The good news is that the Government does not introduce sales tax this year. Instead, the government decide to establish a working team to find out whether Hong Kong's fiscal system has structural deficit and an independent committee to explore some new forms of tax. Although these are good moves, the logic behind is questionable.

Whether there is structural deficit is still a question. If the existing tax system can generate sufficient revenue to finance the total operating expenditure over a business cycle, technically speaking, there will be no structural deficit. Measures to widen the tax base may not be necessary. The fact of 200,000 high salary-earners paying 80% of salary tax is NOT a valid argument to widen the tax base/coverage.

What's more interesting is the case if structural deficits come from the expenditure side but not the revenue side. Instead of working on the tax structure, the government should establish a mechanism to sustain public expenditure on education, healthcare, and social welfare.

The situation may not be too bad in the future because the new economic structure will generate a group of middle-income and young workforce, removing the need to introducing new measure to widen the tax base/coverage.

Dr. CK Law (Chief Economist) and Dr. Raymond Yeung (Senior Economist)