Higher Taxes And Spending Cuts In Hong Kong Budget

by Mary Swire, Tax-News.com, Hong Kong

07 March 2003

Tax rates were increased across the board this week as Hong Kong's finance minister Antony Leung Kam-chung attempted to rein in a widening gap in the governments finances, now estimated at HK$70 billion.

The budget represents the first substantial tax increases for many years, and some fear it could be the first nail in the coffin of Hong Kong's reputation for practicing liberal economic policies.

Among the most visible tax increases are the 1% rise in income tax to 16% and a 1.5% rise in company profit tax to 17.5%, although these rates are still substantially lower than some of the SAR's competitors in the Asia Pacific region. As predicted, the personal tax allowance threshold was cut from HK$108,000 to HK$100,000. Marginal tax rates will also revert to their 1998/99 levels, sucking 90,000 workers back into the tax net.

The result of these measures will see a worker earning a monthly income of between HK$25,000 and HK$33,000 pay about HK$410 more on average according to regional news service, The Hong Kong Standard. They should also see the government bringing in an extra HK$6.8 billion in revenue per annum.

At the same time, Leung also announced measures to curb expenditure by HK$20 billion to a target of HK$200 billion per year, including a 6% cut in civil service pay, and large scale reductions in overall welfare spending by 11.1%. One group likely to be particularly affected by the cuts will be immigrants, especially those from mainland China, who will find it harder to claim benefits.

Other measures designed to help claw back government revenue are a levy on border crossings with the mainland at HK$18 per person, duty on soccer betting and a rise in airport departure tax from HK$40 to HK$120. Property tax will also increase by 1 percentage point to bring in an estimated HK$70 million in tax receipts. A controversial tax on foreign maids at $51 per month per employee has also been proposed in addition to a levy on first registration of motor vehicles.

Though all these measures will not substantially reduce the deficit this year, Leung has said they will at least stop it from growing. However, one alarming statistic for the finance minister is that tax revenue is expected to be 19.2% lower this year, whilst spending will continue to creep higher. This means that expenditure will outstrip income by some HK$64.4 billion according to the HK Standard.

Reaction to the budget has been mixed from the business community. Chairman of the General Chamber of Commerce, Christopher Cheng signalled a pessimistic note over the profits tax as "profits generate investment and jobs.". Conversely, chairman of Cheung Kong Holdings, Li Ka-shing was more magnanimous, commenting "as the process of resolving the deficit needs to be shared by all, we think the increase of 1.5% is acceptable". Cathay Pacific chairman James Hughes-Hallett concurred, telling The Standard: "Hong Kong is still a fantastic place to do business. I am pleased the Financial Secretary has grasped the nettle and decided to deal with the deficit."

Leung stopped short of imposing a general sales tax despite pressure from the IMF to introduce a consumption tax of 3% to help deal with the deficit - a move many fear will be deeply unpopular. However, Leung seems to have left the door open on the subject, pledging that this is a long term goal of the government.

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