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|1 February 2012
||(All denominations are in HK$)|
Will the Dragon Year's budget energise HK's future?
The Financial Secretary, Mr. John Tsang, delivered his final budget address for the current Administration. His speech attempted to highlight the Government's legacy of stability and growth despite the territory's growing social issues and the uncertain global economic outlook. But will this year's budget be remembered?
The Financial Secretary provided a revised forecast from the $8.5 billion deficit predicted last year to a far-greater $66.7 billion surplus for 2011/12. The main reason for the turnaround in fortune is the $63.4 billion hike in revenue over the original estimate. The majority of these increases arose from profits and salaries tax receipts of nearly $30 billion and land sales of nearly $21.1 billion. The Financial Secretary is predicting the fiscal reserves to be around $662.1 billion by 31 March 2012.
Looking ahead to 2012/13 the Government predicts a consolidated deficit of $3.4 billion. According to the years covered by the medium-range forecast (MRF), the consolidated account for 2013/14 to 2016/17 will see a sustained surplus, except in 2015/16, which will have a deficit of $26.2 billion. The deficit will arise from the $50 billion earmarked in the 2008/09 budget to support healthcare reform financing arrangements in 2015/16. The MRF is based on an underlying assumption of an annual average economic growth rate of 4% in real terms and an average underlying inflation rate of 3.5%. We believe these economic forecasts are conservative and should be met. However, further and significant deterioration in the global economy, particularly across the Eurozone, may impact this forecast.
The retail bond market continues to play an important role in Hong Kong's financial system. The Government will enhance its development with a further $10 billion issue of the popular iBond scheme. This measure will help investors alleviate the impact of inflation over the short to medium term.
Small and medium enterprises will benefit with the loan guarantee ratio being raised to 80%. A new one billion dollar business development fund will also help enterprises in general access opportunities in the China market. SMEs are an integral part of Hong Kong's economy with nearly one in five people in the community being employed by an SME. These measures provide much needed incentives for further investment in the sector.
As far as the tax measures and concessions are concerned, the Financial Secretary did, as expected, hand out a number of recurring and "one-off" benefits. These measures are welcomed and do make an effort to address some very valid community concerns. The recurring benefits include increase in personal allowances, increase in the maximum annual tax deduction for Mandatory Provident Fund and the abolishment of capital duty. The "one-off" benefits include the waiver of business registration fees for 2012/13, the waiver of rates for 2012/13 (subject to a ceiling of $2,500 per quarter), the refund of 75% of profits tax, salaries tax and tax under personal assessment for 2011/12 subject to a ceiling of $12,000, electricity subsidy, an extra month of CSSA payment, Old Age Allowance and Disability Allowance for the needy, and two additional months’ rent for public housing tenants. While generally welcomed, some of these "one-off" benefits are very familiar. A possible concern is whether there is public expectation that these "one-off" handouts have become recurring payments. Will there be a negative reaction if these handouts are not made in the future? Furthermore, will benefits that are recurring limit the flexibility of future Administrations to deliver initiatives that meet the needs of Hong Kong and its people?
From a tax perspective, other than handing out the above-mentioned benefits, the Government has not addressed many important requests from the business community, which includes a comprehensive review of the tax system. It has been more than 40 years since the last fundamental review. Tax competitiveness is a critical component towards Hong Kong sustaining its position as a major regional financial and business centre.
Other areas yet to be addressed include super-deductions for research and development expenditure to support innovation and technology. Providing tax incentives and a more certain tax regime to support the growth of the fund management and private equity industries are also needed. This is the current Administration’s final budget and their reluctance to address these issues may arise from not wanting to commit the next Government to future spending.
On the operating expenditure side, the Government proposes to inject $149 billion into essential services across education, health and social welfare. This will account for more than 50% of the Government’s operating expenditure. For education, scholarship funding and financial assistance to post-secondary students will be increased, while $5 billion will be allocated to a Research Endowment Fund to enhance the academic and research development of tertiary institutions. On the medical and health expenditures side, additional funding will be provided to the Hospital Authority to meet community demands for enhanced medical services, including attracting and retaining medical professionals to provide quality healthcare. The Samaritan Fund will receive $10 billion to relieve patients of the cost burden of essential medication. Additionally, the Government will embark on a programme to upgrade and improve existing hospital facilities. This will provide the community with enhanced medical services that will have a lasting benefit.
Affordable housing is another major community concern. The Government is committing to increase land supply and establish a land reserve to facilitate the stable development of the property market. While a step in the right direction, the scarcity of residential-ready land will remain a community issue for some time to come.
The measures in this year's budget are largely expected with few surprises. The Government has made a conscious effort to address community concerns. However, it could be argued it only provides band-aid measures and a lack of vision or strategic planning for the long-term development of Hong Kong. Such an appraisal does not come as a surprise as this is the final budget of the current Government. Further, the fiscal reserves as at 31 March 2012 are expected to be a staggering $662.1 billion - 22 months of Government expenditure. Many in the community will question whether the Government needs to maintain such large fiscal reserves. The Government could have been "bolder" in its approach to painting a long-term picture of Hong Kong's future as a regional business, tourism and cultural centre.