• Type: Business and industry issue, Press release
  • Date: 2/27/2008

A generous budget that benefits a wide spectrum of the economy - KPMG's Hong Kong Budget Commentary 

27 February 2008


The Financial Secretary has delivered a budget that hands back to the people of Hong Kong some of the fruits of a remarkably strong economy over the last 12 months. KPMG believes that it is a generous budget with a number of taxation measures that benefit a wide spectrum of the economy, including taxpayers, businesses and the needy.

In last year's budget, the Government estimated a surplus for the current year of HKD 25.4 billion, which was significantly below the Government's announced forecasted surplus of HKD 115.6 billion. The 2007/08 surplus represents a record for Hong Kong, due to the buoyant economy and strongly performing stock and property markets.

The beneficiaries of this year's budget are taxpayers, businesses and the disadvantaged. The Government's record surplus has again allowed it to provide rather generous one-off tax rebates and on-going tax reductions. Taxpayers have been handed a 75% rebate of 2007/08 taxes, although the rebates will be capped at HKD 25,000. The decision to reduce profits tax and standard salaries tax rates is in line with market expectations and follows an increasing trend amongst our major trading partners of lowering headline rates of tax.

The tax rebate will take place at the time of payment of 2007/08 tax liabilities later in 2008 or early 2009. This is a prudent measure, as a cash rebate of last year's taxes to taxpayers could fuel current inflationary pressures in the economy as people look to spend their tax rebates. Containing inflation remains one of the core objectives of the Government.

The Financial Secretary will no doubt have pleased certain sectors in the community by removing the duties applicable to beer, wine and alcohol with immediate effect. Although such duties have never made a significant contribution to Government revenue, their removal may be viewed cynically by some people as benefiting only a relatively minor percentage of the overall population. However, it is hoped that by removing the duties Hong Kong will become a wine trading hub in the region.

The Financial Secretary has also not forgotten about those less fortunate in the community, by increasing the level of assistance to be provided to the needy through a package of targeted financial assistance and one-off allowances.

The Financial Secretary has granted a one-off allowance of HKD 3,000 to the elderly, instead of increasing the level of old-age allowances that some members of the community would have been expecting. However, the Government acknowledges that it needs to provide more assistance to the elderly in need and that it is continuing to review the level of old-age allowances, as well as other Comprehensive Social Security Assistance (CSSA) payments, before deciding on whether an increase may be required in the future.

The Financial Secretary also announced an extra month's payment to CSSA and other disability payment recipients. The Government will also look to review CSSA payments on a more regular basis, to ensure that such payments are kept in line with inflation. Overall inflation in the economy is running at over 3%, although prices of food have risen by substantially more than that (reportedly at over 10%). The Financial Secretary acknowledged that such inflationary pressures can have a greater impact on less fortunate members of society, especially recipients of welfare support.

The Financial Secretary also extended to low income families transportation and electricity subsidies, waiver of property rates, home maintenance assistance for the elderly and other health fund initiatives. The Government acknowledges that the widening income gap is a problem and these measures are in part designed to ease the burden faced by those in the community that continue to struggle to make ends meet, despite being in paid employment.

The Government will extend the transportation subsidies for low income earners to 12 months. The aim of the subsidy is to encourage people in remote areas to seek employment opportunities outside of their immediate area. The Government has also attempted to assist lower income groups by exempting property rates for the 2008/09 financial year (up to a ceiling of HKD 5,000 per quarter) and providing a rebate of HKD 1,800 to households for electricity charges. The Government estimates that these rebates will effectively reduce the electricity charges to most households in the current year to a negligible amount, while exempting most households from the payment of any rates in the forthcoming financial year. The Financial Secretary should be commended for these initiatives as a means of returning to the community some of the benefits of the Government's healthy financial position.

The Financial Secretary also announced that the Government would contribute a one-off amount of HKD 6,000 into the Mandatory Provident Fund account of those earning less than HKD 10,000 per month to assist in enhancing their retirement protection. Further, the Government also announced a plan to establish a HKD 50 billion healthcare fund, although the nature and purpose of the fund have yet to be clearly explained and will be the subject of detailed consultation. Nevertheless, the Financial Secretary should be commended for this healthcare reform initiative, which if implemented carefully, should enable Hong Kong to continue to provide world-class medical services to the public for minimal cost.

Although the economy has fared remarkably well over the last couple of years and in particular during the last 12 months, the Government is not expecting the same level of growth in the forthcoming year, which it estimates to be 4.5 per cent, down from 6.3 per cent in 2007. The Government's relatively prudent approach to spending in this year's budget reflects the underlying fact that the record surplus stems from fluctuating and unstable income sources. The large amounts of revenue obtained from the buoyant stock and property markets cannot be guaranteed in the future. This again raises the question of the need to consider ideas to remove the volatility in the revenue sources to cope with fiscal challenges in future years.

At the heart of the volatility in Hong Kong's reserves and fiscal planning is its narrow tax base. This remains an issue that will continue to involve further discussion and debate. The Government acknowledges the need to address the imbalances in the system. However, rather than reconsider the implementation of a Good and Services Tax, the Government is more likely to look to other measures to broaden the existing tax.

Until this problem is finally resolved, the Government could face large fiscal deficits when Hong Kong next faces a downturn in economic fortune. The Government would be closely monitoring the impact that the US sub-prime mortgage crisis and a possible US recession could have on Hong Kong's economic prospects. The recent volatility in world capital markets may have had some impact on the Government being a little less generous in its budgetary handouts than what some may have been expecting; however, such volatility further underlines the need for the Government to adopt a cautionary fiscal approach despite the record surplus in the 2007/08 year.

Finally, some commentators have questioned how the Government could have originally underestimated the 2007/08 surplus by such a significant amount; however, perhaps this is also a reflection of the unreliable and unstable nature of the revenue base in Hong Kong. If Hong Kong continues with its current narrow tax base, the Government may never be in a position to accurately estimate its budgetary position.


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