Wednesday, 4 November 2015

Gov't passionate about free market

Financial Secretary John Tsang

The open secret behind the remarkable rise as well as the continuing success of our own home economy is, according to the words of the Lion Rock Institute, our passionate and firm belief of that "potential of the individual and free-market values".

 

Yes, we do take pride in our achievements in realising and safeguarding economic freedom. We do take pride in Hong Kong's own brand of economic success which is quite unlike the fabrication sort of neighbouring pretenders. So it is immensely satisfying to learn that, with our collective efforts to promote economic freedom continuing to be recognised by a raft of like-minded international institutions, we remain on the right track.

 

Earlier this year, the Washington-based Heritage Foundation named Hong Kong the world’s freest economy - for the 21st year in a row. And, in September, Hong Kong topped the annual "Economic Freedom of the World" report published by the Cato Institute and the Vancouver-based Fraser Institute. Hong Kong has done so every year since the report first came out back in 1996.

 

As Financial Secretary, I can tell you, it is a great honour to top the list during my watch, but it is not an easy task to stay on top, year after year. There are just so many temptations for us to take the easy route to get on the populist freeway. That is why it requires a continuing and steadfast commitment to free-market principles from everyone concerned in our community to fortify that achievement and resist going to the dark side.

 

Indeed, Hong Kong's free-market philosophy has been the foundation stone in the formulation of our public policies, in the sustainability of our economic stability and prosperity, and in the well-being of the Hong Kong society at large.

 

We keep government intervention in the economy to the minimum. Only when the market fails to operate properly in very special circumstances would the government exert its influence.

 

Individuals and companies in Hong Kong are free to engage in economic activities of their own choosing, and to realise rewards based on their efforts, their ability, and perhaps on some occasions, their luck of the draw. In Hong Kong, it is the invisible hand of the market which allocates the valuable finite, resources and picks the rightful winners.

 

It is even more important now than ever, to allow the market to run the entire gamut because businesses today are facing unprecedented challenges from their competitors from every corner of the earth in the increasingly globalised and interconnected world economy. The potential customers, and competitors alike, are all just a click-of-the-mouse away. In order to remain competitive, businesses need to adjust swiftly and flexibly, maximising their efficiency according to market principles in attaining their hard-earned income.

 

We are working diligently too to ensure that practices in Hong Kong continue to align with the spirit of economic freedom and the well-tested free market principles.

 

Size of government

With the size of government, I am happy to say that Hong Kong ranks first in this area in the Institute's 2015 report on economic freedom.

 

I always believe personally that the private sector, with its flexibility and knowledge of the market, would be way smarter than the public sector when it comes to the allocation of scarce resources. They should be able to make more effective and efficient use of the limited resources that are available. I also always consider that governments should take only what they need to maintain the essential and services, and to develop the major infrastructure that would help sustain and facilitate the long-term growth of an economy.

 

Maintaining a small public sector allows us to sustain a simple and low tax regime. According to the study "Paying Taxes 2015" undertaken by PwC (PricewaterhouseCoopers) for the World Bank on the ease of paying taxes, Hong Kong ranked fourth in the world amongst 189 economies, with Singapore coming in fifth. With our maximum salaries tax rate set at 15% and our profits tax rate at a flat 16.5%, the total tax rate for Hong Kong stood at 22.8%, as compared with the world average of 40.9%. It took 78 hours, according to the study, for a Hong Kong company to file all the necessary tax returns; the world average was 264 hours.

 

I am a little surprised that it takes more than three whole days for a Hong Kong company to file their tax return, even though it is still very low compared with the world average. It usually takes me almost five minutes to do mine every year. Perhaps that has to do with my income.

 

After we have collected all the taxes, Government will spend no more than 20% of our GDP to provide the community with the necessary services, leaving the great majority of our gross domestic product, some 80% of it, to the private sector to undertake initiatives in fulfilling their aspirations and visions.

 

In fact, it is explicitly promulgated in the Basic Law that we have to keep our budget commensurate with economic growth, while keeping a low tax regime. In light of our commitment to a low tax regime, we need to maintain the strictest fiscal discipline in government's expenditure and in planning for our economic future. We have witnessed the hard lessons learned from the bitter experience of many advanced economies - that high public debt means relegation of the burden to future generations and truncating their freedom to consume; it means forcing them to be frugal in order to repay the debt accumulated by previous generations.

 

To date, our fiscal position remains healthy. We have been able to have surpluses every year during my term as Financial Secretary so far, and we are virtually debt-free. That, however, will become an increasingly difficult plank to hold given our enhanced spending and rapidly ageing population. As the baby boomers get older and our labour force becomes smaller, the problem would become more apparent. In fact, our labour force will start to decline from 2018, which is very soon, dampening our economic vibrancy. No less of a concern, the ageing population will drive up demand for healthcare as well as social welfare, challenging our long-term fiscal outlook.

 

We need to plan ahead in order to help alleviate or simply to lessen the pressure on our future generations. We need to put in place measures to contain the growth of expenditure. We need to ensure that we can achieve value for money in our spending. We need to conduct fiscal sustainability assessments on new major initiatives. We need to seek better returns from longer term investments of our resources. We need to put in place all these initiatives and move to secure a firmer foundation on which future generations can operate.

