2014-15 Policy Address cum Budget Submission

2014-15 Policy Address cum Budget Submission

Hong Kong General Chamber of Commerce

The Hong Kong General Chamber of Commerce, in consultation with our members and in consideration of the need to strengthen both competitiveness and social solidarity, is pleased to present below our thoughts on the means of achieving a practical and balanced approach to the challenges ahead.

2.     The over-riding need is for the articulation of a clear vision of what we want Hong Kong to be, and the roadmap for getting to our objective. In the light of pending constitutional development discussions, this year, more than most, we need to ensure that our policy direction and choices enjoy broad support. We do not pretend that it is possible to seek complete consensus. That way leads to deadlock, wasting time we cannot afford. Instead, we seek thoughtful, considered leadership to guide us on the correct path for the good of Hong Kong.

3.     As a statement of basic governing ideology, we look to the concepts of ‘positive non-interventionism,’ ‘big market, small government,’ and ‘the market leads, government facilitates.’ This does not preclude action when action is required, but it does demand a rigorous examination of the impact of policies, alternatives to regulation and legislation, and a thorough understanding of the costs and benefits of policy choices. We would also be remiss if, as a business chamber, we failed to mention the need to take into consideration the cost of compliance.

4.     The proven method for ensuring that policy decisions are appropriate and correctly framed is a proper regulatory impact assessment. We are aware that the Government undertakes environmental impact assessments, and occasionally economic impact assessments. Both are important in ensuring that the results of policy choices are deliberate, and not inadvertent. But, neither goes far enough, and that is why we strongly urge that the guiding mechanism for deciding policies be a comprehensive understanding of the implications of various choices, including the choice not to act.

5.     The Government has recently enacted major pieces of legislation without adequate assessment, and the actual or prospective unintended consequences are worrying. As new proposals such as Standard Working Hours (“SWH”) and Class Actions work their way through the system, our unease grows. We do not believe there has been a thorough analysis of the implications of reducing the total number of hours worked in our economy each year. Nor do we have at hand a total understanding of the impact on our regional competitiveness of SWH’s effect of increasing the overall cost of doing business. Similarly, we have not seen evidence of a comprehensive assessment of the benefits to be earned through adopting a confrontational class action judicial structure. Nor can we point to the clear costs of failing to introduce such a programme.  We cannot emphasize enough the need to ensure that the community fully understands all the implications of the choices it makes, and does so without fear that the best conclusion might be, “No, that won’t solve the problem.”

6.     As to electoral arrangements, we believe that any proposed changes should be gradual and orderly, consistent with the Basic Law, as well as reflecting the principle of balanced participation. Overall, whilst agreeing with the ultimate goal of achieving universal suffrage in Hong Kong, the business community wishes the proposal adopted be one conducive to maintaining a stable business environment.

7.     The following are top-of-the-mind as we communicate with you the concerns and wishes of the business community. Our concrete proposals are laid out in the attached appendices.

I. Manpower quality and supply

8.     The labour supply situation that has been driving up costs, curtailing economic growth and frustrating both workers and employers for the past few years is getting worse. The retail, construction, accommodation and food services, information technology and elderly care sectors, as well as theme parks and the airport are all reaching critical levels of staffing shortages. Unfilled jobs as a percent of the employed workforce are at their highest level in 20 years. This cannot go on.

9.     This is not, as some insist, a case of callous employers being unwilling to pay what the market will bear. If wages were the determining factor, we would see a rapid influx of workers from among middle-aged women whose participation in the workforce is dramatically lower than it is for men of the same age. The Government’s own studies show that this untapped workforce is not going to be easily enticed into taking up the jobs that need filling. We will address this structural problem more fully in Appendix I.

10.   The immediate need is to fill unfilled jobs, and that means labour importation on a scale significant enough to make a real difference. We are not insensitive to the political difficulty such a decision entails, but neither are we willing to admit that nothing can be done. The Government can, and must take the lead, most notable by reviewing the Supplementary Labour Scheme and importing people to work on infrastructure projects.

11.   Work needs to be done, and if there are not enough hands to finish the job, less qualified people will be hired and they are asked to work longer hours. Tired and inexperienced workers make mistakes, and we have already seen an increase in work-related injuries. In the construction industry, labour shortage not only impacts work quality and safety with a rapid climb in accident rates, but also leads to substantial price increases. We do not accept that a strident, politically motivated objection to labour importation trumps the need to protect workers’ lives. It is time to break this impasse, and one way is for the Government to lead by example.

