Hong Kong unveils its Budget 2013

HK 'may not be able to make ends meet'

Finance chief hints at wider tax base as population ages, health costs rise

By Li Xueying, The Straits Times, 28 Feb 2013

HONG KONG - Hong Kong, faced with a greying population and a shrinking workforce, "may not be able to make ends meet" in future, warned its financial secretary. But Mr John Tsang stopped short of saying that it is considering widening its tax base - a politically controversial move here.

"There is room, perhaps, to broaden the base. But thorough consideration is necessary," he said at a press conference, after announcing the government's Budget for the year.

Instead, a new working group will look at "more comprehensive planning" of its public finances. The Straits Times understands that it will examine what other governments are doing to boost public coffers - for instance, the Australian government's Future Fund which invests budget sur- pluses and Singapore's move from civil service pensions to the Central Provident Fund.

Presenting the first Budget under Mr Leung Chun Ying's administration yesterday, Mr Tsang painted a dire picture of Hong Kong's demographic challenge.

By 2041, there will be just 1.8 adults supporting an elderly person aged 65 and above, down from 5.3 in 2011.

"I expect that the growth of government revenue will drop substantially if our tax regime remains unchanged," he said. "Meanwhile, expenditure on welfare and health care will soar. We may not be able to make ends meet."

Asked if the government was reviewing the tax regime - such as introducing a goods and services tax (GST) or a more progressive structure, Mr Tsang recounted how a government proposal for a GST in 2006 was dropped after widespread opposition.

"The message was very clear," he said. "There is no good time to talk about it. When times are good, people question why you need to tinker. When times are bad, it's even worse."

He added that the government is auditing taxpayers to ensure it gets what it is owed. Fee revisions are also under way. "If we can regularise these income streams, we don't really need other sources."

Hong Kong, like Singapore, has competitively low taxes. Just 12 per cent of companies here pay profit, or corporate, tax. It has a population of 7.2 million, and 1.4 million of its 3.5 million workforce pay salary, or income, tax.

Experts say Hong Kong has to tread carefully in any attempt to raise taxes. Said JP Morgan economist Lu Jiang: "Low taxes are a key reason why we are attractive to companies and talents."

Mr Tsang yesterday presented a basket of sweeteners and stimulants for the people and the economy respectively, as he revealed that growth last year stood at just 1.4 per cent - the slowest since the 2009 recession.

A modest recovery is on the cards, with gross domestic product (GDP) forecast to grow between 1.5 per cent and 3.5 per cent this year. But 2013 will still be challenging, he said, citing an unstable external environment.

From next year to 2017, GDP is expected to grow at 4 per cent annually, slower than the 4.5 per cent average in the past decade.

A raft of measures will give relief to the elderly, families and students. A HK$56 billion (S$9 billion) sum will be spent on social welfare - allowances for the old, waiver of public rents and electricity subsidies. Another HK$63 billion will go to education, including a HK$15 billion injection into a training fund for the low-skilled.

This, say government sources, is aimed at lifting the city's labour force participation rate, now at 60.8 per cent, and is crucial given the impending labour crunch.

To boost the economy in the long term, key pillars like logistics and tourism received a leg-up.

Amid the dry statistics and the grim outlook, there was a moment of levity at the press conference. With all eyes on whether the Budget has enough for everyone, there arose the question of whether it took care of the middle class.

To this, Mr Tsang, who reportedly draws HK$320,000 in monthly pay, said to raised eyebrows: "I think I understand the needs of the middle class. Because I am a member of the middle class myself."