Urges the Government to stimulate the work force to reduce ageing population pressure
18 February 2014
The Hong Kong SAR Government is set to record a consolidated budget surplus of HKD14 billion for the fiscal year 2013/14, against a deficit of HKD 4.9 billion originally estimated by the Government, according to KPMG forecasts. This is mainly being driven by higher than expected revenues from stamp duties and land sales.
While Hong Kong holds more than HKD 700 billion reserves on hand, around HKD 400 billion of reserves is freely disposable after excluding the amount set aside for dedicated funds, which equals to about 14 months of Government’s recurring expenditure. In addition, the challenges of an ageing population will place pressure on the Government’s expenditure in the long run. KPMG therefore proposes the Government adopts measures to increase the working population numbers, which in turn will boost the Government’s income.
Jennifer Wong, Tax Partner, KPMG China, says: “According to Government estimates, the workforce in Hong Kong is expected to have a shortfall commencing in 2018 when the baby boom generation starts to retire. Additionally, economy and tax revenues are expected to decline because of a diminishing labour force, whilst expenditure for social welfare and medical services will be on the rise, due to an ageing population and longer life expectancy. In addition, cumulative growth rate of the Government’s expenditure has outpaced that of income growth since 1997/98. The Government should therefore plan ahead before it is too late.”
KPMG therefore proposes the Government considers encouraging retirees to rejoin the labour market by providing both employers and employees with incentives, such as preferential tax rates, subsidies and re-training programmes.
In the recent Policy Address, the Government proposed a Low-Income Working Family Allowance to encourage self-reliance. KPMG believes this may increase the workforce and reduce government expenditure on Comprehensive Social Security Assistance in the longer term.
Separately, KPMG proposes the introduction of tax concessions to enhance Hong Kong’s business environment, particularly for small and medium enterprises (SMEs).
“SMEs play a crucial role in Hong Kong’s economy and employ a significant number of employees. Some preferential measures dedicated to SMEs could help rebalance Hong Kong’s economic structure and diversify the Government’s income stream,” says Wong.
As at September 2013, there were about 310,000 SMEs in Hong Kong, according to official data. They accounted for over 98 percent of total business units and for about 47 percent of private sector employment, representing job opportunities for over 1.2 million people.
KPMG recommends the Government offers a preferential corporate profits tax rate at 10 percent, compared to the current 16.5 percent, for SMEs with annual revenue below HKD 2 million. The Government should also consider providing rental subsidies or a dedicated zone to provide rental costs relief for SMEs, says KPMG.
Other proposed relief measures for the middle class for 2014/15 include an income tax reduction of up to 50 percent, with a ceiling of HKD 8,000, and the introduction of an allowance for newly-weds.
To help reduce pressures from rising living costs, KPMG suggests the Government introduces a primary home rental deduction of up to HKD 100,000 per annum for 10 years; and to offer public housing tenants a rental wavier for one month.
Wong concludes: “While preferential measures targeting the work force and SMEs may help to stimulate the labour market and economy, it can only partially relieve pressures on public finances due to rising Government expenditure. The Government should continue to pursue a prudent approach when planning its public spending, and assess ways to stabilise the revenue stream, whilst not relying heavily on the current narrow tax base.”
- Ends -
Appendix - CONSOLIDATED SURPLUS / (DEFICIT) FORECAST FISCAL YEAR - 2013/14 (PDF 81.5KB)