PRESS RELEASE

Transcript of remarks by Financial Secretary

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Following is the transcript of remarks (English portion) by the Financial Secretary, Mr Henry Tang, at the press conference on the launch of a public consultation on proposed reform to broaden Hong Kong's tax base at Central Government Offices New Annexe this morning (July 18):

Reporter: You mentioned earlier in Legco that the introduction of a GST would not affect the economy and domestic consumption if it's introduced at the right time. But is it quite inevitable that domestic consumption will be dealt a blow and the economy also if a GST is introduced? And is it true to say that the Government is not that determined to introduce a GST and could withdraw it if there isn't a social consensus?

Financial Secretary: The important point is that in this consultation we provide a document as a basis for public discussion. I believe that although it is a controversial subject and there is no consensus in the community for the introduction of a GST now, it is an important issue that we should discuss in public and that we should have a thorough and informed discussion. This is the purpose of this public consultation. In the document actually we do have a paragraph that illustrates possible effect on consumption. The consumption behaviour will fluctuate upon the introduction of a GST; that there will be some advance consumption in advance of the introduction and there are a number of other economies which have introduced a GST or a VAT have that kind of history, so we do have a paragraph in it that illustrates that point. I welcome you to read it. It's in chapter 9.

Reporter: (inaudible)

Financial Secretary: The Government introduced this document for discussion. We are not saying we will introduce it because right now we do not have a consensus to introduce it. Nor do we have enough votes to introduce it. So as far as this Government is concerned we feel it is important to introduce this document for discussion of this very important subject and that we hope the community will have an informed and rational discussion.

Reporter: The difficulty obviously is in introducing the GST. The public is not going to be very susceptible to such a proposal. And there are concerns that once this is introduced, at a fairly low rate – 5% you're proposing – then there will be quite large subsequent increases. Can you give any assurance that this won't happen within a certain timeframe or can you give an upper limit on the level that we could be seeing as a maximum level of GST? And secondly, you mentioned repeatedly about the controversial nature of this consultation. Do you have any concerns that when you're introducing this to the public it could go the same way as Article 23 legislation and heads could roll in the Government because of it?

Financial Secretary: Well like I said earlier, I believe that this is the right time to introduce this document for consultation so that the public can engage in a rational and mature discussion on this very important subject. I believe ultimately, even if there is or there isn't a consensus, the community will gain from this discussion because this discussion will allow people to have a more thorough and a more rational discussion on what is their responsibility to the community, what is a fair share of the tax burden. We will not be able to force it through Legco, because we don't have enough votes in the absence of a community consensus, but I believe this roughly nine-month consultation exercise will benefit the community in general if we are able to have a rational and mature discussion.

Reporter: (inaudible)

Financial Secretary: We are not talking about introduction of the GST now. We are now really talking about having a rational and mature discussion of the subject.

Reporter: You mentioned that a GST would be fair because it's pegged to consumption. But poor people necessarily consume or spend all of their income. Most rich people can't possibly consume all their income. Doesn't that make it inherently unfair and also what do you think would be the effects of a GST on income inequality in Hong Kong?

Financial Secretary: In our consultation document we have made a number of proposals for discussion, mainly on compensation and offsets for the CSSA recipients, meaning welfare recipients, as well as for the lowest 20% income families. I firmly believe that lower income families should be compensated in order to mitigate the effect on their purchasing power. As far as those who are not in the lowest 20% of household income, we have proposed a number of other measures to mitigate the effect of this new tax. I think most other tax jurisdictions around the world cannot be that wrong in introducing a broad-based tax whether it is a GST or a VAT. I don't think it will erode our international competitive edge upon the introduction of a GST if we can reach a community consensus on it.

Reporter: You said that now was the right moment to have a discussion in part because there was some economic stability. However second quarter GDP growth in China announced today was 11.3% which is higher than forecast and a bit of an acceleration. Raises prospect of cooling measures. Do you expect that to be economically destabilising for Hong Kong and do you expect that to affect this discussion of any possible introduction of a GST?

Financial Secretary: I believe this is the right time for a discussion because the economic recovery has been reasonably robust. In the last two years we have had an average of 8% growth and the last quarter we have seen more than 8% growth. We will be announcing this quarter's figures fairly soon. By and large I feel that with robust growth, moderate inflation and relatively low unemployment it is the right time for a discussion. Also it gives us that window to have this discussion on the premise that it's going to be revenue-neutral ... that we will not be looking to increase revenues if we introduce a GST. It would be highly undesirable if we were in a situation where the discussion of this very important subject has to be both a revenue measure as well as a tax reform measure. So we are now able to concentrate on the tax reform aspect and leaving it as revenue-neutral. I am pretty sure that effects in China will have a spillover effect in Hong Kong because our economy is very closely linked to the Mainland economy. But 11% growth is a blistering pace so I am supportive of measure to cool the economy. Macro-economic measures that will enable the Mainland's economy to have a more sustainable growth should be welcomed by all of us.

(Please also refer to the Chinese portion of the transcript.)

Ends/Tuesday, July 18, 2006
Issued at HKT 14:56

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