Speech on Appropriation Bill 2014 (Budget Debate)

The Financial Secretary has eventually responded on falling competitiveness in recent years, and mentions it together with industrial development in his latest Budget. Although the discussion, in my view, is far from adequate, it is good starter as the Government finally admits and realizes where all our problems lie.
This year’s Budget cautions that competiveness should not be taken for granted. It would not live on by default but would demand unfailing improvements and proactive responses to the changing environment. The Budget also foresees considerable room for our four pillar industries to grow and prosper towards higher added-value. They would continue to support our economy and employment. Meanwhile, we should endeavour to nurture new and globally competitive industries and to create more opportunities for economic growth.
I fully agree to these analyses but much more efforts are needed to improve and reinforce our competitiveness. Apparently, proposals in the Budget are insufficient. Measures to improve the four pillar industries are merely remedies. The Government probably still subscribes to the doctrine of “big market and small government” and is reluctant to direct any in-depth development and reform. In fact, we could do a lot more, like actively seeking partnership with “Free Trade Zones” on the Mainland or aggressively bringing in international investors. All these ideas deserve further study. I am looking forward to more innovative ideas from Financial Services Development Council on more diversifications in terms of business and market. Similarly, the Government should extensively review and reform the other three pillar industries with a view to lifting their competitiveness as well.
Among promising industries, only innovation and technology are mentioned. The Budget is silent on others including those six industries having comparative advantages. In fact, we should pursue many more industries for broader diversification and more prudent development of the economy. Thus, we would avoid over-reliance on financial services and trade. We may still recall the hard time when financial services contracted abruptly following the Asian financial crisis. We should not be complacent today with our prosperous economy and full employment and unenthusiastic about new industries. It would turn out to be gross mistakes. Frankly, financial turmoil would come and go. There is no guarantee that Hong Kong would still maintain its role as international financial centre in future. Economic diversification is the only way out.
Among those six promising industries, innovation and technology are now fully supported and their prospects would be undoubted. There are different views on medicine and education as “industries” for development but the debate might continue in parallel. As for the other three, i.e. testing and certification, culture and creativity, and environment and conservation, much effort are devoted but pace of development would be still tough and rough without government support. I wish the Government would continue supporting them for the sake of industrial diversification.
Another highlight of the Budget is the analysis of structural deficit and aging population. They are potential problems and might become time bombs if not properly addressed.
The Budget points out that if public expenditure continues to outpace revenue and economic growth structural deficit would appear between 7 and 15 years depending on the scenario. The Financial Secretary says that these projections ring a warning bell but we should not be over-reactive. In the next 20 to 30 years, the economy would grow, revenue would rise, and expenditure would also increase though more restrained. Thus, the Budget reiterates that public expenses should not exceed 20 per cent of GDP and proposes that a “Future Fund” be set up as savings for the next generation.
Many learned colleagues criticize the Financial Secretary for another “false alarm”. However, I fully agree that public finance should be prudent and spending should be budgeted on desirability. A rigid threshold , like the 20 percent-rule, on spending would unnecessarily tie our own hands in responding to social demand in future when being called upon or in introducing new fiscal measures. The proposed Futures Fund is merely setting aside part of the reserves for future years. Saving is virtue and I could hardly disagree. In my view, the proposal deserves thorough public debate. After all, we have over $700 billion of fiscal reserves, and public reserves including the Exchange Fund would amount to some $1 trillion in total. An excessively conservative fiscal approach is not necessarily desirable, isn’t it?
However, I am skeptical that public finance is a cause for concern as suggested by the Budget. No matter spending less or saving more would not resolve our economic problems. Only expansionary policy to promote competitiveness would consolidate our economic strength in meeting challenges ahead. As discussed earlier, the Budget does not bring in new ideas on economic development. It is always proper to remind the community of preparing for rainy days but the Government is also falling short of a blueprint for the economy.
Meanwhile, the Budget has responded to the concern of business community, including inadequate land for commercial use. Actually, rising office rental is pushing up operating costs and probably deterring foreign investors. Increase in commercial land supply is imminent as reiterated by the Legislature on different occasions. According to the Budget, land sale in the coming year will include seven commercial sites and one hotel site. Moreover, the Government would increase commercial land supply in various areas through seven measures. More economic activities and job opportunities would be provided. They are right moves for benefits of the business community.
On the other hand, it deserves attention that both the Policy Address and the Budget have many concrete measures to help the poor but only a few to support the middle-class. In fact, the middle-class is equally under great stress in livelihood. Obviously, they are disgruntled to see Government policy skewed towards helping the poor. Meanwhile, the Government is promoting more new births to increase the youth population. However, incentives are lacking in particular those for the middle-class. I wish the Government would consider raising tax allowance for children. It would not only encourage new births but also help relieve burden of the middle-class.
Finally, I would like to talk about concern of the insurance industry. The Budget takes on the issue of aging population. On Health Protection Scheme (HPS), it reaffirms the commitment of $50 billion as public subsidy. It also indicates that tax concession would be offered to people joining the plan. In fact, the Government has already resolved to substantially reduce subsidy to healthcare insurance and confine it to the high risk pool and tax concessions. It is anticipated that public subsidy would drop substantially from the budgeted $50 billion to only $0.43 billion or cut by 90% in effect. Let’s consider from the perspective of preferential premium. If the annual premium payable were $4,000, the original proposal of 30 percent discount would mean a saving of $1,200. Such benefit will be abolished and replaced by tax concession. The average tax rate of Salaries Tax payable is 8 percent. Even if the whole sum of $4,000 were eligible, the benefit would be only $320. With much discounted incentive, attraction of the plan would also be much discounted. The insurance industry is doubtful of the viability of revised proposals. I ask the Government to reconsider its position and revert to the original preferential terms given the sum of $50 billion already set aside.
On offshore renminbi business, the Budget says that Hong Kong should capitalize on its inherent advantages of forerunner to broaden and deepen existing business including cross-border re-insurance denominated in renminbi. The latter has been focus of our industry. Frankly, rules and regulations are so complex that we are not sure that we may accept re-insurance denominated in renminbi in Hong Kong. The Government now clarifies that it is permissible, and the new business would prosper. This is very encouraging to re-insurance in Hong Kong. Mainland underwriters would re-insure their exposures in Hong Kong and local re-insurers might invest renminbi receivable on the Mainland. I am sure that the insurance industry would follow up and endeavour to development this new line of business.
In last year’s Budget, the Financial Secretary proposes to cut profits tax on earning attributable to offshore exposures of captive insurance companies by half. The Government would step up promotion through its trade and economic networks on the Mainland and overseas to attract more enterprises to establish captive insurance in Hong Kong. I am pleased to see that the Government is putting more efforts in promotion. However, we are not providing comparable benefit to similar plans elsewhere and thus less attractive. I ask the Government to review the outcome after launch and consider increasing tax incentive to make Hong Kong more competitive.

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