| "Hong Kong outperforms against budget - but underperforms against expectations"
On 22 February 2006, Financial Secretary, Mr. Henry Tang, delivered his third budget speech. True to form, there were few surprises, with a continuing emphasis on fiscal and budgetary discipline in the face of continuing economic uncertainty. However, with burgeoning economic growth and reduced Government expenditure, Mr. Tang could afford to relax a little - and did so, with some modest tax concessions to build on those provided in the last budget.
Whilst the $4.1 billion consolidated surplus for the year is better than the forecast deficit of $10.5 billion, it is much less than many commentators had predicted, including ourselves. The $4.1 billion is still an estimated figure and we would expect the final outturn to be considerably greater. Nevertheless, the narrow surplus announced by Mr. Tang supports the Government's current objectives.
The deficit of $1.7 billion on capital account is particularly surprising as it appears to imply that the Government will receive little or no revenue from lease modifications, extensions and changes in the last three months of the current fiscal year. This would seem questionable given the fact that over $13 billion of revenue was generated from this source in the first nine months of the year. It is pertinent to note that the revised medium range forecast reflects a reduction in land revenues of over $3 billion (or just under 10%) a year over the next five years. Despite this, expenditure on capital projects is set to increase over the same period.
On operating account, it also appears that the Government has been cautious in its revenue estimates.
Mr. Tang's speech also revisited some familiar themes. There were welcome words of encouragement for the financial services industry - with the development of the Renminbi business seen as a testing ground for a move towards full convertibility for the currency. Tourism and logistics also continue to be seen as crucial to the development of the economy. However, there was little in the way of real measures to promote the level of education and skills necessary to push Hong Kong up the value chain.
With Mr. Tang acknowledging that Hong Kong's tax base is too narrow and prime sources of revenue too volatile, the subject of a Goods and Services Tax once again found a place in the speech. A public consultation exercise on the tax will now finally go ahead, and anticipating the likely degree of debate this will generate, the consultation period has been set at nine months, commencing in the middle of 2006. In recognition of the potential impact of a GST on people's purchasing power, tax reductions and increased CSSA payments are proposed as part of the compensatory measures that would accompany the tax. However, with the consultation now stretching into 2007, and a three year timescale for implementing the tax after reaching a decision to go ahead - not to mention the likely political barriers ahead - a GST still looks like a distant prospect.
In the run up to the budget, expectations were running high that Mr. Tang could afford to hand back some of his budget surplus by way of reductions in salaries tax. Others believed that largesse of this kind should be directed to the poorer in the community. In the event, the estimated surplus was much smaller than many expected, but there was still something left in the bag for taxpayers, in the form of reductions in the second, third and top marginal tax rates and extension of the limit for deduction of home loan interest. Those expecting a one off tax rebate will have been disappointed. Those with mortgage home loans can expect to see a reduction in their tax bills of some 15% on average, although the average saving for those without a home loan is no more than 9%.
Consideration for those outside the salaries tax net is limited to extra funding for Government support of certain disadvantaged groups in the community and the unemployed.
Little else was said in relation to taxes. The lack of any changes to Profits Tax, Stamp Duty and Rates was not surprising. As for measures to protect the environment, a few limited proposals were mentioned, but there was no hint of the kind of 'mindset' change in environmental protection that many of those living and working in Hong Kong now believe to be necessary.
In the past, we have compared Mr. Tang to being at a crossroads, needing to choose between a path of traditional reliance on land revenues and economic growth, and more radical measures. Mr. Tang still tarries at the crossroads.
While acknowledging the many challenges facing Hong Kong, including an aging population, a degrading environment and a narrow tax base, concrete and decisive measures to address these issues remain absent. Nevertheless, we agree that firm fiscal and budgetary control over the Hong Kong economy needs to be maintained, and in the event Mr. Tang has understated the surplus for the year he will have put something away for the uncertain economic times that may lie ahead.
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