Hong Kong’s Financial Secretary John Tsang has offered a package of sweeteners, including tax rebates, as he unveiled on Wednesday the budget for the coming fiscal year. In doing so, he has continued the past practice and boosted his popularity.
The latest budget has secured a rating of 60.2 marks, the highest in five years, according to a survey from the University of Hong Kong.
Meanwhile, Hong Kong’s long-time rival Singapore also unveiled its own new budget on Monday. But the Lion City has taken a totally opposite approach. The city-state opted to raise income taxes on its middle class for the first time in three decades. The income tax has been hiked from 20 percent to 22 percent, compared with 17 percent peak rate in Hong Kong.
Singapore has been less generous compared to Hong Kong in helping citizens combat rising prices and aging population. It has offered 50 percent income tax refund, while Hong Kong unveiled a 75 percent reduction in salaries tax and profits tax.
Hong Kong has registered a fiscal surplus of HK$63.8 billion for fiscal year 2014, and projected another HK$36.8 billion surplus for the new fiscal year. By contrast, Singapore’s overall budget balance for fiscal year 2015 is projected to be a deficit of S$6.7 billion, after a deficit of S$13 million the previous year.
The different picture in Hong Kong and Singapore is the result of divergent fiscal policies adopted by the two cities.
Singapore means big government, where its citizens expect the government will take care of them. For example, 85 percent of the city’s population lives in public housing flats, and its subsidized education ranks among the top level worldwide.
However, the big-government approach is a one-way drive, which means the fiscal expenditure will increase year after year. And the People’s Action Party has to ramp up welfare to woo the public and cement its ruling, which has also led to increased government spending.
During 2009 and 2015, the city’s recurrent expenditure soared 58 percent to S$48.7 billion, accounting for 71 percent of the total government expenditure. In Hong Kong, the recurrent expenditure only expanded by 43 percent during the period, equivalent to annual growth of 6 percent.
Some appreciate Hong Kong’s prudent and disciplined approach, while some criticize the government saying that it only cares about money.
But one should bear in mind that there is no free lunch. For example, Singapore needs to earmark 17 percent of government revenue to develop public housing in the new fiscal year. Hong Kong government only spends 7 percent of its revenue in building and operating public housing.
Also, Singapore’s national defense expenditure is expected to reach S$13.1 billion in fiscal year 2015, equivalent to 20 percent of the government revenue. By contrast, Hong Kong has no nominal defense expenditure at all.
The big-government model adopted by Singapore is facing a dilemma. Government revenue may fail to keep up with rising expenditure further, leading to a situation where the city has to impose new tax on top of GST. That could hurt its reputation and attraction as a free economy.
This article appeared in the Hong Kong Economic Journal on Feb. 27.
Translation by Julie Zhu
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