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Thursday, February 25, 2021, 10:46
Hong Kong meets challenges with confidence, composure
By Ho Lok-sang
Thursday, February 25, 2021, 10:46 By Ho Lok-sang

I like the latest budget. I had hoped for a measured increase in the stock market stamp duty but no increase in other taxes nor introduction of new taxes; I had hoped for job creation by the government; I had hoped for targeted relief to the unemployed; I had hoped for consumption coupons; I had hoped for an increase in government-funded residential elderly care places. Essentially, I got almost all the things that I had hoped for. 

Although the stock market plunged Wednesday on the news that the SAR government has increased the stock market transaction tax (stamp duty) from 0.1 percent to 0.13 percent, I think the stamp duty hike is good for Hong Kong over the long haul. We suffered our worst recession in 2020 with GDP plunging 6.1 percent on the back of a 1.9 percent drop the previous year. Obviously, Hong Kong’s fiscal position is under tremendous stress. The current fiscal year is expected to end up with an unprecedented deficit of HK$257.6 billion ($33.2 billion), and the following year is likely another deficit year, with HK$101.6 billion in the red. The financial secretary correctly decided that this is not the time to bring in new taxes or raise taxes on incomes. The measured increase in the stamp duty for stock market transactions is the best way of raising tax revenue, because it is a tiny tax on a huge volume. Transactions on Wednesday when the budget was read, for example, totaled HK$353 billion. Although this is not a typical day, a typical trading day these days is upward of HK$200 billion. Since the tax is paid by both buyer and seller, the increase of 0.03 percentage point on either side amounts to 0.06 percent of $353 billion, which is almost HK$212 million on one day. An extra benefit is that there is no extra collection cost. 

The financial secretary correctly decided that this is not the time to bring in new taxes or raise taxes on incomes. The measured increase in the stamp duty for stock market transactions is the best way of raising tax revenue, because it is a tiny tax on a huge volume

I can understand why stock market brokers object to the tax. This is because they also depend on a tiny commission on stock market transactions. The 0.03 percentage point on both buyers and sellers is actually huge compared to the commissions that they earn, and they do worry about the impact on transactions. I would advise that there is no worry. Investors typically will hardly notice any difference on the cost of transactions. There is indeed the thought that some transactions are driven by arbitrageurs, who look for profits based on tiny arbitrage opportunities which could disappear because of the rise in the stamp duty rate. It was because of this consideration that my own suggestion was a smaller rise of 0.01 percentage point. The situation should be monitored, and the government can adjust the rate downward if necessary. In any case, any tax will cause a burden somewhere on the economy, and the social cost of the stamp duty increase should be the smallest among all tax increase options. We must also remember that a large fiscal deficit will also be socially burdensome. If our credit rating were to fall, all borrowers based in Hong Kong, including the government and the business sector, would face higher borrowing costs. 

Financial Secretary Paul Chan Mo-po’s proposal for a loan program for the unemployed is highly commendable. The unemployed are facing financial pressures because they have bills to pay and loan payments to honor. So the proposed loan guarantee could be like manna from heaven to the desperate. Under the plan, the unemployed can borrow from banks up to six times their average monthly income during employment with a ceiling of HK$80,000, and the interest rate is only 1 percent per year. Borrowers need only pay the interest in the first 12 months.  Afterward, the principal and interest can be repaid over a period of up to five years. Applicants who have repaid loans in full as scheduled will be offered full reimbursement for the interest paid. Even freelancers who provide proof of loss of income may also apply for the loan. All this is great except the loan amount. If someone making HK$50,000 a month is laid off but needs to pay the mortgage installment repayment each month to avoid foreclosure by the bank, the overall loan ceiling at $80,000 would be far too low. 

Readers of my column will know that I have advocated the creation of “basic jobs” by the government (“Provide basic jobs, not basic incomes,” China Daily Hong Kong Edition, June 14, 2016). The financial secretary has proposed the allocation of HK$6.6 billion for the creation of some 30,000 time-limited jobs. This will address the complaint, voiced by listeners who called RTHK in its morning phone-in program, that since they could not prove that they were laid off by their employers, they would not benefit from the proposed government-guaranteed loans to the unemployed. My complaint is that the proposed jobs are time-limited. In my view, the basic jobs should be socially productive jobs and they should be part of the social safety net to give people a chance to earn a living while making a contribution to society. They should not be regarded as a “handout” and should not be temporary. 

I am, of course, highly supportive of the consumption vouchers and various measures to make our city a livable one. 

The author is a senior research fellow at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.

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