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Tang Resists Cutting Hong Kong Tax Rates

by Mary Swire,, Hong Kong

01 March 2007

Financial Secretary Henry Tang says the HK$20 billion in tax concessions proposed in his 2007-08 Budget adhere to the principle of prudent fiscal management and do not narrow the tax base.

Speaking at a press conference on Wednesday afternoon, Tang said his budget will provide flexibility for the next-term government, and lay a good foundation for Hong Kong's economic development and improving the living environment for its citizens. Tang was keen to stress, however, that this year's budget measures have nothing to do with the coming Chief Executive election, which current leader Donald Tsang is expected to win comfortably.

To prevent the creation of a long-term fiscal burden, three-quarters of the tax concessions are one-off measures, Tang said. To comply with the principle of affordability and not to narrow the tax base, he also decided not to reduce the basic allowance and standard rate of salaries tax.

When asked whether Hong Kong's tax system will become less competitive as the government did not introduce a profit-tax cut, Tang said a tax system's competitiveness relies on many factors, including political stability, government efficiency and the investment environment. Noting that the city's tax system is simple and competitive, he said that the Government will review the situation when necessary.

The Budget's centrepiece is a HK$20 billion package of tax concessions and other one-off relief measures, including HK$4.9 billion cuts in salaries tax by reverting marginal tax rates and tax bands to their 2002-03 levels, and by waiving 50% of salaries tax and tax under personal assessment assessed for 2006-07, subject to a ceiling of $15,000. In addition, there will be an HK$250 million reduction in stamp duty on property transactions between HK1 million and HK$2 million with the introduction of a fixed HK100 charge, HK$8.1 billion in salaries-tax rebates, HK$5.2 billion in rates waivers and HK$1.5 billion in extra social-security payments. The Financial Secretary will also allocate about HK$900 million to provide more assistance to the disadvantaged.

Other measures include reducing by half the duty rates on wine, beer and other drinks containing not more than 30% alcohol, costing HK$350 million a year in lost revenue; HK$300 million to help finance film production and overcome the film-talent shortage; and HK$210 million to install WiFi networks, enabling free Internet access by the public in government facilities such as libraries, parks and community halls.

Due to the economy's better-than-expected performance over the past 12 months, Tang said that investment income and revenue from land premiums, stamp duty, profits tax and salaries tax alone are about HK$31 billion higher than the original estimates. He predicted a consolidated surplus of HK$55.1 billion for 2006-07, much higher than the original forecast. An operating surplus of HK$7.2 billion and a consolidated surplus of HK$25.4 billion are forecast for 2007-08. Despite rising revenues, government spending has been reined in below HK$200 billion for three years running. He estimates operating expenditure for 2006-07 will be HK$195.7 billion, up just 1.7% per cent over the 2005-06 figure.

Tang noted that GDP grew 6.8% in 2006, higher than the 4% to 5% forecast by the market and the government earlier that year. GDP growth for 2007 is forecast at 4.5% to 5.5%, with a trend growth rate of 4.5% a year from 2008 to 2011. He noted that the economy had staged a strong recovery since mid-2003, when the city was in the doldrums following the SARS outbreak. Consequently, employment was now at a record 3.5 million - 310,000 more than in 2003. Unemployment had fallen from a peak of 8.5% in mid-2003 to a six-year low of 4.4%.

Tang also emphasised that Hong Kong's continuing economic integration with mainland China was key to its future growth and competitiveness.

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