| Hong Kong said show us the money - the Financial Secretary did, but have the big issues been fully addressed?
On 27 February 2008, Mr John Tsang, Hong Kong's Financial Secretary, delivered his maiden budget speech. As expected, the budget includes a record surplus and generous tax concessions and handouts. These concessions and handouts will benefit a large spectrum of the community. However, despite the giveaways, some in the community may still be of view that some of the big, long-term issues, such as the ageing population and shrinking workforce, healthcare, and the civil servants' pension, have not been fully addressed.
At $115.6 billion, the revised consolidated surplus for 2007/2008 is nearly 4.5 times higher than the $25.4 billion surplus originally forecast last year. The surplus for 2007/2008 sets a new record, surpassing the previous record surplus of $86.8 billion achieved in 1997/1998. Furthermore, there was a change this year (announced in last year's budget) in the method of calculating the investment return of the Government's fiscal reserve with an aim to enhance its stability. The 7% return for the year under the new method is about 60% of what it would have been under the old method. Had the old method of calculating the return on the fiscal reserves been used this year, the surplus for the year would even have been larger by $18.5 billion.
This record surplus is mainly due to the exceptionally strong stamp duty collection on stocks and property transactions (an increase of $27.2 billion over the figure originally forecast), better-than-expected land revenues, profits tax revenue and salaries tax revenue, and the normal savings in predicted expenditure. The huge size of the surplus highlights again the unstable and unpredictable nature of the Government's revenues with respect to stamp duty collection and land revenues. There may again be calls to reduce reliance on these unstable sources of revenue. However, since the Government announced that Goods and Services Tax is no longer being advocated in the Final Report on the Public Consultation on Tax Reform released in June of last year, any dramatic changes in the tax regime in the near term are most unlikely.
Looking ahead to 2008/2009 and the following years covered by the medium-range forecast (MRF), the Government is predicting a period of sustained budget surpluses, except in 2008/2009, which has an estimated deficit as a result of the one-off measures announced in the budget. The MRF is based on an underlying assumption of a trend growth rate for Hong Kong's economy in real terms of 4.5%. While many in the community will hope that Hong Kong's strong economic performances can indeed be sustained as the Government predicts, some may question whether the surpluses in the MRF are overly optimistic in light of the economic uncertainties Hong Kong faces: the sharper-than-expected US economic downturn, increased financial market volatility, persistent current account deficits in the US, the unwinding of global economic imbalances, rise of protectionist sentiments, lack of progress in global trade talks, higher inflation risks on food prices, and the weakness of the US dollar.
As far as the tax measures and concessions are concerned, in addition to confirming the reduction in the standard salaries tax rate and profits tax rate to 15% and 16.5% respectively in 2008/2009 as announced previously by the Chief Executive in his 2007/2008 policy address back in October 2007, Mr Tsang did hand out a number of recurring and one-off benefits. The recurring benefits include restoration of basic allowance, married person's allowance and single parent allowance back to the 2002/2003 level, increase in marginal salaries tax bands and ceiling for tax deductible charitable donations, waiver of hotel accommodation tax and exemption of duties on alcoholic drinks (except spirits). The one-off benefits totalling $27.6 billion include the waiver of business registration fees and rates for 2008/2009, and refunds of profits tax, property tax, salaries tax and tax under personal assessment for 2007/2008. These measures and concessions will benefit the vast majority of Hong Kong taxpayers and will be welcomed by many. Mr Tsang did surprise us with the concessions from the waiver of property tax and hotel accommodation tax. The waiver of the latter will help to further promote tourism and benefit the Hong Kong economy.
The restoration of basic allowance, married person's allowance and single parent allowance back to the 2002/2003 level represents an 8% increase in the allowances, which is greater than the inflation rate. As a result, taxpayers with borderline salaries will get out of the salaries tax net and further reduce the already narrow salaries tax base of only about 1.2 million taxpayers. This appears to be out of line with the principle of broadening Hong Kong's tax base. Moreover, similar to last year, none of these one-off measures announced by Mr Tsang will have an immediate effect on the taxpayers' wallets - no cheques are in the post! The profits tax, property tax and salaries tax measures announced will only be realised in the form of reduced 2007/2008 final payments, while the waiver of rates will be enjoyed in April, July and October of this year and January of next year.
The Chief Executive had pledged in his election campaign that, in his term of office, he would gradually lower salaries tax and profits tax rates to 15%, if fiscal conditions allowed. Assuming Hong Kong's economic prosperity continues as predicted in the MRF, it is likely that a further and gradual reduction in the profits tax rate to 15% will materialise within the Chief Executive's term of office, which ends in 2012. This will make us more competitive in the region.
The exemption of duties on alcoholic drinks except spirits will be welcomed by the wine-investing community. However, there are some concerns in the community that the exemption will encourage more people to drink, while some are of the view that it will promote Hong Kong as a regional wine trading hub. It remains to be seen whether the exemption will benefit Hong Kong in the long run in terms of stimulating economic growth, increasing employment and direct tax revenue.
On the expenditure side, a number of welcome measures were announced to help the needy and the elderly, including the granting to each residential electricity account a subsidy of $1,800 to ease inflationary pressure. Mr Tsang announced a one-off grant of $18 billion for the establishment of a Research Endowment Fund to finance appropriate research and development activities. This is heading in the right direction as these activities are essential to sustain economic growth and enhance the competitiveness of Hong Kong in the long term. Mr Tsang also announced the drawing of $50 billion from the fiscal reserves to assist the implementation of healthcare reform. This is welcomed by the community as it demonstrates the Government's commitment to share the healthcare financing burden with the people of Hong Kong.
In summary, this year's budget was generally full of good news and the prospects for Hong Kong as predicted in the MRF over the coming years seem excellent. The challenge for the Government is to overcome the economic uncertainties Hong Kong faces and deliver on Mr Tsang's predictions. Furthermore, considering the massive surpluses predicted in the MRF, it is time for the Government to start laying down detailed plans to tackle the big, long-term issues.
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