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Many politicians in Hong Kong have seized the opportunity presented by public debate about government expenditure in Hong Kong, especially the growing cost of medical services, to win recognition and support. But they are merely reciting tired old ideas that are neither illuminating nor useful.

Some of their opinions are downright naive. For instance, a prominent politician recently suggested that the Hong Kong government's budgetary problems could easily be solved by raising taxes.

He argued that Hong Kong people could be persuaded to accept a higher tax rate, which is among the lowest in the world. To him and some other politicians, the tax regime of Hong Kong should have the built-in flexibility to cover any projected shortfall in government expenditure.

Such a suggestion is most irresponsible because it seeks to destroy the Hong Kong government's long cherished fiscal discipline, an essential component of the established economic principle that has been a cornerstone of Hong Kong's success as an international financial centre. These politicians have demonstrated a failure to understand that consistency in government policy is a basic building block of Hong Kong's financial services industry.

We have to remember that Hong Kong is not a country. It does not have a large domestic economy to support its financial services industry. A low and simple tax system is one of the main attractions to the many foreign banks, international stockbrokerages, fund management companies and other financial institutions to establish their regional headquarters in Hong Kong.

It can be argued that raising the tax rate by a couple of percentage points is not going to drive these institutions to seek refuge elsewhere. Hong Kong, after all, has never sought to be known as a tax haven for anyone.

But the precedent set by the tax increase could be seen, rightly or wrongly, as an indication of a fundamental change in the government's economic policy. That would have the effect of undermining foreign investors' confidence in Hong Kong as an international financial centre.

The government did change the tax rates on a number of occasions in the past. But those changes were made to cover sudden shortfalls in revenue due to unexpected sharp downturns in the economic cycle.

What some of our prominent politicians are suggesting now is to raise taxes to cover projected government recurrent expenditure on essential social services that are difficult to dismantle once they are instituted. An increase in taxes under such circumstances would almost certainly set the precedent for future increases because it would fuel ever greater public demand for better and more available social services.

This is certainly not the way Hong Kong should be heading.

Instead, the Hong Kong government should try to exercise even greater fiscal discipline to strengthen the confidence of the private sector at a time when Hong Kong's position as a financial centre to service the needs of China's economic development is seen to be facing increased challenges from various mainland cities, particularly Shanghai.

Under Hong Kong's long-established economic policy, fiscal measures can never be a means to achieve a fairer distribution of the wealth created by economic growth. It is deemed undesirable for the government to get directly involved in the distribution of wealth by taxing businesses and the rich to pay for benefits to the poor; such a policy would have led to the eventual crowding out of the private sector by a big and powerful public sector that sucks in the major share of the available capital and labor resources.

Without tinkering with its existing economic policy, the government is trying to help the less wealthy segment of the population indirectly by introducing a number of key legislative changes that include the setting of a minimum wage and maintaining fair competition to protect small businesses. This, I believe, is a much more viable approach in the economic climate of Hong Kong to create a more harmonious society, rather than raising taxes to pay for direct government social services that are not necessarily efficient and equitable.

(China Daily April 18, 2006)