12.   Over the medium term, we need to keep the workers we have and attract more people to take up employment. Flexible employment options and extending retirement age will help, and the business community has moved in this direction for many years. The Government needs to do the same, as the Civil Service is facing its own demographic challenges. We also need to create an apprenticeship system that shares the cost of enhancing the skills of school-leavers. Vocational training and retraining must be the foundations of our pillar industries.

13.   On a longer-term horizon, we must recognize that our labour force will begin to shrink in just a few short years. The problems facing us today are not going to ease as global growth gets back onto an even footing. Nor are we going to find solutions in limiting working hours, raising pay or otherwise adding to the cost of doing business. We need to understand why young people are unwilling to take up the jobs on offer, or lack the skills needed for the work they desire. As a global business and financial centre, Hong Kong presents young people with a vision of prosperity and fulfilment. Parents raise their own, and their children’s expectations to possibly unrealistic levels, leading to frustration and alienation. This, we need to change. As to the consultation on population policy which touches upon manpower and related issues such as MPF, we will prepare a formal response in another paper.

II. Education

14.   A world-class city, by definition, offers top quality education recognized and respected around the globe. While our tertiary institutions are winning recognition, primary and secondary education is unworthy of our ambitions. Hong Kong is the most global city in the world that does not take as a basic standard the International Baccalaureate or its equivalent, and today, and in the future, this failing hinders our growth.

15.   Despite the tremendous outlay of government expenditure on education, the investment in human capital does not appear to provide a proportionate positive return. Frequent change in curriculum has made life difficult for schools, teachers, parents and students. While the conversion of polytechnics and a few other tertiary educational institutions in the 1990s have created the illusion of significantly more university places, the actual capacity of tertiary education in Hong Kong has not expanded since the opening of HKUST. The introduction of Associate Degrees has further reinforced the perception that the Government encourages university education. We do not disagree, but worry that those school-leavers, unable to take up higher education, are unsuited for our job market, and this trend will have harmful long-term consequences. Our young people seem to think the only career worth having is in finance, leaving an insufficient supply of talent in the engineering, IT and trades professions. Accordingly, the Government should help promote the latter’s popularity and future prospects so as to increase young people’s exposure to these professions.

16.   The lack of trust in the public school system, which drives many local families to ESF and international schools, tells us that English as a medium of instruction is the most desirable. This Chamber agrees, and urges the cultivation of a quality English-based educational alternative at affordable cost as a basic characteristic of a world-class city.

III. Staying competitive

17.   Hong Kong will never be an inexpensive place to do business, but it is and must remain a top choice for those who can afford to be here. That means we need to pay greater attention to why companies locate or relocate elsewhere. The most often cited reasons are the cost of doing business and the quality of life.

18.   We need to raise our game. By manipulating the breadth of taxes and introducing fiscal incentives, our key competitors can often match or even beat our “low” tax rates. Through paperwork cutting, one-stop shops and customer-oriented approval processes, they further reduce the cost of complying with necessary regulation. At the same time, they recognize that first-class cities must offer a quality living environment and internationally recognized educational curricula.

19.   We have work to do. Our headline profits tax rate looks good on paper, but numerous studies have shown that we are rapidly losing ground. The World Bank estimates that the effective profits tax rate in Singapore is 6%, in Malaysia 7.5%, in Taiwan 12.7% and 17.6% here in Hong Kong. While other economies have diversified away from dependence on profits taxes, we have not, and it is beginning to show.

20.   The Chamber proposes a reduction in the tax rate on the first $2 million of assessable profits to 10% for the purpose of boosting our international competitiveness and by a means that primarily benefits SMEs. The change is simple, effective, inexpensive and fair. Details are spelled out in Appendix II.

21.   For smaller companies, cash flow is the key to survival. A lower tax rate will help, and we believe that it is an idea whose time has come. While we recognize the Government’s concern for maintaining recurrent revenue, repeated and large surpluses suggest that it is time to fulfil the now 12-year old commitment to return the profits tax rate to 15%, and to provide a small concession on the first tranche of earnings.

22.   Together, the 15% general rate and 10% rate for the first $2 million taxable profits would reduce the cumulative budget balance over the past eight years by about one-quarter. Instead of the estimated $515 billion in surplus revenues over identifiable needs, in the 2005-06 to 2012-13 period the total would be around $385 billion. If these policies were put in place at the beginning of this eight year period, our reserves at the end of 2013-14 would remain well over $600 billion, more than enough for contingencies. Surely that money would be better utilized in the hands of those who earned it, rather than sitting idle in our fiscal reserves. Moreover, this would be accomplished without narrowing the tax base at all.

