Hong Kong has a budget surplus – the UK could too

WHEN Vince Cable arrived too late to hear Hong Kong chief executive Donald Tsang speak at a special dinner in London three weeks ago, some suggested he was saving face. Indeed, where would Cable have looked while Tsang was expounding on Hong Kong’s HK$71.3bn (£5.84bn) budget surplus? How does it feel to be the representative of no-growth Britain?

Some say it is cynical – others that it’s tragic: the UK was the fount of the greatest economic miracle the world has ever seen, yet it continues to opt for the stagnation of yesteryear instead. It was John Cowperthwaite, a British civil servant, who introduced Hong Kong’s free-market economics, lifting Hong Kong’s per capita income from 28 per cent of the UK’s in 1960 to 131 per cent in 2010.

At the Hong Kong dinner, some Brits in the room looked green with envy when Tsang boasted about the HK$6,000 cheque that each one of Hong Kong’s 6m permanent residents aged 18 or above will receive from the Hong Kong revenue. In addition, 75 per cent of salary taxes will be waived, up to a maximum of HK$6,000 per taxpayer.

Not that there is much tax to waive. That De Beers, Chateau Lafite, Rolls Royce, and Vuitton are doing so well in Hong Kong is not thanks to the tourists, but because of the size of the locals’ take-home pay. Corporations in Hong Kong pay a flat tax of 16.5 per cent. Individuals pay a salary tax that is stepped from 2 to 17 per cent, with numerous deductions (mortgages, charitable giving, education, pensions, care of elderly relatives). But the total is topped to 15 per cent, meaning that one can choose to pay whatever is the lowest.

Because of the deductions, most employees pay little or no tax. The top 2 per cent choose the top 15 per cent rate – they account for half of all salary tax revenue.

Hong Kong’s low taxes nonetheless produce a budget surplus of HK$71.3bn. That is after all possible public works and other plans have been taken care of. (Government spending is 18.6 per cent of GDP). An equivalent budget surplus to Hong Kong’s would amount to £51bn for the UK, adjusted for population size.

Hong Kong remains the greatest example on earth of the Laffer curve: proof that total tax revenue can rise through economic growth if you lower taxes. Even today, Hong Kong routinely lowers its tax rates – the maximum rate for its salary tax was 16 per cent back in 2004/2005. As such, Hong Kong has continuously been the world’s most free economy since the Index of Economic Freedom’s inception in 1995. In 2010, Hong Kong’s economy grew by 6.8 per cent; the UK economy grew by 1.25 per cent.

The UK could do this too. It chooses not to, which encourages individuals and businesses to flee to places like Hong Kong. It is very odd: one would have assumed that the coalition government wanted to receive more money, not less.

JP Floru is the author of What the Immigrant Saw, published by Bretwalda Books £9.99.