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This year’s budget has been carefully designed to address a much broader range of issues than has been the case in recent years. There are concrete measures to assist the development of most of the key industries in Hong Kong and to meet the needs of many different sectors of society.
The Financial Secretary’s approach this year is to share 40% of the projected surplus with the community and to invest 60% in the future. An important challenge is to ensure that this model will provide enough for an ageing population in the longer term – assuming that the tax base is not significantly broadened. Another challenge for the Government is that setting up the various funds outlined in this commentary is only the start of a process. It is vital that these funds are then disbursed properly and used to implement meaningful change.
This budget builds on the last policy address by emphasising the need to facilitate development and give greater impetus to the market.
One of the main areas of focus has been to incentivise R&D expenditure so that Hong Kong companies can be more innovative and move ever further up the value chain. While we welcome these incentives, we would encourage policy formulation in this area to be more holistic and aligned with international best practice. The Government needs not only to encourage companies to carry out R&D, but also to keep the resulting IP within the jurisdiction. Refundable credits may also be of greater value to start-ups than deductions.
The raft of measures to support innovation in biotechnology, AI, smart cities and FinTech should help strengthen Hong Kong’s position within the Bay Area – an increasingly integrated region of ‘9 plus 2’ cities and 68 million consumers.
Support was not limited to the sectors cited in the previous paragraph. The Budget touched on a wide range of industries, from logistics to the arts, and measures including Free Trade Agreements and capital investment in cargo facilities.
We particularly welcome the measures announced to boost Financial Services in Hong Kong. As the Financial Secretary points out, bond issuance in Asia ex. Japan grew 60% last year, but Hong Kong has long been under-represented in this market. Measures to incentivise bond issuance and the extension of tax exemptions to debt instruments with maturities under seven years will both prove highly beneficial to Hong Kong’s financial sector.
Green finance has been a flourishing segment in China. It issued its first green bond in 2015 and now accounts for roughly one third of global issuance. The issuance programme announced in the budget will hopefully encourage more issuers to seek financing through Hong Kong’s capital markets.
Other notable measures that can help maintain Hong Kong’s competitive position include the tax exemptions for open-ended funds which will come into effect this year. Enhancing Hong Kong’s role as an insurance hub for the region is also important, given the prolific growth in this sector across Asia.
A range of targeted welfare measures included in the budget are complemented by the launch of a Life Annuity scheme, which we expect to be well received by those preparing for retirement. Extending tax concessions to voluntary MPF contributions will also help an ageing population achieve a measure of financial security. As these will be subject to the same withdrawal restrictions as mandatory contributions, this largely deals with any potential tax planning implications that could arise from this measure.
The budget stands out from those of previous years due to the comprehensive range of measures in areas such as education, social services and welfare and every segment of society should be benefitted from this Budget.
This Budget has given as much emphasis to the ‘software’ of Hong Kong as it has to the hardware. But its success will depend on timely and commercially-minded execution.