HK unveils HK$92b Budget surplus

Hong Kong

HONG Kong's new Financial Secretary Paul Chan on Wednesday doled out sweeteners and set the stage for a long-awaited tax-system revamp and a more flexible approach to fiscal policy in his maiden Budget address.

Mr Chan, who has been in office only a month following the sudden resignation of his predecessor and chief executive hopeful John Tsang, also emphasised that innovation and technology (I&T) would be a new engine of growth.

He opened his two-hour speech with an overview of Hong Kong's 2016 economic performance. The city's growth rate progressed from 1 per cent in the first quarter to 3.1 per cent in the fourth, and finished the year with a modest growth rate of 1.9 per cent - in line with the 1-2 per cent growth forecast last year.

The unemployment rate averaged 3.4 per cent last year, and the underlying inflation rate was 2.3 per cent; 2016 was the fifth consecutive year of easing.

Mr Chan disclosed that the city is set to post a HK$92.8 billion (S$17 billion) surplus by the end of the 2016-2017 fiscal year on March 31. This is more than eight times the initial HK$11.4 billion estimate, with the majority of this surplus coming from "the far-higher-than-expected land revenue and stamp duties on properties", he said.

Revenue from land sales alone is set to come in at HK$50.8 billion, 76 per cent higher than the original estimate; stamp-duty revenue for the whole year will be HK$8 billion, 16 per cent higher than estimated "as a result of a period of hectic trading in the property market last year".

Mr Chan said he would "take a forward-looking approach to put HK$61 billion of the surplus to good use" in a slew of initiatives aimed at the long-term benefit of the community.

The sum will comprise allotments of:

He also announced HK$35.1 billion in short-term relief measures and tax breaks, which, together with other spending initiatives in the Budget, "will have a fiscal stimulus effect of boosting gross domestic product (GDP) for 2017 by 1.1 per cent".

Included are one-off relief measures such as reduction in profits tax for 2016-17 by 75 per cent, subject to a ceiling of HK$20,000.

In addition, five recurring tax measures will start this year. One of them is the widening of the marginal bands for salaries tax to HK$45,000; this would in effect lighten the tax burden for 1.3 million taxpayers and reduce tax revenue by HK$1.5 billion a year.

Mr Chan said: "My endeavour is to make use of the wealth we have accumulated together through hard work to take care of the needy in the society, ease the heavy burden of middle-class families and make appropriate investments essential for building a better Hong Kong."

Also outlined in his Budget was forthcoming legislation aimed at providing a tax concession to attract aircraft-leasing companies and enhancing regulations to combat money laundering and terrorist financing.

Acknowledging the calls for tax cuts, concessions and the broadening the Hong Kong's tax base, Mr Chan - a former President of the Hong Kong Institute of Certified Public Accountants - announced the setting up of a new tax policy unit "to comprehensively examine these tax issues". This could give the city's tax system its first major revamp in decades.

He added: "On the one hand, we will seek to align our tax practices with international standards and actively study ways to foster the development of pillar industries... so as to ensure that Hong Kong remains competitive and can create wealth.

"On the other hand, we will enhance our tax regime and explore broadening the tax base and increasing revenue, so as to ensure that adequate resources are available to support the sustainable development of our society."

The new unit will also look into enhanced tax deductions for expenditures in innovation and technology (I&T), another key plank of his Budget speech. Identifying I&T as a new engine "to power the sustainable and diversified economic development of Hong Kong", he announced the setting up of a new committee on I&T development and Hong Kong's re-industrialisation.

"We believe that I&T can drive Hong Kong's re-industrialisation, thereby facilitating the development of a high-end manufacturing industry conducive for Hong Kong, promoting economic growth and creating quality jobs."

With technology also transforming financial services, he announced that the Hong Kong Monetary Authority will develop a "faster-payment system" for a real-time, round-the-clock interbank payment platform as early as next year to boost the electronic payment infrastructure.

Looking ahead, Mr Chan estimated that in the next fiscal year, the government will collect HK$507.7 billion in revenue and spend HK$491.4 billion to yield a surplus of HK$16.3 billion; its fiscal reserves will stand at HK$952 billion.

In a departure from previous more-conservative Budgets geared towards generating surpluses, he forecast deficits in upcoming fiscal years, while calling for a "certain degree of flexibility" in fiscal policy-making.

From 2018-2022, growth of recurrent government expenditure is estimated to be at between 5.3 per cent and 9.8 per cent per annum, consistently higher than the average annual nominal economic growth rate of 4.5 per cent over the same period.

"Hong Kong, as a small, externally-oriented economy, is highly susceptible to the influence of the external environment and cyclical fluctuations, and short-term fiscal imbalance is probably inevitable," said Mr Chan.

"Some expenditure increases are justifiable, as in the case of welfare spending, since the government is catching up on service delivery. Some other expenditure items are investments and the potential returns may be realised only in the future. I consider that it is most important to spend only when necessary and to act with prudence and strive for an overall fiscal balance over time."