Time ripe to fix narrow tax base
About a month after Financial Secretary Paul Chan Mo-po announced his second budget, he finally accepted the community’s suggestion to hand out HK$4,000 in cash to each qualified person. Most if not all political parties and commentators applauded the decision.
After all, who does not want free cash? Many of us could surely remember when the government handed out HK$6,000 in cash to everyone in Hong Kong back in 2011 and the positive effect it had on the local economy and community mood. The amount to be handed out later this year is less than that of 2011 but is more concentrated and focused to help those who really need the extra cash.
Despite the similarities mentioned above, there is a marked difference between the handouts of 2011 and 2018. The HK$6,000 in 2011 went to everyone without any means-testing. On the other hand, the HK$4,000 this year has a rather high threshold. According to the government’s announcement, applicants must fulfill all the following criteria: be aged 18 or above with a Hong Kong identity card, have no property, do not benefit from tax rebates and are not recipients of any form of social welfare. In other words, this is an anti-poverty scheme funded by the government’s community care fund. It is designed to support those who did not benefit from the other “goodies” announced in this year’s budget speech. This is an important improvement over that in 2011, where people shared their experiences on social media on how they had “wasted” the free money from the government on travel, new gadgets, clothing and other non-essential expenditure.
Another noteworthy point is that there are rising populist calls from a public no longer satisfied with the standard “goodies” such as tax rebates, additional welfare payments, rates concessions and other fee reductions. Hong Kong is one of the few developed economies in the world where the government has a repeated budget surplus with no net public debt. It is a privilege living in Hong Kong and being able to enjoy world-class public services while paying a very low tax rate. We really should not take for granted that the government could hand out free money, rebate taxes and increase social welfare every year. Unfortunately, for the government, the biggest problem does not lie in insufficient wealth giveaways but in its perceived unequal distribution. To be fair, it is impossible to completely balance the needs of all sectors of society and give out “goodies” in a way that everyone is happy. The government has years of relevant experience but there seems to be no way to please everyone.
I believe that the government’s reluctance to simply hand out free cash is not only because this is unfocused and cannot target those who really need it, but also because it is not financially sustainable. We have enjoyed massive budget surpluses in recent years but should not forget the tough time of budget deficits in the early 2000s. The problem with government revenue is that it is unstable since it mainly relies on land sales and stamp duties from property and stock transactions. These revenues fluctuate widely when we are in different parts of the economic cycle. To stabilize government tax revenues, we need to broaden our tax base. Previous attempts to launch a goods and services tax did not even go past the consultation phase because any tax increase is clearly politically unpopular. Introducing new taxes will always be controversial to say the least but we cannot afford to delay broadening the narrow tax base problem indefinitely. When times are tough and people’s incomes decline, it would be even harder to broaden the tax base. Moreover, Hong Kong has an aging population and the percentage of working population who pay taxes will continue to decline. Previous government studies have shown we may face structural deficits beginning in the next few years.
Therefore, it is now time to act. Unfortunately, the government is too busy countering the opposition’s incessant bickering. At the same time, the public’s focus is firmly on the cash handout and now that the government has already given out money directly to the people twice, it is virtually impossible not to do so for a third time. Unless there is a major economic slowdown and huge budget deficit next year, the political cost of not giving money again will further rise significantly. The public now has even higher expectations on the budget speech, which are even harder to meet. In order to prevent the job of financial secretary becoming even tougher, there should be public debate and consultation on broadening the tax base soon. The annual budget speech should not be an occasion for the public to discuss how much money they receive this year but should be about investing in the future and saving for a rainy day.