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Hong Kong's Deficit Remains on the Rise - 2003-01-08

While Hong Kong's economy appears to have grown around two percent growth last year, some serious concerns remain over its ballooning budget deficit. Many analysts warn the government must change its tax base and cut spending to protect the economy.

Hong Kong's deficit is estimated at $9 billion for the fiscal year that ends in March. Many economists and business leaders say the government must cut the deficit now if it wants to protect the city's financial health and return the economy to strong, steady growth.

On Wednesday, many Hong Kong residents expect the government's leader, Tung Chee-hwa to unveil new plans to resolve the deficit when he gives his annual policy speech. It will not be an easy task. One major problem is the property market, which has seen prices fall steadily for five years. That leaves many Hong Kong companies with sagging profits and reduces the value of homeowners' assets.

It also drains the government's coffers. The Hong Kong government earns much of its revenue by auctioning land to developers. It also collects a tax when homes are sold. But with few properties being sold, experts say Hong Kong needs to find new sources of revenue. Joseph Fu is president of the Taxation Institute, which advises the government. "The difference now we can't rely on property-related revenue and additional land revenue. Now we have to go back to … where government spending [that] should be below something like 20 and 18 percent of GDP," he says.

Mr. Fu urges the government to cut spending and to widen the tax base by taxing more middle-class people who now pay little to the government.

David O'Rear, chief economist with the Hong Kong General Chamber of Commerce, agrees that spending needs to be curbed. He calls for reducing the civil service, in part by hiring private companies to do some of the government's work. "There's a very large number of people working for the government, much larger on a per capita basis than most of our competing economies around the region," says Mr. O'Rear. "And so the issue is why do we, who do not have a defense or foreign affairs branch to our government, have such a large per capita bureaucracy?"

Despite the gloom, Mr. Fu thinks the deficit is not insurmountable. He estimates that two-thirds of it is the result of the weak local economy, which has grown slowly or not at all over the past few years. Once the economy improves, he says, the deficit will shrink because companies and workers will earn more, and pay more taxes.