- The Washington Times - Sunday, March 2, 2003

SINGAPORE, March 3 (UPI) — Over the last couple of weeks, the Hong Kong government has been announcing a raft of measures aimed at helping reduce its runaway budget deficit. But with the new 2003-04 budget (end-March) to be announced Wednesday, it appears almost certain the government will have to raise corporate taxes and possibly even income taxes.

Hong Kong's fiscal deficit stood at U.S. $7.49 billion for the first 10 months of 2002/2003 (March-January), already above the $5.8 billion initially forecast by the government and many economists are predicted it will balloon to $8.9 billion-$10.2 billion this year or about 6 percent of gross domestic product. JP Morgan economist Ben Simpfendorfer is forecasting the budget gap to rise to 5.8 percent of GDP this fiscal year or $9.55 billion, while CSFB Joseph Lau is projecting a budget gap of $10.2 billion to 11.2 billion.

The main reason behind this widening fiscal gap has been lower revenues due to the current economic recession and a shrinking tax base. With deflation and plunging property prices, the government has had to postpone its land sales program, as well as delay the divestment of stakes in key firms, thus depriving itself of further revenues. Financial Secretary Antony Leung has already acknowledged that the lack of revenues from the sale of land would $2.2 billion alone this year.

Economists believe the fiscal gap in itself is not the real issue, as Hong Kong is not short of fiscal reserves yet, currently at $33.23 billion or 3.7 times the current 12-month deficit, but the recurrent budget overspending is, and needs to be fixed.

The government is showing some sign of trying to rein in expenditures. It has reached an initial agreement with unions to cut gradually the 180,000 civil servants' salaries by 6 percent gradually, with a 3 percent reduction starting in January 2004, and a further 3 percent reduction from January 2005. This is estimated to save the government $897 million in 2005, economists said.

"It makes Financial Secretary Antony Leung's Budget Speech on March 5 a little easier as he will have a solid timetable for cost cutting. In addition, this saves the government possible embarrassment by taking unilateral action to force a pay cut and then being sued by the unions," CSFB said in a recent research.

Meanwhile, JP Morgan economist Sonia Martin estimates that these cuts would reduce the deficit by 0.7 percentage points by the end of 2006-07. This followed from an earlier proposed 10 percent cut in the civil servant labor force, which would potentially lower the deficit by an additional 1 percent of GDP, she noted.

But further expenditure cuts are proving difficult. A proposed 11.1 percent cut in welfare benefits is being vigorously opposed. The government has unveiled its plans to reduce welfare payments from June, while benefits for the elderly, disabled and those in ill health will be reduced over 2 years, with the first 6 percent cut in October, followed by another reduction of 5.1 percent a year later.

Which puts the emphasis back on revenues and taxes.

The government has just proposed a $51.8 tax on foreign domestic workers to be paid by employers from October. But the move is seen as highly discriminatory and is already attracting vocal condemnation, even internationally, because the maids (mainly Filipinas) will effectively be paying it out of their own pockets as their minimum wage will also be cut by $51.8 to $41.9 a month from April. Chief Secretary Donald Tsang anticipated the move could raise $1.4 billion.

On Wednesday, the government is also very likely to announce a increase in corporate profits tax to 17 percent from the current 15 percent. If implemented, this would raise an additional $384-$448 million in revenues, economists estimated.

There is also speculation that the salary tax rate will be hiked by 0.5 percentage points to 1.0 percentage point from the current 15 percent, the lowest level of taxation in Asia. A 1 percentage point increase in the standard rate of personal income tax to 16 percent would yield about $64 million a year in additional revenue, one economist said.

With only 20 percent of the population actually paying taxes, the government may also lower personal allowances, possibly to 1997-98 levels, economists said.

According to the local media, the government may also set out a timetable for the sale of certain assets, including a second tranche of shares in MTR Corp that could yield $1.9 billion.

But economists said the introduction of a Goods and Services Tax (sales tax) is likely to be deferred at least until next year given the current consumer confidence.

All figures in U.S. dollars.

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