Hong Kong Budget Splashes The Cash

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

24 February 2011

A buoyant economy has boosted tax revenues in Hong Kong to such an extent that the Financial Secretary, John C Tsang, in his 2011-12 budget, was able to allocate more resources to the provision of education, health and social welfare services, and to restraining the inflation in property prices.

The economy helped to significantly boost government revenues in 2010-11. Tsang said that rising income levels had generated HKD140.5bn (USD18bn) in revenues from profits tax and salaries tax in 2010-11 - HKD22.2bn higher than original estimates. In addition, the stock and property markets brought in much higher than expected revenues from stamp duty – an estimated HKD51bn (HKD21bn higher); and land revenues jumped to HKD62 billion (HKD27.9bn higher).

Total revenue for the 2010-11 financial year reached HKD374.8bn - HKD82.8bn higher than the original estimate - while government expenditure is estimated to reach only USD303.5bn, or USD13.7bn less than the original estimate. By March 31, 2011, fiscal reserves are expected to reach USD591.6bn, equivalent to 23 months of government expenditure, or 34% of Hong Kong’s gross domestic product (GDP).

In that situation the government is looking to increase its spending substantially in 2011-12 – to a total of HKD371.1bn, representing an increase of HKD67.6 billion over 2010-11. With the proposed increases to spending in the budget on education, health and social welfare, its recurrent expenditure is expected to rise by nearly 8% in 2011-12, while operating expenditure will be higher by some 24%.

Even then, with total government revenue for 2011-12 estimated to reach HKD375bn, a consolidated surplus of HKD3.9bn is forecast for 2011-12. Fiscal reserves can still be expected to rise and reach HKD595.5bn by end-March 2012 – the equivalent then of 19 months of government expenditure, or 32% of GDP.

After all the measures in the 2011-12 budget, fiscal reserves are still estimated to reach almost HKD700bn by the end of March 2016, representing about 30% of GDP and equivalent to 20 months of government expenditure. Tsang said that Hong Kong’s fiscal reserves had provided a buffer to alleviate the impact of economic cycles on people’s livelihood.

“Apart from being used to meet daily operational requirements, fiscal reserves can also be drawn on in contingencies, allowing us to maintain our expenditure at a relatively steady level when government revenue is affected by economic downturns,” he said.

“The fiscal reserves placed with the Exchange Fund help reinforce public confidence in the Hong Kong dollar and our monetary stability,” he added. “In 2010-11, the investment income of the fiscal reserves accounted for about one tenth of government revenue. It is an important source of revenue for us.”

In his budget, and in addition to the previous introduction of a Special Stamp Duty on the short-term resale of residential properties, he announced further measures to increase the supply of residential sites to combat property price inflation. However, to combat inflation, he also proposed to waive rates for 2011-12, capped at HKD1,500 per tenement per quarter, so that about 82% of properties will be subject to no rates in the year, costing around HKD9.9bn.

The government will also provide an electricity subsidy of HKD1,800 to each residential electricity account; pay two months’ rent for public housing tenants; and provide one more month of social security payment, old age allowance and disability allowance, at a total cost of HKD8.5bn.

Furthermore, child allowance will be raised by 20%, while dependent parent/ grandparent allowances and the deduction ceiling for elderly residential care expenses will be raised by a similar percentage. The government will reserve HKD24bn for making a one-off injection of HKD6,000 into provident fund accounts to increase the retirement savings of scheme members.

The government will also issue HKD5bn to HKD10bn in Hong Kong-dollar inflation-linked three-year retail bonds ('iBonds') to provide another investment option for coping with inflation, while also promoting the development of the local retail bond market.

With regard to the business environment, Tsang said that, at present, more than 6,500 enterprises from overseas, Mainland China and Taiwan have established their presence in Hong Kong, employing some 350,000 people. The government is to step up its promotion efforts and take the initiative in approaching overseas enterprises, particularly those in the industries where Hong Kong enjoys clear advantages, to encourage them to set up business there.

In addition, given the importance of small and medium enterprises (SMEs) to Hong Kong’s economy, the total guarantee commitment under the SME Loan Guarantee Scheme will be increased substantially from HKD20bn to HKD30bn.

Finally, to protect public health, Tsang increased tobacco duty by 50 cents per stick of cigarette and, to contain the growth of private cars and the consequent congestion, the rate of each tax band for the First Registration Tax for private cars was increased by about 15%. Rates for other vehicles and existing concessions for environmentally-friendly petrol private cars and electric vehicles remained unchanged.

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