Tax Rebates Give the Wrong Incentives

Ho Lok-sang

特區政府第二份預算案給不少市民帶來意外驚喜。市民 普遍支持財政司司長提出的退稅建議。然而，由於政府 財政狀況仍然緊張，而經濟前景仍欠明朗，85億元的退稅並非合時宜的理想的刺激經濟或解民紓困的辦法。85億元如果用作補貼企業貸款的利息支出、或補貼企業僱用更多的員工，對經濟復甦的幫助肯定會比退稅更為有效。

然而筆者認為港府對經濟增長作出0.5%的預測，應可實現。事實上，筆者預期全年會有接近1%的正增長。只是中期而言要達到3.5%平均增長率會相當困難。

港府就開支方面保持既克制又審慎地「應加則加」的可喜策略，筆者極為讚賞。

隱憂方面，筆者擔心房屋政策仍未能撥亂反正，賤價推售公屋對居屋市場乃至整體樓市仍產生不利的影響，而財政收入方面也因為該政策削弱賣地收益而大受影響。

Most Hong Kong people have received the 1999-2000 Budget with joy and gratitude. Most taxpayers, naturally, were pleased and surprised by the tax rebate announced by the Financial Secretary. Others were excited by the announcements about the Cyberport project and the possible launch of the Disney theme park in Hong Kong.

The 1999-2000 Budget, like the 1998-1999 one, brought pleasant surprises. Yet behind the excitement I see worrying trends, and I expect that, unless interest rates drop further and/or amendments are made to the public housing sale scheme (the "Tenant Purchase Scheme") the recent modest recovery of the property market may not last, and I also anticipate continued rising unemployment. Having said this, I must say that the short-term economic forecast for Hong Kong, namely 0.5 per cent real growth in 1999, is a realistic one. Hong Kong's economy had shrunk particularly in the first quarter so much last year that it is not difficult to achieve positive growth. My own forecast is for positive growth right in the first quarter of 1999, with yearly growth being closer to one per cent than to zero, and I also expect that inward investment as well as public sector investment will be relatively strong. Over the medium term, however, growth is unlikely to be sustained at 3.5 per cent as the Government now predicts. The drag of bad debt will restrain both domestic investment and domestic consumption. Thus to expect that the fiscal deficit would decline any time soon is, in my mind, unrealistic.

To the extent that the projected decline in the fiscal deficit has incorporated the non-recurrent revenue to be derived from the privatization of the Mass Transit Railway Corporation, in truth the fiscal deficit is by no means tamed in the medium term. To the extent that the deficit for 1998-99 has incorporated extraordinary gains due to the investment earnings incidental to the Government's incursion into the stock market in August 1998, the gravity of the fiscal deficit problem facing Hong Kong may not have been fully appreciated.

As a public policy economist, I am quite disappointed with the tax rebate. The tax rebate is worth HK$8.5 billion. By giving this money away the government has given up that much worth of stimulus and assistance which otherwise would be available and which some of the badly hit sectors in our economy need badly. I can think of several ways of returning that money to the private sector which would better meet the need of the times. The government could use that money to subsidize business loans. Such subsidies would reduce the interest cost of firms at a time when the real rate of interest (approximately equal to the interest rate minus the rate of inflation) is at a historical high. The government could use that money to subsidize the employment of various disadvantaged groups, particularly older workers aged 40 or above, and school leavers with little or no work experience. The first initiative would relieve not only profitable firms--which tax rebates would--but also those which could not generate a profit because of the financial crisis. The second initiative would benefit both firms and the unemployed. In so far as the unemployment rate is reduced it may have further benefits as a result of the greater confidence generated.

The tax rebate gives the money to those who had suffered the least during the financial crisis and to the relatively well off. The Hong Kong Bank, for example, is expected to get a refund worth over HK$300 million. A top earner among salary taxpayers will get back some HK$20 million. I just do not see the point of doing this at a time when the Government is running a huge fiscal deficit and when so many people are crying out for help.

Another newly announced initiative is also badly timed. This is the announced increase in stamp duties payable on property transactions. From April 1 properties worth HK$6 million or above will be subject to a stamp duty of 3.75 per cent, up one full percentage point. Properties worth HK$3 million to HK$6 million will be subject to a quarter percentage point increase. These proposed increases in the stamp duties payable on property transactions is exactly the opposite of what Hong Kong needs now. Because property transactions are relatively thin these days we need to boost transactions by cutting stamp duties. Some people argue that those who can buy properties worth HK$6 million or more are relatively rich and so should be able to afford the extra tax. But one percent tax on the capital value of a property represents a lot of money. Think about the owner who had to sell his properties to pay off his debt, and you may agree with me that the proposed increase is neither fair nor efficient.

I would have liked to see the government reduce the stamp duty temporarily by a quarter or even half a percentage point. This will increase turnover and contribute towards a more active property market. While property transactions have picked up since the announcement of the Budget I am concerned that the picture would be different after March 31.

The proposed deferment of the payment of the stamp duty until the closing of the transaction is timely. This is certainly a positive factor for the property market and will offset the effect of raising stamp duties. Properties worth HK$3 million or less certainly benefit the most from this deferment, as they are not subject to any stamp duty increase. So on balance they are certainly net gainers.

On the expenditure side, the Government appears to be quite prudent. There is no announcement of any new project justified on the grounds of stimulating the economy. All projects announced are justified on their value for enhancing the long-term development potential of Hong Kong. Worthwhile areas continue to enjoy real increases, including education and health care, while efforts are made to contain the rapid increases in social welfare expenditures. At the same time, the Financial Secretary announced that civil service pay would not be increased this year, and depending on the outcome of the private sector pay trend survey, there could even be a nominal salary cut. More importantly, he also announced a major revision of the terms of service for civil servants, and particularly an effort to bring the overall pay package more in line with that of the private sector. This initiative is highly commendable. If the high salaries in civil service are used to attract people with the right calibre to do the job they can be justified. But if the high salaries end up attracting the wrong type of people at the expense of more productive jobs in the private sector they are absurd and counterproductive. Right now a Consultation Document on Civil Service Reform has been released. The objective is to "lay the foundation for developing the Civil Service into the next century." The civil service, as well as the subvented sector, certainly need an infusion of "carrots and sticks" in order to achieve greater efficiency and productivity.

In summary, there are no lack of commendable initiatives in the Budget, but there are also causes for concern, particularly over the future trends of the fiscal deficit. The Financial Secretary suggests that even without the partial privatization of the Mass Transit Railway Corporation the fiscal deficit should start declining from 2000-2001, so that by 2002-2003 a surplus of HK$7.3 billion would emerge. I certainly hope that this is the case. The worry is that this is based on an overly optimistic assumption about growth in the medium term. My greater worry is that if the HK$8.5 billion tax rebate was a gimmick to buy support, the Government would be very short-sighted. With that kind of mentality at the highest rank within the Government (I sincerely hope that this conjecture is misplaced) Hong Kong's longer-term interest would be at risk.

Professor Ho Lok-sang is the Director of the Centre for Public Policy Studies at Lingnan College.