunity may well segue into fate if this conversation remains just talk.

A group of economists and other experts tasked to take the pulse of Hong Kong's long-term finances has projected that the city will suffer a structural deficit in 15 years, based on current spending and adjusted only for demographic and prices changes.

Widening coverage for education, social welfare and health care could see a debt crisis emerging in a mere seven years.

The projections "spark off a clear warning and call for serious attention", Mr Tsang said, adding that Hong Kong will step up tax enforcement, increase fees and consider a new reserves fund.

But far more needs to be done to avert a crisis, say analysts here. The city should look at neighbours which also face similar challenges of an ageing population and a shrinking workforce.

"We are looking at Singapore, to see what it is doing," said Mr Marcellus Wong from the eight-member working group of experts which will release its detailed report on Monday.

Social spending in both cities is set to rise. While Singapore announced an $8 billion Pioneer Generation Package last week, the Hong Kong government under Chief Executive Leung Chun Ying came up with a Workfare-style scheme to supplement workers' income, while pledging to ramp up public housing. Another HK$660 million (S$107.8 million) this year is going to elderly services.

Since dampening spending is not a real solution, analysts say the key is for the government to boost its coffers. An obvious recourse is to broaden Hong Kong's tax base and to raise taxes. Only about 45 per cent of the working population pay income tax. Unlike Singapore, Hong Kong does not have a goods and services tax (GST).

But any such move here will be controversial. A bid to introduce a GST in 2006 was abandoned after public opposition. With fiscal reserves standing at a massive HK$700 billion, people are unlikely to accept it. Meanwhile, companies will fight tooth and nail against moves to increase corporate rates.

"Politically, it is difficult to introduce any new taxes in Hong Kong," acknowledged Mr Wong, a senior adviser at PricewaterhouseCoopers.

A less painful way is for the government to drive economic growth, which will increase tax receipts. Gross domestic product growth last year stood at 2.9 per cent, and the group has projected, based on certain assumptions, that real GDP will grow at 2.8 per cent a year for the next 20 to 30 years. Singapore's GDP growth last year was 3.7 per cent.

One area in which Hong Kong needs to go great guns is nurturing innovation and its technology industry, said Mr Wong. "This is a new area that Hong Kong has not done well in. We moved a very small step in this budget, such as in giving seed money to universities. But far more needs to be done."

Introduce a Productivity and Innovation Credit scheme that rewards companies for adopting automation as Singapore has done, suggested Ms Grace Tang, a tax and business advisory services partner at Ernst and Young.

Meanwhile, the government has also taken a good first step in considering interest deductions in the taxation of treasury activities, "definitely a good way to encourage more overseas companies to set up their treasury functions here", said Mr Davy Yun, tax partner at Deloitte China.

Hong Kong has its strengths too - not least in labour productivity growth. However, this has slowed since the 2008 financial crisis, noted HSBC's Greater China economist John Zhu.

"Hong Kong is a services-driven economy, which means investment in education and skills, in addition to infrastructure, will be key. Indeed, deficits, if brought on by wise spending on investment in human and physical capital, should actually reduce the risks of structural deficits in future."

On Wednesday, an important first step was taken, with the publication of such projections. Singapore does not make public any such reports as it does not reveal the full size of its reserves.

As Ms Tang noted: "With this kind of analysis, we will have a heads-up on challenges ahead."


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