HK Budget Mulls Fiscal Sustainability Over Longer-Term
Thursday, February 27, 2014
While Financial Secretary John Tsang put competitiveness as the theme of his
2014/15 Budget, a significant portion of his speech looked at the maintenance
of Hong Kong's healthy public finances in the face of increased spending on
education, social welfare and healthcare.
He said Hong Kong's gross domestic product (GDP) growth for last year was 2.9
percent, a marked improvement over 1.5 per cent in 2012. He forecasted GDP growth
of between 3 percent and 4 percent in 2014, still lower than the average annual
growth rate of 4.5 percent over the past decade.
The revised estimate for government revenue for 2013/14 is HKD447.8bn (USD57.8bn),
some HKD12.7bn or 2.9 percent higher than the original estimate. Amid the uncertain
global economic situation, revenue from profits tax was 8.8 percent less than
originally estimated, while that from salaries tax was 7.8 percent higher than
the original estimate. Despite a revised estimate for government expenditure lower
than the original estimate, an overall surplus of only HKD12bn is expected.
Total government revenue for 2014/15 is budgeted at HKD430.1bn, with salaries
and profits tax, estimated at HKD177.5bn, remaining the major sources of revenue.
Land revenue is estimated to be HKD70bn.
Tsang has budgeted for a marginal surplus of HKD9.1bn in 2014/15, with fiscal
reserves estimated to be HKD755bn by the end of March 2015, representing about
34 percent of GDP and equivalent to 22 months of government expenditure.
However, despite the overall balance in Hong Kong's finances, Tsang devoted
a significant part of his speech to an analysis by the Working Group
on Long-Term Fiscal Planning, which was set up in June 2013 to perform a health check
on the current state of Hong Kong's public finances, and make projections of
Government's long-term fiscal position up to 2041/42.
According to the Working Group's analysis, Hong Kong's overall fiscal position
in the short to medium term remains healthy. In the longer term, however, Government
must seek to align the growth rates of its revenue and expenditure. For example,
if services were to be enhanced following the historical trends at about 3 per
cent annually for education, social welfare and healthcare, government expenditure
would grow by 7.5 percent per year and a structural fiscal deficit would surface
in seven years.
The Group recommends that the Government should "preserve, stabilize and
broaden the revenue base." However, Tsang noted that, having regard to
the competitiveness of Hong Kong and the impact on the community, there is little
room for major tax hikes. He also understood that "it would be controversial
to propose any new taxes, which need thorough consideration and public discussion."
On the other hand, to prevent revenue loss, the Inland Revenue Department (IRD)
is "to step up tax enforcement and make better use of information technology
to combat tax evasion and avoidance, thereby recovering tax payable." The
IRD has already recovered over HKD14bn in taxes over the past three years.
He also confirmed that fees and charges are an important source of government
revenue. Since last year, more than 1,300 fees and charges have been reviewed,
and more than 200 increases have been proposed, reducing the loss of public
revenue by around HKD60 million per year.
Amongst other measures in the Budget, as in previous years, Tsang proposed further one-off relief
measures, aimed primarily at helping the public to cope with short-term financial
pressure, or as a counter-cyclical measure to preserve economic stability and
short-term employment. The tax relief for 2014/15 involves around HKD20bn in
lost revenue, with a fiscal stimulus effect on GDP of 0.7 percent.
These measures include a reduction in profits tax, salaries tax and tax under
personal assessment for 2013-14 (claimed in 2014/15) by 75 percent, subject
to a ceiling of HKD10,000. The tax reductions will benefit around 1.87m taxpayers,
and cost about HKD10.2bn billion.
With regard to the development of the financial services sector in Hong Kong,
Tsang recorded his proposal in last year's Budget to allow private equity funds
also to enjoy tax exemption for offshore funds to attract them to expand their
business in Hong Kong. He confirmed that an industry consultation has been completed
and the legislative work will be taken forward as soon as possible.
With regard to the proposal to introduce an open-ended fund company structure
to attract more funds to establish in Hong Kong, relevant regulatory frameworks
have been drawn up and consultation will begin next month.
Furthermore, while, in 2010, Tsang extended the stamp duty concession to cover
exchange traded funds (ETFs) that track indices comprising not more than 40
percent of Hong Kong stocks, he has seen that the number of ETFs listed in Hong
Kong have since seen a substantial increase from 69 at end-2010 to 116 at the
end of last year. The daily average turnover of ETFs has also increased from
HKD2.4bn to HKD3.7bn, making Hong Kong one of the largest ETF markets in the
He has therefore proposed to waive the stamp duty for the trading of all ETFs,
so that the trading cost of ETFs with a higher percentage of Hong Kong stocks
in their portfolios can be reduced as well. He hoped that this will help promote
the development, management and trading of ETFs in the city.
Finally, as Hong Kong already appears to be a popular place for multinational
enterprises to manage their global or regional treasury functions, and to draw
more of these functions to Hong Kong and enhance its strengths in financial
and professional services, Tsang has asked the Financial Services and the Treasury
Bureau to set up a task force to review the requirements under the tax code
for interest deductions in the taxation of corporate treasury activities, and
clarify the criteria for such deductions. It is to produce concrete proposals
within one year.