23.   We also would urge relaxation of the time companies have to pay the final tax owed, without the imposition of penalties or interest. To reduce unnecessary paperwork, we believe that the Companies Ordinance should be amended so that smaller incorporated companies can dispense with the audit requirement. Revising the Inland Revenue Ordinance to allow these firms to file a very simple profits tax document would also reduce costs and free up scarce management time.

24.   These measures would help wean SMEs off of the SME Loan Guarantee Scheme, which we believe must be continued indefinitely, or at the very least until indigenous corporate cash flows are able to take up the slack.

IV. Land supply and usage

25.   Land has always been a scarce commodity in Hong Kong and likely always will be. To manage this resource, we believe that the Government should articulate a detailed land supply roadmap that takes into consideration competing demands and provides multi-pronged solutions. Our specific recommendations are found in Appendix III.

26.   One of the more pressing needs arises from the inadequate space available for residential development, which has fuelled deep concerns in society. To address this shortfall, we recommend developing the existing “brownfield” sites and rezoning and relocating existing facilities, before embarking on scalable new land reclamation.  As both labour and land shortages are equally important, even when we have the additional land, the labour shortage situation if unaddressed will waste the efforts of increasing land supply.

27.   Demand for commercial space is being slowly satisfied through development of new business districts, although the market may remain distorted by the double stamp duties imposed on non-residential properties in the medium term. Over the longer term, flatted factories and other underutilized space should be consolidated for combined office and retail use. Much of the land recovered in these ways is suitable for a variety of uses. However, a few areas are specifically required for more focused uses. In particular, the harbour front is primarily attractive for developing tourist, recreation and dining facilities. Similarly, it is of great urgency that we expand the space available to support our shipping and logistics industry. We believe that it should be a priority to consolidate some of the wider port facilities, and remove or relocate facilities currently in close proximity to the port but which may be adequately located further away.

V. Caring for the environment

28.   A clean and sustainable environment is crucial for the city to maintain its attractiveness to both domestic residents and foreign investors, and hence its competitiveness compared to neighbouring economies.

29.   The Chamber fully supports the initiatives the Government is taking to tackle our poor air quality, most particularly by getting heavy polluting vehicles off the road, implementing bus route rationalization and preparing legislation for ocean-going vessels to switch to ultra-low sulphur diesel while in Hong Kong waters. Where appropriate, we suggest that the Government should, in devising these policies, maintain a balance between the environmental objectives and their consequences, such as the cost impact and reliability of services. More importantly though, any sustainable and significant improvement in air quality probably requires regional cooperative effort, which should be made more visible to the public.

30.   Being a true believer of the polluter-pays principle, the Chamber is a strong advocate of developing a comprehensive package of waste management measures. Such proactive measures include incentives for waste reduction at source, landfill and waste charging, facilitation of the development of the environmental and recycling industries, consideration of a producer responsibility scheme, development of a circular economy, and construction of a large-scale waste-to-energy integrated waste management facility. Overseas experience confirms that fiscal support is necessary if private sector recycling efforts are to reach a financially sustainable critical mass. Therefore, we urge the Government to review its current support for the recycling industry to see if additional resources should be allocated.

31.   Similar to neighbouring jurisdictions, recycling is one of the primary tools employed by Hong Kong in treating municipal solid waste. Yet, we remain over-reliant on landfill, and this must be addressed. Government statistics indicate that our existing landfill sites will reach their full capacity in 2014-19. The Government’s proposal to expand the landfills was defeated in LegCo during the past legislative year, but this cannot be the final word. The Chamber supports the expansion of the landfills as the only viable option when other options are not yet available. In the long run, while the Government should continue to promote waste reduction at source and recycling, there is an urgent need to develop large-scale waste-to-energy facilities to treat massive volume of residential waste in Hong Kong.

32.   Cleaning the air, reducing waste and recycling all require firm government leadership and support. The Hong Kong SAR Government should set itself the target of being among the ‘greenest’ administrations on earth, leading by example so that the rest of society follows.

VI. International and regional positioning

33.   Our vision of Hong Kong, which we believe to be shared by many, is that of an international city deeply integrated with a thriving hinterland and competing with the very best in the world in terms of governance, regulation, quality of life and respect for the environment. We have many of the foundations firmly in place, but further work needs to be done.

