HONG KONG: Striving to meet the costs of ageing population

HONG KONG - In announcing the Budget last month, Financial Secretary John Tsang raised alarm bells over Hong Kong's ageing population.

He warned that "the growth of government revenue will drop substantially if our tax regime remains unchanged".

He added: "Meanwhile, expenditure on welfare and health care will soar. We may not be able to make ends meet."

Despite his warning, it is unlikely that the city, famed for its simple and low tax structure, would go down the route of expanding its tax base and increasing the rates.

Politics and riches in the government coffers - reserves stand at HK$734 billion (S$117 billion) - mean that it will be difficult to convince the populace that such a step is necessary.

Mr Tsang, while acknowledging that "there is room, perhaps, to broaden the base", was quick to say that there are no plans to review the tax regime.

A 2006 attempt to levy a value-added tax (VAT) was scrapped after widespread opposition.

Meanwhile, Hong Kong has been lowering taxes in recent years to "enhance its competitiveness as a wealth management centre", notes Professor Ho Lok Sang, director of the Centre for Public Policy Studies at Lingnan University.

In 2006, Hong Kong did away with death taxes. High income earners pay a standard rate of income tax of 15 per cent - one of the lowest in the world.

About 1.4 million people pay salary tax. This is about 40 per cent of its 3.5 million work force, and 20 per cent of its overall population of 7.2 million. There are no capital gains taxes, withholding taxes, sales taxes, VAT or annual net worth taxes.

What has gone up are stamp duties, a move to cool the red-hot property market rather than to collect more public revenue. In 2010, to curb property speculation, the government introduced a special stamp duty on properties that are resold within a certain timeframe.

Raising taxes may not be the way for Hong Kong to underwrite the costs of an ageing population. A debate is brewing over whether it should implement a pension system, and if so, in what form.

Prof Ho suggests a "cohort-based pension system", where each person born in the same year contributes a lump sum to a fund so the cohort supports itself without transferring the debt to future generations.

The poor who pass a means test can get government subsidies to make their contributions.

xueying@sph.com.sg