HK plans to raise taxes and trim civil service

  • Business
  • Thursday, 09 Jan 2003

Tung Chee-hwa

HONG KONG: Hong Kong Chief Executive Tung Chee-hwa announced yesterday plans to increase taxes, cut the size of the civil service and slash the pay of top officials in a bid to wipe out the territory’s growing fiscal deficit. 

In his annual policy speech, Tung said the deficit had reached a “critical stage” which was threatening to undermine Hong Kong’s financial strength if the government did not change the way it taxes and spends. 

“Solving the deficit problem is the government’s top priority,” he told legislators in his first major address as he began his second term as leader of the southern Chinese territory of 6.8 million people. 

Once one of the most dynamic economies in the world and a favourite spot for investors, Hong Kong is now struggling to reinvigorate itself, maintain its position as one of the world’s top financial centres and restore battered consumer confidence. 

But first it has to find its way out of high unemployment, the ballooning deficit and persistently falling prices which are hurting the economy and companies’ ability to boost profits. 

To eliminate the deficit, Tung said the government had to cut public expenditures, raise revenues and boost economic growth. 

The former shipping magnate said he planned to cut the size of the 178,000-strong civil service by 10% by 2006/07 through natural attrition and retirements, which would help slash government spending by HK$20bil. 

He also announced unprecedented pay cuts of 10% for himself and 16 of his ministers and closest aides. 

Tung earns a salary of about US$420,000 a year while his ministers earn about US$500,000 a year, dwarfing the US$380,000 salary of US President George W. Bush. 

The Chief Executive also warned Hong Kong to brace for higher taxes but gave no details, saying they would be released in the budget in March. 

“We...intend to introduce appropriate tax increases and adjust government fees and charges upwards to help eliminate the fiscal deficit,” he said. 

Tung said he expected the budget deficit to top HK$70bil for the 2002/03 fiscal year ending in March, which would make it one of the biggest in Asia, equivalent to more than 5% of gross domestic product. 

The territory’s massive fiscal reserves, which are needed to help back its US-linked currency, are being eroded as the government dips into them to meet the shortfall. 

Hong Kong prides itself on having one of the lowest tax rates in the world, which is a key enticement to foreign investors, and some economists worry that increasing or imposing new taxes now will stifle the economy’s fragile recovery. 

Financial markets were little fazed by the speech. Premiums on Hong Kong dollar forwards, which reflect perceived risk to the US-dollar linked currency, stayed within a 10-pip range between 145 and 155. A pip is just one ten thousandth of a dollar. 

The benchmark Hang Seng Index of leading blue-chip shares ended up 0.37% but off early highs. – Reuters  

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