Pay pause only patches a small part in city's fiscal debt hole

Hong Kong is in a bit of a pickle, bleeding a colossal amount of cash. When Financial Secretary Paul Chan Mo-po announces the budget this morning, he will most likely announce a freeze in civil service wages to calm a population nervous about the city's rising debts.

A decision to freeze civil servants' pay is the absolute minimum choice the government has to make amid this social atmosphere.

The question is: can it do more?

For example, will top level officials and lawmakers take the lead to show taxpayers they are willing to shoulder more by accepting a reduction, rather than a freeze, in the lucrative wages, perks and allowances that they are getting?

A freeze in civil service pay is more a symbolic gesture that alone would not patch a hole requiring a structural fix. Before Hong Kong is a fiscal dilemma that is more structural than cyclical.

Not that far away in Singapore, people there were recently delighted to hear their government announcing a new round of handouts of shopping vouchers, leaving many here to wonder why Hong Kong cannot be as successful as Singapore's example. Aren't they both Asia's little dragons after all?

Besides a government team decorated with Harvard graduates, Singapore has a tax base broader than Hong Kong's - and this broader tax base offers structural support.

In 2024, Singapore raised S$20.6 billion (HK$119.7 billion) in goods and services tax - more than the S$19 billion in personal income tax. In other words, the GST introduced in 1994 is now the second largest contributor to national income only after corporate tax.

However, timing a GST rollout has to be careful. Rolling it out when Hong Kong's economy is weak and consumer confidence is low can be tricky as this would be like rubbing salt on an open wound if mishandled even though it may offer a chance to reset the fiscal foundations.

Singapore introduced its GST at 3 percent in 1994, and gradually increased it to its current level of 9 percent. Yet, it cushions the impact on people's living with rebates and cash handouts, with low-income households receiving GST vouchers up to S$850 last year.

Japan, too, kicked off its GST - known there as consumption tax - at 3 percent in 1989, and has increased it to 10 percent since 2019. The tax is collected at every transaction stage, hitting most goods and services. In 2023, the consumption tax accounted for a third of the country's national tax revenue.

Nonetheless, the Japanese experience has not been short of lessons.

When Japan increased the tax from 5 percent to 8 percent in 2014, the raise instantly tipped the economy back into recession as consumers started hoarding cash rather than spending it. Retail sales plunged 9.7 percent that quarter.

Will Hong Kong's retail sector be able to survive another punch when the sector already experienced a drop of almost 10 percent in sales in December 2024?

Before Chan is a dilemma nobody envies.

A freeze in civil service pay, while being politically sweet to taxpayers, offers little help to improve a public finance that needs a structural repair. While GST may be a probable solution, it can backfire if announced at the wrong time.

Perhaps, for the time being, Chan has no choice but focus on revitalizing land sales.