Hong Kong's new financial chief, Henry Tang, may be mild-mannered and moderate to a fault, but in less than three months on the job he already has begun laying the groundwork for major changes in the city's public finances.

His first accomplishment has been to ratchet down the level of hysteria about the budget deficit he inherited from his deeply unpopular and scandal-plagued predecessor, Antony Leung - who warned in March that a bigger deficit could "trigger a financial crisis."

Tang has of course benefited from the local economy, which is improving rapidly after the outbreak of SARS, or severe acute respiratory syndrome, ended earlier this year. And with polls showing the public is still most concerned about the economy, Tang has decided not to immediately tighten fiscal policy and has moved back the target for getting rid of the deficit to the 2008-09 fiscal year.

"I don't want to create too big of a negative impact, especially at a time when the economy has just begun to recover," Tang told reporters last week. "I think this course of action is more moderate than my predecessor's, but it is a pragmatic one."

Tang also has broken with his predecessor by publicly endorsing two new ways of raising revenue: government bond issues and a new goods and services tax, or GST.

Those measures, if realized, would mark a major break with Hong Kong's long-held traditions of extremely low taxes and essentially no government debt - making the city more like its regional peers with a broader tax base and a more normal fiscal profile.

"He is doing better, because he has introduced these three instruments," said Li Kui-wai, a professor of economics and finance at City University of Hong Kong, referring to the GST, bond issues, and Tang's planned 11% cut in government spending over five years.

Still, after Tang outlined his fiscal strategy in a speech last week, many said the sketchy proposals - which are to be fleshed out over the next few months - didn't offer enough details to give confidence the budget would, in the end, be balanced. "I am still cautious as to whether they will be enough," Li said.

Splitting The Deficit In Two

Others praised the way in which Tang presented the finances, saying it will make it easier to convince the public and legislators to back the necessary budget-balancing measures when the time comes for Tang to present his budget for the next fiscal year in March.

"Henry and his people are sitting down and saying we'll show you what the budget's really like. He has made clear this difference between capital and recurrent spending," said Stephen Brown, head of research at Kim Eng Securities.

Capital expenditure - mainly public works projects - and capital revenue, such as that from the development of government land, both tend to vary widely from year to year. So analysts say it's more important for the government to ensure there's a balance between recurrent spending, on its operations and core services, and its recurrent revenue, like income taxes. That's what Tang is now trying to do.

"My philosophy is to draw a line between recurrent operating revenue and operating expenses, and balance that by the year 2008-09 at HK$200 billion. On the capital account side, I also intend to balance that by the year 2008-09, but capital expenditure should be covered by capital revenue, so therefore the consolidated account will balance by then," Tang told reporters.

He said revenue from bond issues, and from privatizing and securitizing government assets like toll roads and the airport, would be dedicated to capital expenditures. A goods and services tax, by contrast, would help fill the gap between recurrent revenue and expenditure that has opened since the government boosted spending to gain public favor after the handover to China in 1997.

"It will become apparent to the Legislative Council that if we want to have that extra HK$20 billion of recurrent expenditure on education and health care, we are going to have to raise HK$20 billion through recurrent means," said Brown.

Tang's advocacy of a goods and services tax isn't groundbreaking - a government panel strongly recommended it just last year - but he has definitely moved it up on the government's agenda. Analysts say a GST would take two to three years to implement, and would likely raise about HK$6 billion in revenue for every 1% in tax rate.

"There was, within Treasury, a GST group that had done a lot of studies. Then Antony Leung came in and basically disbanded it. Tang, to his credit, has put it back together again," said Lloyd Deverall, a tax partner at KPMG.

Bonds Less Controversial Than GST

A sales tax is never a popular option, and Tang will have some convincing to do. The opposition Democratic Party, for one, objects to the proposed tax. "We won't support it in the near future - three or four years. It's a regressive tax," said Sin Cheung-kai, a legislator and the party's spokesman on economic issues.

However, his party does support a bond issue to fund capital expenditures, and this is likely to prove less controversial. Economists generally see bonds as a sensible way to fund infrastructure projects, because they can spread the cost of the project out over a long period, just like the project's benefits.

Though a bond issue is sometimes presented as a radical departure for a government that has no debt, in fact Hong Kong has issued bonds once in each of the past three decades. Each time they were used to fund capital expenditures and were paid off within a few years.

"If they sell a bond of, say US$1 billion, it isn't because they don't have the money to take care of the fiscal problem. It would just give the government that much more firepower," said Dilip Parameswaran, an analyst with Credit Agricole Indosuez.

Close

Today's Top News		Top Business News
+Thousands homeless in sub-zero temperatures ( 2003-10-27) +Framework for closer trade ties in sight ( 2003-10-27) +Survey: House price rises slow down ( 2003-10-27) +Referendum rally by separatists on island condemned ( 2003-10-27) +Euthanasia faces ethical and legal dilemmas ( 2003-10-27)		+Chips see sizzling profits ( 2003-10-27) +HK's Tang to make his mark on city finances ( 2003-10-27) +US firm 'bets' on China ( 2003-10-27) +Bay bridge set to boost delta area ( 2003-10-27) +Commercial banks going overseas ( 2003-10-27)