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A long-term view for tomorrow's success

Hong Kong, 25 Feb 2015


Financial Secretary John Tsang delivered the eighth budget speech of his career on 25 February 2015. In it he announced a revised budget surplus for 2014-2015 of HKD63.8bn and a forecast surplus of HKD36.8bn for next year.

Businesses will be pleased that some of their concerns around business competitiveness, as highlighted in PwC’s pre-budget survey, were addressed in the speech. Tsang demonstrated a stronger commitment from the Government to improve citizen’s livelihoods and promote Hong Kong as a top-tier international destination for business and tourism.

Last year’s budget announcement focused on enhancing both Hong Kong’s business environment and competitiveness. This year’s budget set out more clearly how the Government intends to achieve this through a series of more targeted measures. There was also a clearer focus on funding and developing social enterprises, the financial services sector, innovation and technology, as well as creative industries including fashion, film and the arts. The budget set out relief measures, mainly one-off measures, to boost the local economy in the short-term in view of the challenging international macroeconomic environment and unstable economic factors.

The greatest step forward is the establishment of the Future Fund. PwC applauds the Government for adopting the recommendations made by the Working Group in late 2014. This is an important step in the right direction to address the problems associated with Hong Kong’s aging population and should help stabilise Hong Kong’s financial position over the longer-term. This is a welcome example of the Government taking a longer term approach to fiscal planning.

One-off measures

Overall the one-off measures announced were balanced. Increasing the child dependence allowance, a recurring measure, from HKD70, 000 to HKD100, 000, is a positive move that recognises the rising costs of raising a child. However, it is disappointing that the Government has not made any concessions to the personal allowance, especially as there has not been an increase for the past three years. We would encourage the Government to consider an inflationary adjustment to the personal allowance.

Long-term fiscal planning

Tsang addressed most of the recommendations made by the Working Group on Long-Term Fiscal Planning, most importantly, the Future Fund. Tsang has asked the Secretary for Financial Services and the Treasury to work with the HKMA to decide on the specific management and investment mechanisms of the Future Fund. We look forward to seeing more detail of how the fund will work in practice, including how it will be run and how the investment decisions will be made. The Government has said that the fund will target high investment returns, but there should be caution that high returns also mean higher risk. The fund is starting with an endowment fund of HKD220bn from the Land Fund, and it is envisaged that there will be an annual injection from the budget surplus into the fund. This could constrain the amount of one off measures announced in future budgets.

He also stressed that stabilising and broadening the Hong Kong revenue base remains of utmost importance and announced the possibility of exploring again the feasibility of broadening the tax base.

In response to recommendations to contain expenditure growth is the newly launched “0-1-1” envelope savings programme to reduce operating expenditure by a total of 2% over the next three financial years and to cap the total public expenditure at around 20% of GDP.

With regards to sustaining the financial health of the Housing Authority, Tsang disclosed details of a Housing Reserve, with an initial injection of the investment returns generated in 2014, which amounted to HKD27.5billion.

Tsang also acknowledged the Working Group’s recommendations that “the Government manage its asset portfolio more proactively, and use the financial return to help reduce the fiscal pressures in the coming decades”, and promised to follow up on their recommendations.

Cementing competitiveness

The desire to establish Hong Kong as a viable jurisdiction for companies to set up their group treasury was a feature of last year’s budget speech. Tsang announced that they will amend the Inland Revenue Ordinance to allow, under specified conditions, interest deductions under profits tax for corporate treasury centres and reducing profits tax for specified treasury activities by 50%. This should help attract more multinational and Mainland enterprises to set up their corporate treasury services for their group companies in Hong Kong.

PwC welcomes the raft of measures aimed at enhancing the competitiveness of Hong Kong’s financial services industry. This includes:
  • The commitment to further develop Hong Kong’s position as a global hub for offshore RMB business by working with the Chinese authorities to increase the investment quota for the RMB Qualified Foreign Institutional Investors (RQFII) Scheme.
  • Plan to table a bill to allow private equity funds to enjoy profit tax exemption available to offshore funds.
  • Formulating legislative proposals to provide the legal framework for introducing an open-ended fund company structure.
  • Setting up of a steering committee to plan how to develop Hong Kong into a financial technology hub.
In order to attract more tech companies to Hong Kong and promote IP trading and ownership, the Government is considering expanding the scope of intellectual property (IP) tax deduction measures, as well as proposing a HKD23 million funding for offering IP consultation, manpower training and other services to SMEs.

Amongst other measures include expanding tourism facilities, enhancing business and professional services, and reinforcing logistics hub status.

Looking forward

Despite the positive measures announced, the budget did not address the Working Group’s recommendations to segregate and balance the Operating and Capital accounts and make clear what the fiscal reserves cover. Another missed opportunity was the failure to undertake a review of the Inland Revenue Ordinance, which we believe is long overdue.

Although Hong Kong continues to rank in the top tier globally for its economic success, Tsang warned that we must remain vigilant so that the city remains “a better place with a brighter future for everyone…”

This is reflected in the Government’s demonstrated willingness to support the leading businesses of today but also strive to develop Hong Kong as a hub for the businesses of tomorrow.