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Moving Hong Kong Forward

With CEPA helping drive forward Hong Kong's economic recovery, the government now needs to focus its efforts on tackling the budget deficit and constitutional reform, says ANTHONY NIGHTINGALE

Following is the speech by Anthony Nightingale, Chairman of the Hong Kong General Chamber of Commerce, at the 10th Annual Hong Kong Business Summit.

The year 2003 has certainly been an eventful year, and one that no one could have predicted.  Twelve months ago, the expectations were that 2003 would be no worse than 2002.  The final result is indeed likely to be similar but there have been some ups and downs on the way.

In the spring, suddenly what we thought to be the major issues of the year -- the budget, CEPA and Article 23 -- were all put temporarily on hold while we turned our full attention to deal with SARS.

And Hong Kong did successfully deal with SARS.  By pulling together as a community we beat back one of the least understood diseases to affect the world in many years.

Just as we got the all-clear from the WHO, the Hong Kong SAR Government and the Central Government signed the long-awaited CEPA agreement. I am proud to say that this initiative was conceived within the Chamber almost exactly four years ago, and that, over a long period since the end of the year 1999, we played a strong and determined role in publicizing, educating, and lobbying for its realization. CEPA, is not a panacea for all the issues facing the Hong Kong economy, but in the next several months, it is our job, as business executives, to make the most of this opportunity.

The interest in CEPA that we have been seeing from other parts of the world certainly has been surprisingly strong. Last month, we updated a delegation from Taiwan on the terms of CEPA, and I can tell you they were both very knowledgeable and highly interested in the advantages this agreement offers business here. Here in Hong Kong, it was heartening to see in our annual Business Prospects Survey that nearly 60 percent of Chamber members are optimistic that CEPA will be a benefit to their own businesses.

While, as I said, CEPA is not a cure-all for every company in Hong Kong, it will provide many players with additional opportunities to expand their businesses in and with the Mainland of China. Perhaps even more important, it firmly underlines Hong Kong's role as the business and financial center and the gateway both going in and out of China. Making CEPA work will be a priority for us in 2004.  You can be assured that the Chamber, in addition to all the promotion work it is doing, is closely monitoring the implementation and in collecting views on what the next round of CEPA or CEPA II should contain. 

Budget deficit

CEPA is great, but we must get our own house in order.  Therefore, another top priority for Hong Kong must be getting our fiscal situation under control. While the economic recovery in the last several months has been highly encouraging, economic growth alone will not solve our budget deficit. We need to tackle the tough issues, including reducing government spending and broadening the tax base.

Neither of these topics will be popular, but we cannot let that stand in the way of doing what needs to be done for the good of Hong Kong. It is never an ideal time to tighten our collective belts, but certainly one would rather do so on the up-swing than on the downward trend.

And, we are now on the up swing. Sentiment has turned for the better, and we are seeing similar signs of optimism in a variety of surveys and opinion polls. Our annual Business Prospects Survey is one of them. The majority, nearly 60 percent, of chamber member respondents expect the economy to be stronger in 2004 than it was in 2003. A year ago, when we did this survey only 15 percent of our respondents felt that way.

While much has been written about the requirement in the Basic Law that our government employees should not be worse off than they were before 1997, too little attention is paid to those parts of the Basic Law that mandate a low tax rate and a balanced budget. It is now time for the government to present a clear, comprehensive and credible plan to reduce recurrent spending.

Rebalancing the budget will require sacrifices by all sectors of society, and a considerable amount of political will. I want to be very clear, however, that we are not advocating continued pay cuts for the civil service salaries until the budget balances. But, neither are we in favor of the entire burden being shouldered by a very small number of taxpayers. Government, taxpayers and those who benefit from public services need all to do their part. It won't be easy to square this circle, but the other options are much worse.

We need a multi-pronged approach, one that reduces the size of the government's obligations, reduces the cost of providing services, and ensures reliable sources of revenue with which to pay for the services Hong Kong needs.

With this in mind, it is vital that we reconsider what services society needs, and review those services from the perspective of which ones should be provided by government and which can be done by the private sector. The private sector has long expressed its willingness to work with government on out-sourcing, privatization and other public-private partnerships, and the sooner we get started on this formula, which has been successful in many countries, the better it will be for all of us.

Among developed economies, our revenue base is the narrowest in the world. This means that any effort at raising additional revenues from those already paying taxes is unlikely to be very successful, although I notice that one of our prominent political parties is advocating just that.

Our view as the Chamber is that if we attempt to raise corporation and income taxes sufficiently to cover our deficits, our taxpaying companies and employees will walk away. Clearly, we need to broaden the tax base, both to better share the burden and to be better able to predict our future revenues. Yet, broadening the tax base cannot be done in isolation; it must take place while we simultaneously reduce the size and cost of government.

A goods-and-services tax is complicated and controversial, but the Chamber feels it is the right time to start educating the public on the details of such a form of tax, and this may very well be the type of broad tax, levied at a modest level, that Hong Kong needs to balance its budget in a permanent manner.

As I said a moment ago, no one likes new taxes or indeed any taxes, but it is interesting that in our Chamber survey, there was some support for introducing a GST as a way of finding a solution to the revenue side of the budget deficit.  We should also remember that a GST is not exactly revolutionary.  In East Asia, the only places that do not have any form of sales tax are Hong Kong, Macao, and Brunei, and unfortunately we do not have Brunei's reserves of oil.

The Chamber hopes that the education process and debate on a GST can begin in 2004.

Constitutional reform

Fiscal matters are not the only challenge facing us in the coming year. As we have seen this year, our political environment also is changing. In 2004, we must begin the process of building a consensus on how, and when constitutional changes should take place.  And the conclusions must ultimately be acceptable to a majority of people in Hong Kong and to the Central Government in China.

The outcome of this consultation is unclear, but to a lot of people, the current system is dysfunctional and has led to many of the problems we have seen these past few years. It may be unworkable in the future.  We should not fear political maturity. As seen on July 1st this year, the people of Hong Kong are quite capable of acting with responsibility in the political sphere.

What will be critically important, however, is that the process be handled with great wisdom, patience and understanding, and that the consultation process starts sooner rather than later.  In our Business Prospects Survey, over 75 percent thought consultation on this crucial subject should begin no later than early 2004.

Once we begin the consultation process, we must do it right this time.   One of the most important aspects of The Hong Kong Way -- right up there with good, honest government and adventurous risk-taking entrepreneurs -- is our consultation process. It gives us access to the best thinking available while creating a real sense of ownership in the results. When we do it right, the outcome is the best we can hope for.

Earlier this year we didn't get it right. I am, of course, referring to the consultation on national security legislation, Article 23. That process was rushed, the consensus building inadequate and the results divisive. We need to reflect on how and why the process failed, and learn from the mistakes.

As we move forward, as we rethink how we want our society and government to be organized, it is absolutely crucial that we consult widely and listen carefully.   It is important too that we in the business community play an active role in this process.

And so, let me close with this: Hong Kong has been through a tough year and survived quite well, and while 2004 looks to be much better, we still have a lot of hard work ahead. The government cannot do it all alone, nor can the business community or society at large make proper progress without the right kind of government support. We are in this together, and we must together find the solutions that fit Hong Kong.

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