Breadth of views - breadth of capabilities
We will give you a choice of best approaches


26.02.2015 03:07 Age: 21 days

Hong Kong and Singapore plot divergent fiscal paths

Hong Kong and Singapore have revealed differing plans for how to combat rising prices, ageing populations and slowing global growth, setting Asia’s financial centre rivals on divergent economic paths, reports the Financial Times.

The two former British territories have long been known for their low taxes, rising incomes and booming financial services sectors. The World Bank has ranked them as two of the top three places in the world to do business since 2010.

But both have more recently faced the challenges of increased living costs and shifting demographics. This week leaders in the two cities announced their budgets for the coming year, highlighting alternative views on how to tackle those problems.

Hong Kong on Wednesday chose to use its HK$63.8bn (US$8.2bn) budget surplus to help fund a one-off salary and profits tax rebate for all residents, confirming its longstanding commitment to a low-tax, laissez-faire style of government.

The benefits are likely to be felt only by the middle and high-income households in Hong Kong, said KPMG’s Charles Kinsley, because many poorer workers do not earn enough to pay salaries tax in the first place.

“I am aware that many of our citizens are expecting relief measures from government to allay their burdens,” said John Tsang, Hong Kong financial secretary. However, the government must allocate funds in a “prudent manner” because of worries over short-term economic growth. Hong Kong’s economy grew 2.3 per cent in 2014, while Singapore’s expanded 2.9 per cent.

Mr Tsang announced fee waivers for restaurants, hotels and travel agents to boost the flagging tourism industry, which he said had suffered as a result of last year’s pro-democracy protests.

Retail sales in Hong Kong slipped 0.2 per cent in 2014, although many analysts attribute the weakness to China’s crackdown on corruption, which has dented demand for luxury goods. Overall consumer spending rose during the protest months, largely thanks to the launch of Apple’s iPhone 6.

Hong Kong also earmarked funds for some short-term relief measures and extra cash for poorer retirees, but stopped short of introducing a universal pension. Instead, the government will encourage older people to return to work.

In contrast, Singapore on Monday moved to redistribute wealth by raising taxes on its wealthiest residents to pay for increased spending on social welfare, particularly healthcare.

The package of improved benefits included more generous support for retirees and low-income families, and extra funding for high-skills training. The combined measures will take government spending up to 19-19.5 per cent of gross domestic product by 2020 from the current 18.5 per cent, according to CIMB.

“We have set new directions for the future,” said Singapore finance minister Tharman Shanmugaratnam in his budget address. “We are making fundamental policy shifts to give Singaporeans greater assurance at each stage of life, more opportunities, and a better home for all.”

Singaporeans are due to go to the polls any time between now and 2017, leading some analysts to bill the budget as a pre-election vote-winner.

Living costs in both Hong Kong and Singapore have risen sharply since the financial crisis, heightening concerns about inequality. The Economist Intelligent Unit now ranks Singapore as the world’s most expensive city, while Hong Kong has its highest home prices, according to Savills.

The cost of living was one of the frustrations aired by protesters during the Hong Kong protests, which shut down major roads in three commercial districts for almost three months.

Universal suffrage is due to be introduced to Hong Kong in 2017 but critics say the plan for a strictly controlled system for nominating candidates falls short of genuine democracy.