| "Cheers! Both Hong Kong and its Financial Secretary outperform expectations (for almost everyone)."
On 28 February 2007, Mr Henry Tang, Hong Kong's Financial Secretary, delivered his fourth budget speech. Unlike his previous budgets, his last before the forthcoming election for Hong Kong's next Chief Executive contained a number of surprises, including a better-than-expected budget surplus and generous tax concessions and handouts. However, despite these surprises, some in the community, especially businesses, may argue that more should have been done for them.
At $55.1 billion, the revised consolidated surplus for 2006/2007 is nearly $50 billion better than the $5.6 billion originally forecast 12 months ago. The surplus for 2006/2007 is the largest since the record surplus of $86.8 billion achieved in 1997/1998. This dramatic improvement is thanks again to better-than-expected investment income, stamp duty and land revenue collections, together with expenditure savings. In previous years, the final outturn for the fiscal surplus or deficit has normally been better than that announced on Budget Day. With the $55.1 billion surplus being higher than many commentators expected, including ourselves, it remains to be seen whether that trend will be repeated this year.
Looking ahead to 2007/2008 and the following years covered by the MRF, the Government is predicting a period of sustained and increasing budget surpluses. The MRF is based on an underlying assumption of a trend growth rate for Hong Kong's economy in real terms of 4.5%. It also assumes continued strong collections from land sales and other land revenues, and investment income of over $30 billion each year. On the other hand, the targets for the revenues from the sale of Government assets over the period have been revised down from $52.6 billion to a mere $28.6 billion - with no explanation or reasons given. All in all, the MRF presents a rosy picture for Hong Kong.
While many in the community will hope that Hong Kong's strong economic performance can indeed be sustained as the Government predicts, some may question whether the surpluses in the MRF are overly optimistic. Only time will tell, but there are still a number of risks that Hong Kong faces. The strong performance in 2006/2007 is due to a strong local property market and booming equity markets, both locally and globally. But these are highly volatile sources of revenue for the Government.
As far as the tax measures and concessions Mr Tang announced are concerned, as had been widely predicted ahead of his speech, Mr Tang did restore the marginal tax rate and bands back to their 2002/2003 levels. The measure will benefit the vast majority of Hong Kong's taxpayers. The increases in allowances for children had also been predicted, but will still be welcomed by many.
Mr Tang did, however, surprise us with the extent of the concessions in relation to the waiver of rates, salaries tax and tax paid under personal assessment. These were much more generous than expected. However, while the changes in the marginal tax rates and bands have an ongoing effect, these waivers are simply one-off.
Moreover, none of the measures announced by Mr Tang will have an immediate effect on taxpayers' wallets - no cheques are in the post! The salaries tax measures announced will only be realised in the form of reduced tax payments in January 2008, while the benefit of the waiver of rates will be enjoyed in April and July this year. Given the healthy surplus he announced, some may wonder why Mr Tang refrained from giving the relief earlier.
Despite Singapore's recent announcement to cut its corporate tax rate from 20% to 18%, Mr Tang resisted the urge to make changes to Hong Kong's profits tax rate. However, assuming Hong Kong's continued economic prosperity, it is likely that a reduction in the profits tax rate will be announced by the Government of the next term. Many of the expenditure measures that Mr Tang announced to promote the economy and employment, and to improve people's livelihoods were also one-offs. Given the surpluses predicted over the MRF, perhaps some of these measures could have been bolder.
Over the years, much has been said and written about Hong Kong's narrow tax base and the possible need for tax reform. But in his 2007/2008 budget, Mr Tang only devoted one paragraph to the topic. While a Goods and Services Tax is no longer being advocated, the Government still wishes to receive the public's views on other ways to broaden the tax base. A report on the topic will be prepared after the conclusion of the consultation period at the end of March this year, and submitted for consideration by the Government of the next term.
In summary, this year's budget was generally full of good news and the prospects for Hong Kong over the coming years seem excellent. The challenge for the Government of the next term will be to deliver on Mr Tang's predictions.
|
