By Hong Liang (China Daily)
Updated: 2007-10-16 07:30

Tax cuts and ambitious development programs do not go together very well.

Doing both at the same time while trying to maintain a budgetary surplus seems to defy conventional economic wisdom.

But that is exactly what Donald Tsang Yam-kuen, Hong Kong's chief executive, proposed in his policy speech last week. With his vast experience in managing Hong Kong's economy, he obviously knew what he was talking about.

Lofty it may seem, the goal set by Tsang for Hong Kong in the next five years is achievable because the bulk of the expenditure in the proposed HK$250 billion ($32.24 billion) program, consisting of 10 different transport and development projects, is expected to come from the private sector.

This ambitious program can be seen as a declaration of confidence in Hong Kong's future by the private sector that is expected to put its money at stake.

Tsang said the projects would add value amounting to a combined HK$100 billion a year to the economy, or 7 percent of GDP. In addition, they would create a total of 250,000 jobs.

As such, the proposed development program could help underpin the sustained recovery of the Hong Kong economy from 2004 after a six-year slump. Since then, the economy has been moving along at a brisk pace, generating annual budgetary surpluses that have boosted the government's fiscal reserves to an estimated HK$400 billion.

Expecting a continuous strong flow of revenue into the government coffers, Tsang proposed a series of social and environmental initiatives costing a total of HK$14 billion in the next five years. Central to these initiatives was the proposal to extend free education for children from nine years to 12.

Optimism about Hong Kong's economic future has apparently prompted Tsang to propose cutting rates for both salary and corporate taxes, with the promise of further tax relief if the economy stays strong.

Based on Tsang's optimistic note, the Hong Kong stock market staged a strong rally on Friday, pushing the benchmark index to an all-time high. The stock market performance is widely seen as a reliable indicator of public sentiment in a commercial town like Hong Kong.

But lurking in the shadows of this rosy outlook is the nagging concern of Hong Kong's long-term relevance to the mainland's economic development when major mainland cities, particularly Shanghai, are rapidly establishing themselves as business centers and commercial hubs.

Entitling his policy speech "A new direction for Hong Kong", Tsang obviously recognizes that fresh thinking is needed to meet the challenges we now face.

"Over the next five years, we need to cultivate a new spirit for these new times," Tsang said. "We need to become new Hongkongers, better equipped to sustain development in the new era."

Urging fellow citizens to adopt a new mind-set, Tsang said people should drop their "small island mentality" so that they can begin looking at themselves in a new perspective.

"Only through leveraging the strengths of our country can we position ourselves globally to create a better future," he said.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 10/16/2007 page9)