 

Legal system and the rule of law

Rule of law - another indispensable building block of our sustained success. Our legal structure provides a robust framework of protection for all the entities in Hong Kong. And these laws, which are constantly under review to ensure that they serve their intended purposes amid changing circumstances, have been effectively enforced by relevant government agencies.

 

To uphold the rule of law, it is equally important that the judiciary remains independent of the other branches of government. And that is exactly the guarantee enshrined in the Basic Law and jealously guarded in Hong Kong. The rule of law is also fearlessly and rigorously protected by our hugely vocal media - local and international.

 

Regulations

The regulation of credit, labour and business is the next area of consideration. This is another aspect that Hong Kong ranks first in the Institute's 2015 report. We are proud to have a transparent, fair and predictable regulatory regime. All persons, businesses and organisations, regardless of their nationality, are treated exactly the same. Every business in Hong Kong can enjoy the same privileges and enjoy the same benefits provided by our international agreements.

 

On the other hand, we are constantly reviewing our regulations with a view to reducing unnecessary red tape and eliminating outdated and spent processes. That serves to enhance our efficiency and reduce compliance costs for business.

 

We are also constantly searching for ways to further improve the business environment in Hong Kong. I believe that the Government does have an important role to play as market facilitator, in maintaining a favourable business environment and ensuring the operation of a level playing field for everyone in our markets. I know some of you fundamentalists out there would take issue with that, but that's fine. Nobody is perfect.

 

Freedom to trade

Another key area is freedom to trade. As a free port and an open market, we are naturally a staunch supporter of free trade. We impose zero tariffs and no non-tariff barriers. Traders in all sectors, and from all jurisdictions, can trade freely here in Hong Kong. That makes us one of the largest trading economies in the world, according to the World Trade Organisation. Hong Kong also actively participates in various international forums to expound on the benefits of free trade, and to explore trade-enabling initiatives with other economies. Our status as one of the world’s best trading platform is clearly well-recognised.

 

Hong Kong offers also unparalleled connectivity for multinational businesses and corporations. We are within five hours' flying time of half the world's population. Each day, some 1,100 flights arrive at and depart from the Hong Kong International Airport, one of the finest in the world.

 

According to the latest data released just last week, the number of business operations in Hong Kong with parent companies overseas and in the Mainland has climbed to a new record of some 8,000 in 2015, an increase of 4.2 per cent year on year.

 

Access to sound money

Together with free trade is the free flow of capital. Our external trade is equivalent to more than four times our GDP. And the massive flow of funds through Hong Kong, day in and day out, fuels a wide spectrum of financial activities.

 

As the United Nations World Investment Report 2015 suggests, Hong Kong, for the first time, came second in global foreign direct investment, with record amounts of inflows and outflows, at US$103 billion and US$143 billion respectively.

 

On this note, it helps enormously to maintain a simple, credible and transparent monetary regime. Our Linked Exchange Rate System has stood the test of time, having been in place and working effectively for Hong Kong since October 1983. I value highly the hard-earned credibility of our monetary system.

 

Clearly, free-market principles have served Hong Kong well, and they will continue to do so. But for the Hong Kong economy to reach new heights, we must continue to seize fresh opportunities.

 

Opportunities that I have in mind don't get any fresher, any larger or more promising, than the visionary and ambitious concepts of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, or the "Belt and Road" initiative, spearheaded by President Xi in 2013.

 

Created with connectivity at its heart, this grand and far-reaching scheme seeks to enhance ties in infrastructure, in trade and investment, in culture and more, among some 60 plus economies spanning Asia, Europe as well as Africa.

 

More importantly, the initiative presents the world with an abundance of business opportunities in an unprecedented way, and I think it has all it takes to become the much-needed driving force of the lacklustre world economy in this 21st century. Under the initiative, we envisage soaring infrastructure investment, deepening financial integration, expanding trade flow and growing people-to-people bonds.

 

Hong Kong, with our unique advantages under the "one country, two systems" framework, has all it takes, from our world-class market infrastructure and professionals to the robust legal system and the unparalleled business network, to play a central role in delivering fully the enormous possibilities presented by the "Belt and Road" initiative.

 

We shall do all we can to fast-track the future that we see in the "Belt and Road" initiative, through our efforts on the G2G level in promoting closer ties and deeper understanding with potential partner economies along the "Belt and Road", in particular those emerging economies that dominate the landscape.

 

We shall also step up our efforts in signing bilateral agreements with economies to expand trade and investment flows, while helping Hong Kong companies better understand the economic realities and regulatory requirements in these new markets.

 

The Government will remain a passionate supporter of free-market principles. As Nelson Mandela once said: "Action without vision is only passing time; vision without action is merely day-dreaming, but vision with action can change the world."

 

We have the vision. A vision that we share. A vision that requires us to safeguard our core values, to sustain our effective policies, and to preserve our unswerving commitment to free-market principles, for long term benefits that can be enjoyed by you, by me, by our children and grandchildren, by Hong Kong.

 

Financial Secretary John Tsang gave these remarks at the Economic Freedom of the World & Lion Rock Institute Gala Dinner.

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