Solid foundation: Financial Secretary Henry Tang (right) says Hong Kong should not squander this opportunity to put its public finances on firmer ground so we can build from strength to strength.

Hong Kong's economy is recovering well - but it is still in a fragile situation, Financial Secretary Henry Tang says, explaining why the second-phase salaries tax increases will go ahead as planned.

"We're still suffering from a lot of volatility," Mr Tang told reporters at a press conference following his 2005-06 Budget address. "Based on our experience over the last five years, we know the harm that volatility can bring."

He admitted there were calls for him to cut salaries tax, but the Government would forgo $3.4 billion in revenue if it did not implement the second phase of tax increases.

"My lifelong conviction is to leave wealth with the people," he said. "If there is no absolute need to increase taxes, we will not increase taxes."

His proposal to abolish estate duties was based on the fact that  98% of Hong Kong's  businesses are small and medium enterprises.

"Very often the proprietor calls the shots, and if he should die all of a sudden, usually he hasn't put in the right arrangements," he said. "The Inland Revenue Department will freeze his assets and immediately there will be a cash flow problem for the SMEs."

Abolishing the tax would be a good arrangement, he added.

"We want to develop Hong Kong as an asset-management centre. This will have far-reaching changes, and we make changes with a long-term vision."

In reply to reporters' queries about  a proposed goods and services tax, or GST, Mr Tang replied that he had first mooted the idea when he assumed office in October, 2003. "People then asked why I was being so controversial," he said.

The Government is planning to start the consultation on such a tax this year, he said. It would begin after July 10, he stressed, when the new Chief Executive fills the post left vacant after Tung Chee Hwa's resignation.

"We are a transitional government," Mr Tang said. "What is more appropriate is to have the new Chief Executive first and come up with a timeline for consultation."

People in the community are taking the initiative to discuss a GST, he said. They understand more about it even though his office did not issue any documents on GST, and the acceptance level for GST has increased from 30% to 40%, he said.

He hopes to have a rationale and in-depth, objective discussion in the community on the tax, he stressed.

When asked about the delay in issuing the LINK Real Estate Investment Trust, the listed vehicle for holding retail space and commercial parking spots once owned by the Hong Kong Housing Authority, he stressed that the principle of paying for capital expenditures with capital income still holds.

Land sales - which have fetched far more money than originally estimated - have taken the pressure off privatisation. The Financial Secretary said "the timetable will depend on when we get the best value for our investment."

He added the Administration is still committed to securitise or privatise "as many things as possible at the right time."

"I very much believe in our market economy; our low and simple tax system is what makes Hong Kong what we are today; we want to give the private sector as much room to invest in Hong Kong as possible," he added.

When the Chief Executive made the  suggestion to set up a Commission on Poverty in his January Policy Address, there was some reaction from the middle class, Mr Tang said.

"The public does not want the Government to dish out largesse. That's written in the Budget. I don't think the public will agree that we should hand out cash indiscriminately."

While there are no plans to provide handouts, he said the Budget had earmarked funds "not precisely for helping the poor but for social welfare spending." For example, there is about $320 million set aside for elderly services, and $170 million for rehabilitation services.

"Poverty alleviation does not equal just handing out money," he said, adding the Poverty Commission would establish the best way forward.

The Financial Secretary stressed that his Budget was not designed to win people's support should he choose to run for election as Chief Executive.

"This is a solid, prudent, pragmatic piece of work," he said, adding there was nothing in this budget to pave the way to be the next Chief Executive.

"We are not handing out money lavishly, we are not mapping out a grand plan or blueprint for the future," he said.

"We in the Government adhere to the 'market leading, government facilitating' principle, and maintaining a low and simple tax regime. We are still maintaining our finances prudently. This is not a budget to secure support to be the Chief Executive and I hope the public will accept this budget."

He noted that as Financial Secretary, he had a responsibility to live up to the expectations of the public, and that the Basic Law dictates that Hong Kong must live within its means.

In response to a journalist's query, Mr Tang said: "I wouldn't exactly say this is a campaign speech. I think it is just a very good reflection of what I truly believe in. The economic recovery we are experiencing now is actually something which was very difficult.

"We came through many years of many challenges. Over those years, Hong Kong people became tougher, we became more adaptable and we became harder working. So this recovery didn't come easy. And so we really shouldn't squander this window of  opportunity to put our public finances onto firmer ground so we can build from strength to strength. In order to do this, we have to continue to work together as a team to achieve that."

RMB business promotion innovative

Speaking later on a television forum, Mr Tang said the initiative to grant allowances for taxpayers to care of their dependent parents or grandparents between 55 and 59, will help alleviate their financial burden as many in this age group may become unemployed due to structural change in the economy.

Responding to criticism the budget lacks new initiative, Mr Tang said the introduction of three strategic directions to promote Renminbi business in Hong Kong as well as the study on establishing a clearing and settlement platform for RMB transactions are innovative measures.

On the proposed goods and services tax, Mr Tang said being a transitional government, it is more responsible to handle the situation by launching consultation on such a controversial issue after the new Chief Executive assumes office.

On legal proceedings over civil service pay, Mr Tang said it will impose a grievous burden which could cost the public purse $10 billion if the case is lost.

Mr Tang also reiterated there is no high land price policy in Hong Kong, adding the sale of land is market-driven and the present application list system works well.