XN000022-1984-03-29 — Page 4

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THURSDAY, MARCH 29, 1984

MR BROWN NOTED THAT THE MOVE AWAY FROM THE TERRITORIAL CONCEPT DID CAUSE LEGITIMATE CONCERN AND THAT ANY FURTHER ATTEMPT TO APPLY HONG KONG TAXATION TO ALL INCOME IRRESPECTIVE OF ITS SOURCE COULD CREATE SERIOUS REPERCUSSIONS FOR THE ECONOMY, THUS HIS CALL FOR A RECONFIRMATION FROM THE FINANCIAL SECRETARY,

TURNING TO THE BUDGET DEFICIT, MR BROWN SAID IT WAS A FAIR ASSUMPTION THAT CYCLICAL FACTORS RELATED TO THE DOWNTURN IN THE ECONOMY HAD PLAYED A PART IN FIRST PUSHING GOVERNMENT INTO THE RED.

HOWEVER, HE FELT THAT THE FORECAST THAT TOTAL EXPENDITURE WOULD STILL EXCEED TOTAL REVENUE IN A PERIOD WHEN THE RECOVERY IN THE ECONOMY ENTERED INTO ITS SECOND AND THIRD YEAR, OR EVEN FURTHER AHEAD, SUGGESTED THAT A CERTAIN PORTION OF THE DEFICIT MIGHT IN FACT BE STRUCTURAL.

POINTING OUT THAT STRUCTURAL DEFICITS OF COURSE ARE

NOT EASY TO CURE, MR BROWN SAID, THE CHOICE BETWEEN INCREASING TAX RATES TO ACHIEVE A HIGHER LEVEL OF REVENUE THAN THE GIVEN GROWTH RATE OF THE ECONOMY, OR THE REDUCTION IN THE RELATIVE SIZE OF PUBLIC SECTOR EXPENDITURE - AS A PERCENTAGE OF GDP - HAS SIGNIFICANT SOCIAL AND POLITICAL IMPLICATIONS.+

+GIVEN OUR PRESENT AND FUTURE PLANS FOR PUBLIC WORKS, HOUSING, TRANSPORT AND OTHER INFRASTRUCTURE FACILITIES, AND THE NECESSITY NOT TO COMPROMISE OUR SUCCESS IN THESE AREAS, IT IS NOT REALLY FEASIBLE TO FREEZE THE LEVEL OF CAPITAL EXPENDITURE, AND TO REDUCE THE LEVEL OF RECURRENT EXPENDITURE WOULD BE DIFFICULT, NOT LEAST BECAUSE SUCH EXPENDITURE IS DIRECTED TO EMINENTLY DESIRABLE ENDS, HE SAID.

+ON THE OTHER SIDE OF THE COIN, ACTION IS NECESSARY TO PREVENT THE ACCUMULATED DEFICIT REDUCING THE LEVEL OF OUR 'FREE' FISCAL RESERVES TO AN UNACCEPTABLE LEVEL, HE ADDED.

IN THESE CIRCUMSTANCES, HE SUGGESTED THAT THE BEST COURSE TO FOLLOW WAS A MIX OF INCREASED EFFICIENCY-PRODUCTIVITY OF THE PUBLIC SECTOR, INCREASED TAXES AND FURTHER DEFICIT FINANCING MEASURES.

ON THE SUBJECT OF RETROACTIVE TAXATION, HE SAID, THE POSSIBILITY OF TAX BEING IMPOSED RETROACTIVELY ARISES IN CONNECTION WITH THE PROPOSALS TO COUNTER TAX AVOIDANCE DEVICES IN REGARD TO THE LIABILITY TO PAY PROFITS TAX, WHICH HAVE BEEN MADE POSSIBLE BY THE REMOVAL OF INTEREST TAX ON DEPOSITS.+

HE SAID HE HAD STUDIED THE BUDGET SPEECH CAREFULLY IN REGARD TO THESE PROPOSALS AND FELT THAT IT WOULD BE PREMATURE TO JUMP TO CONCLUSIONS REGARDING THE POSSIBILITY OF TAX BEING LEVIED RETROACTIVELY UNTIL THE ENABLING LEGISLATION WAS LAID BEFORE US AND ONE COULD COMMENT ON FACTS RATHER THAN ASSUMPTIONS.

HE ADDED THAT HE WOULD LIKE TO BELIEVE THAT TAX WOULD NOT BE IN FACT BE LEVIED RETROACTIVELY.

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