34.   Our economy outperformed most of the other global business and financial centres over the past five highly tumultuous years. While we will continue to see our overall growth rate dictated by the ebb and flow of trade and external demand, the opportunities standing on our doorstep are the envy of less well-positioned competitors. Our capital markets, tourism flows and value-added logistics all depend on our maintaining and enhancing the international character we cherish. It is understandable that differences between our own and our visitors’ culture and mannerisms will periodically rub us the wrong way. But, we need to be sure that such friction does not endanger our cross-border relations or become so deep-rooted that it taints our reputation.

35.   Since the conceptualization of the Pan-Pearl River Delta Region in 2003, and the establishment of the Pan-Pearl River Delta Regional Co-operation Framework Agreement a year later, the business opportunities available to us have blossomed. After investing heavily to explore, investigate and invest, the low hanging fruit has largely been harvested. Today, the challenges are not identifying opportunities but managing government regulations, and the systemic differences in legal, accounting, cultural and other practices. Government to government discussion and cooperation to overcome these barriers to future prosperity for all sides are both warmly welcomed and strongly supported.

36.   The Chamber applauds the recent establishment of a joint SAR-Guangdong-CPG working group to enhance the implementation of CEPA. We look forward to seeing concrete outcomes as they emerge, and will provide whatever assistance and advice may be useful. Not long ago, Hong Kong was head and shoulders above the other ‘9+2’ jurisdictions. We had hoped that the Government would take a leading role to pave the way for deepening the integration and allowing more involvement of Hong Kong businesses in regional development. Now that chance may be passing us by as the gap between Hong Kong and most of the neighbouring provinces has significantly narrowed.

37.   As noted elsewhere in this submission, areas such as the environment, education, infrastructure, logistics, tourism and even elderly care can best be addressed with regional solutions and cooperation. Blending the strengths of each place with the needs of the others creates synergies and scale economies that few would achieve alone.

38.   From the beginning, Hong Kong has used its own resources in combination with others to build a strong and competitive economy. This must continue, and we believe that the Government should make use of our Mainland ties to enhance the growth of the local business sector in both the Mainland and overseas markets. In this vein, we fully support the Government’s efforts in trying to gain entry to the China-ASEAN Free Trade Agreement, and similar arrangements with Korea and other economies.

VII. Conclusion

39.   Many of the recommendations made above are specifically focused on supporting our SMEs, and we believe that the time has come for the Government to make a strategic investment in ensuring that these backbone companies are able to afford the high cost of operating in Hong Kong. Among our suggestions are measures that might also benefit larger companies, but we do not believe this should prevent action to shore up the cash flow and sustainability of smaller firms. To maintain our non-discriminatory and simple regulatory and fiscal regime, steps such as the 10% initial profits tax rate should be introduced across the board.

40.   We have the resources, yet we have delayed too long in addressing our pressing labour, land and fiscal challenges. The Chamber is prepared to stand together with the Government to take the steps necessary to ensure Hong Kong’s long term sustainable and equitable progress.

Appendix I

Labour Shortage

Labour supply is an increasingly pressing issue for Hong Kong, and we have reflected this in our submissions to and discussions with senior officials and legislators.  The worsening situation is already taking percentage points off our economic growth rate, and threatening to undermine our competitiveness. Companies that cannot find the staff they need may have to move functions to where workers are more readily available. Those that do not have this option will contribute to wage inflation and its knock-on effects. It will inevitably chip away at our quality of service and ultimately the quality of life in Hong Kong. Accordingly, it is vital for the good of Hong Kong to find a pragmatic way forward that will be to the advantage of all stakeholders.

I-2.  The Chamber understands that the current difficult manpower situation requires many employees in Hong Kong to work long hours.  In fact, employers are suffering as well.  According to Government statistics, sectors that have suffered particularly severe manpower shortages for an extended period of time (over 36 months) include import/export trade, wholesale and retail trades, accommodation and food services, social and personal services, and construction. For certain low-skilled jobs, even offering an hourly wage of $50 – well above the statutory minimum wage – attracts few people willing to take up the work. It has severely undermined not only normal business operations but also economic expansion. The wage spiral will drive consumer prices higher, which will have its most severe impact on the less well-off and those on fixed incomes.

