The Financial Secretary will deliver his new Budget at the end of this month. Few will be surprised if he unveils another record surplus. Is that good news or bad news? It depends on the context.
For economies struggling under a mountain of public debt, a budget surplus may well be good news to spell relief, finally. For Hong Kong, which has been running a surplus for the past 12 years that adds up to over HK$1 trillion, it means the time is ripe for new thinking.
This substantial perennial surplus clearly indicates that the Government is taking far too much money out of the economy. In depriving the economy of the nourishment it needs to expand and compete, it is retarding growth. Much of this money should have been left in the hands of companies to innovate and grow their businesses, or of the middle class to stimulate the economy.
To this end, the Chamber’s Budget submission this year urged the Government to return part of the surplus to taxpayers. This would mean respecting market forces while upholding the time-tested principle of small government. Despite the best of intentions, businesses and consumers are better placed than politicians to decide how to allocate resources. (Investing part of the surplus to enhance human capital would also pay dividends over the longer term.)
A very effective way to do this would be to cut taxes for both individuals and corporates by one percentage point. This would be more substantive than the ad hoc concessions that are often too marginal to make any real or psychological impact on Hong Kong’s competitiveness.
For prudent fiscal management, we proposed these tax cuts be limited to three years. It would limit public income foregone, while enabling the Government to better assess and prepare for the short-term reduction in revenue.
As we compete globally with other economies, Hong Kong cannot ignore the large tax cuts that are being implemented around the world. In the United Kingdom, the corporate tax rate has been reduced to 19% and is on its way to 17%. In the United States, the corporate tax rate has been slashed to 21%.
Just across the border, enterprises operating in some of the Mainland’s free trade zones enjoy a corporate income tax rate of 15%. Like it or not, a “tax war” has already started and Hong Kong needs to defend itself. A one-point tax cut may not be adequate quantitatively but it makes a statement about Hong Kong’s determination to defend its competitiveness.
We can hide our heads in the sand by repeating to ourselves that our tax regime remains competitive. However, being (still) competitive in tax alone is not the same as being competitive as a place of business. Tax is but one of a number of factors used by businesses to measure the competitiveness of a location. Any movement in any one of those factors can easily upset the scoring.
Our “low and simple” tax regime has served Hong Kong very well for decades, but this may no longer be enough given developments around the world. Which is why, in addition to being “low and simple,” our tax advantage has to be restored if Hong Kong is to remain one of the most attractive business and financial hubs in the world.