Consumption tax can help meet social welfare needs

Despite having the world’s largest oil reserves, Venezuela is plunging into the economic abyss with annual inflation of more than 800 percent in the past few years and a currency that is worth next to nothing. Its problem has been widely attributed to a lack of any form of fiscal discipline while the government prints money at will to fund a corrupt populist policy.

In sharp contrast, Hong Kong is a model of fiscal discipline as evidenced by the enduring linked exchange rate system and the large fiscal reserves amounting to more than HK$1 trillion, or more than 20 months of government expenditure. But the government’s tight-fisted policy has been blamed for insufficient efforts in narrowing the income gap between the minority rich and the rest of the population.

Hong Kong has the widest income gap among all developed economies. The situation is expected to get worse in coming years due to the rapidly aging population, resulting in the sharp increases in retirees who have little means to care for themselves in a city where housing prices rank among the highest in the world.

The World Health Organization forecast that by 2050, 40 percent of the population of Hong Kong will be over 65 years of age, up from the current ratio of 25 percent. The existing pension scheme is widely seen to be woefully inadequate in covering even the basic expenses of the average retiree in their remaining years.

To be sure, Hong Kong’s healthcare service is the envy of neighboring economies, providing quality and affordable medical care to all. But the living standards of the majority of poor people have been deteriorating despite increased government spending on social welfare.

Much has been said and written about the government’s new thinking in fiscal management. Indeed, the government had adopted a fresh approach in the use of the massive budget surplus for the fiscal year ended March 31, 2018 by shifting the emphasis onto promoting economic growth through diversification.

But the basic principle of its fiscal policy has remained little changed. That principle is focused on keeping recurrent expenditure from ballooning to levels that cannot be covered comfortably by recurrent revenue. In strict fiscal terms, the budget surplus was derived mainly from sales of public land at prices that reflected the property market boom which also generated a larger-thanexpected amount of income from transaction taxes, or stamp duty.

The more stable sources of income are income tax and corporate tax which usually go up and down roughly in line with economic performance. Many economists have warned that the rapidly aging population can affect economic growth, depressing government income while expenditure on social welfare and healthcare to meet growing demand continues to increase at gathering pace. By then, Hong Kong will have to face the dreaded problem arising from what economists call a structural deficit.

For that reason, the government may have little choice but to seek to broaden the tax base by introducing a form of sales, or valueadded tax. To make it palatable to the less well-off families, some economists suggested passing a law to require that the consumption tax be used only on social welfare to enhance the livelihoods of the needy.

Earlier proposals of a consumption tax were hastily shelved in face of stiff opposition not only from businesses but from labor groups and social activists. Understandably, the government is reluctant to bring the issue up for discussion again while society remains highly divisive.

It is easy to understand why the business sector loathes such a tax which can hurt smaller businesses, such as shops and caterers. But it is important to note that nearly all developed economies have this tax and it doesn’t seem to bother consumers after the initial shock. There is no evidence to show that people in those economies are buying less because of the tax.

The social activist groups argue that a consumption tax will penalize the less well-off families which tend to spend a bigger portion of their household incomes on daily necessities than the rich. That can be mitigated by excluding foodstuff from tax as some developed economies do. What’s more, the less well-off families stand to benefit the most when the tax they pay is used only on improving social welfare.

Nobody wants more taxes. But the issue cannot be avoided if we want to achieve the common goal of narrowing the income gap.