Hong Kong Versus Singapore: A Tale of Two Opposite Budgets

The big surprise when Singapore Finance Minister Tharman Shanmugaratnam unveiled the country’s 2015 budget on February 23 was the proposal to raise the top personal income tax rate by two percentage points to 22% on 2016 income. The additional revenue is earmarked for additional spending on the elderly and the poor.

Will Singapore’s move ensure social harmony (and thus retain business confidence), albeit at the cost of higher business expenses? Will Hong Kong’s laissez faire regime eventually lead to grief?

It was the first increase in three decades and raised the question of whether Singapore is eroding its business competitiveness and moving towards becoming a welfare state. Grahame Wright, a partner at Ernst & Young Solutions, called the move a “calculated risk” because it weakens Singapore’s competitive position for highly mobile senior executives.

There are no such qualms in Hong Kong, seen as Singapore’s economic and business rival. When Financial Secretary John Tsang presented his own budget two days later, there was no mention at all of changing Hong Kong’s standard rate for salaries tax, which is currently at just 15%.

Tsang even reduced both the salaries and profits tax by 75%, a one-off measure for tax year 2014-15, and raised basic and additional child allowances for the current and future tax years. And while the budget surplus for the year to March 2015 is estimated at HK$63.8 billion (US$8.2 billion), in contrast to Singapore’s budget deficit of around S$100 million (US$74 million), Tsang’s proposed social spending remains small.

No one can accuse Hong Kong of abandoning its low-tax, laissez-faire approach, which has long been seen as a big attraction for businesses and their senior executives. But there is growing criticism that this business-friendly regime has exacerbated the wealth gap, causing dissatisfaction that could fuel social unrest, such as the recent Occupy Central protests – and eventually affect business confidence.

In perspective

Is Singapore’s proactive move a judicious step that will ensure social harmony (and thus retain business confidence), albeit at the cost of higher business expenses? Will Hong Kong’s laissez faire regime eventually lead to grief, even though the cost of doing business is kept low? Will the competitiveness of the two centers deteriorate, allowing others in Asia and the world to cut into their lead?

To be fair, it should be pointed out that, despite Singapore’s tax changes, its tax rates are still among the lowest in the world along with Hong Kong’s, as shown by the chart below. Even at 22%, Singapore’s top personal income tax rate is still lower than the Asian average of 27.57%, North America’s 34.3%, Europe’s 32.59% and Latin America’s 31.66%.

Singapore and Hong Kong: Still Tax Winners 

But the issue of the day is the relative competitiveness of Singapore compared with Hong Kong in the context of their 2015 budgets.

“Tax rates are not the only way we stay competitive. Singapore has other key strengths”

We compare key indicators from the budgets and other sources, including the World Bank’s ranking of 189 economies on ease of doing business, in the chart below.

Hong Kong Versus Singapore

While both economies seem to be in good health, Singapore is running a slight budget deficit while Hong Kong is enjoying a budget surplus. Hong Kong’s foreign currency reserve, at US$324.8 billion, is also 26% larger than Singapore’s.

Both rank highly in the World Bank’s ranking of ease of doing business, in terms of business regulations for domestic firms, and are practically at full employment, with the jobless rate at 2.9%-3.2%.

But Hong Kong appears to have the edge in terms of labor costs. According to Singapore’s calculations, its median worker’s wage is equivalent to 93% of Japan’s median, while that of Hong Kong’s is 80% of Japan’s.

This is a point of pride for Finance Minister Shanmugaratnam. “The median Singaporean worker’s wage was about 60% of that in Hong Kong in the mid-70s, and less than half of that in Japan,” he says. “Our median wage is now the highest among the Asian NIEs (Newly Industrialized Economies), and is only about 10% lower than in Japan.”

From the point of view of some hard-headed international businesses, however, that differential could be a mark against Singapore. Add to that the levy that employers must pay to import foreign workers (Hong Kong imposes no such charge) and the higher top rates for personal income and corporate taxes, and some companies may well choose Hong Kong over Singapore in siting their regional headquarters.

Different approaches

But argues Shanmugaratnam: “Tax rates are not the only way we stay competitive. Singapore has other key strengths, including our culturally diverse and cohesive society, a family-friendly environment, clean air especially compared to other Asian cities, and a world-class healthcare system.”

Still, he concedes that “it would be naive to think that we can keep raising tax rates without affecting our competitiveness.” The finance minister implied that there will be no more changes to tax rates in the next five years, since the increase in the top personal income tax rate is forecast to yield additional revenue of S$400 million a year.

“Based on current projections, the revenue measures we have undertaken will provide sufficiently for the increased spending needs we have planned for till the end of this decade,” he says. “This must remain our approach – ensuring that we always have the resources to meet our commitments.”

Ensuring that resources meet commitments is what Hong Kong’s Tsang wants to do as well. Some in the community, however, say he can be more generous in spending and investment, given that stamp duties (partly from current property tightening measures) and profit taxes helped bring in HK$470.7 billion in revenues, 9.4% larger than forecast.

Coupled with government expenditures that came in at HK$397.2 billion, 3.4% lower than originally budgeted, Hong Kong is forecast to reap a budget surplus of HK$63.8 billion in the year to March 2015, equal to 2.8% of GDP.

That’s why, unlike Singapore, Tsang is not fiddling with tax rates. Some of the windfall is also being returned to citizens in the form of salary and tax rebates, waivers on property tax, and additional social security, old age and disability allowances for the needy, as well as a one-month waiver of public housing rent.

But Tsang is mindful of what he calls Hong Kong’s “structural deficit problem” of a rapidly aging population and slowing economic growth. “While Hong Kong would still experience budget surpluses in the coming few years, we need to take early and positive actions to contain expenditure, preserve the revenue base, and save up in a timely manner to avoid the appearance of structural deficits,” he argues.

Securing the future

Both finance chiefs are investing in infrastructure, education and healthcare, with perhaps Singapore doing more at this stage. Shanmugaratnam will spend 4.8% of GDP – about S$20 billion – on a fifth airport terminal, the public transport system and other development works, while Tsang is allocating HK$86.5 billion on capital expenditure, around 3.8% of GDP.

With national elections possible this year, the focus on the middle class and the needy in Shanmugaratnam’s budget is seen, fairly or unfairly, as a way to secure electoral support. There is no universal suffrage in Hong Kong, where the chief executive is not directly elected.

But universal suffrage is promised in 2017, a process that is proving contentious as China, which has sovereignty over Hong Kong, puts forward policies that are at odds with the demands of pro-democracy forces and opposition politicians.

A budget that focuses strongly on the needs of the people, including the middle class and the underprivileged, could conceivably help smooth the political process in Hong Kong. But the emotive issue of an acute shortage of affordable housing, for example, is not really addressed by Tsang’s budget, and is something that no single budget can address, in any case.  

Political stability and social harmony are yet two other factors that business factors in when making investment and expansion decisions. All things considered, it would seem that Singapore could retain and even enhance its competitiveness, the increase in the personal income tax rate notwithstanding.

The question for Hong Kong is whether it can do the same.

About the Author

Cesar Bacani is Editor-in-Chief of CFO Innovation.

Photo credit: Shutterstock