I-3.  In addition to a serious skills mismatch, we have a longer-term, more difficult challenge ahead. Young people, and to an extent their parents, do not seem to find the jobs available in our economy to be up to their expectations. While we admire those with high aspirations, obtaining the education and skills needed takes hard work, and many young people do not seem to have sufficient willingness to take the first step on the ladder toward a fulfilling and rewarding career. The skills mismatch problem is thus compounded by one of attitude.

I-4.  Projections suggest that Hong Kong’s domestic labour force will begin to shrink after 2018 as the impact of population ageing becomes more evident. Therefore, it is time that the Government critically studies the manpower issue and starts planning before it is too late.

Proposals

I-5.  To facilitate a comprehensive review of manpower options, we propose the following:

I-6.  We should first examine the existing domestic labour supply to see if there may be some hidden spare capacity available to fill existing vacancies. According to Census and Statistics Department data, the latent labour force amounted to 2.4 million in 2012, and around 518,800 of them were female home-makers aged 30-59. The Government should study ways of bringing more of these potential workers into the labour force. Among the possible solutions are flexible work hours, extending retirement age and other incentives to increase labour participation rate among youth, homemakers and early retirees. We welcome the recently released consultation document on population policy, and will be sending you our expanded comments once we have consulted our members.

I-7.  For youngsters in particular, we would support the development of apprenticeship schemes, supported by financial incentives and transportation allowances, as appropriate, for those sectors experiencing acute labour shortages. While the Vocational Training Council is already organizing a number of apprenticeship and traineeship schemes, we believe introducing more schemes covering a wider range of industries could yield positive results. Nonetheless, these programmes as well as other retraining initiatives all take time to implement and thus they are medium-term solutions at best. It is obvious that for the imminent labour shortage problem, we do need a quick solution before it causes more serious damages to our economy.

I-8.  For immediate relief of the labour shortage problem, the Government should take a more proactive stance on labour importation. Existing programmes are not meeting the economy’s needs, as evidenced by the lack of a comprehensive examination on the 17 year-old Supplementary Labour Scheme (“SLS”). It is time for a review of lessons learned, and adjustments to the implementation structure.

i)               Under the current arrangements, 26 job types are taken out of SLS. The Chamber strongly recommends the Government to take a balanced and objective look at the scheme, with all relevant facts and data, to explore the feasibility of importing labour for specific sectors suffering from acute shortages.

ii)             On the approval arrangement of the scheme, the present arrangement of having an equal number of employer and employee representatives to vet applications does not work. In many cases, the votes are tied, resulting in inaction. In other jurisdictions, such as Singapore and Macau, the application and approval process is commonly handled within the Government.

iii)           While we agree that it is imperative that local workers be given priority in hiring, the persistently wide gap between supply and demand, and between skill availability and skill requirements, points directly to imported labour as the obvious solution.  The Government should take the lead by importing workers on a project-defined basis. This will free up workers to take up employment in the private sector. We have ample experience setting clearly defined boundaries and conditions under which companies may import workers, and so there is no practical reason for delay. The construction industry, in particular, is facing a rapidly aging workforce and mounting unfilled vacancies. Despite offering higher and higher wages, the industry struggles to attract young blood. We recognize that there are political challenges to be overcome, but persistent labour shortage creates health and safety risks. Elderly care is another example of an extremely difficult situation, as are the retail and food services sectors.

Appendix II

Tax competitiveness

The Government typically receives more than one-third of its annual revenues in the final fiscal quarter. As such, and considering trends to date, it would appear that we are concluding our ninth year of excessive budget surpluses. We believe that these funds do not need to be taken out of the economy and into the reserves in such large volumes, year after year, and that better fiscal management would seek to reduce revenues to something much closer to identifiable needs.

II-2.Both the domestic and international business environments are extremely challenging. Demand is uncertain at best and, in the case of some of the largest, most developed economies, still declining. Rising costs at home are pushing corporate cash flows to the brink. The most vulnerable are our SMEs, and they are the ones who would most benefit from the set of policies we advocate below.

II-3.The 300,000-odd SMEs in Hong Kong currently account for more than 98% of local businesses and are responsible for employing about 47% of the total workforce. Given the significance of this segment of the business population and its contribution to the health of the economy, it is only appropriate that the Administration should do more to nurture and support them to sustain the virtuous cycle of job creation, economic growth and also improved tax revenues.

Proposals

Two-tiered profits tax system

II-4.The Chamber believes that the time is right to introduce a very simple two-tiered profits tax structure. We propose immediately reducing the standard rate to 15% and further reducing the rate imp