FISCAL POLICY - The Budget: Growth, Moderate Spending and Consistency

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Global uncertainties have weighed heavily on the considerations in this year’s Budget, with Financial Secretary Paul Chan planning one-off deductions in taxes on income and business. We ask the Big Four accounting firms for their analysis

By Kenny Lau


Financial Secretary Paul Chan Mo-po has used the Budget speech to emphasize an intention to use the fiscal surplus to “take care of the needy… ease the heavy burden of middle-class families and make appropriate investments essential for a better Hong Kong.” In telling the city he would not attempt to “open up a new world for Hong Kong” in a single document, his proposed measures suggest a sense of cautious optimism.

The spending and tax measures proposed in Chan’s first budget are largely in line with those of the past few years, allowing one-off tax deductions on personal incomes and business profits, yet following a broad strategy for longer-term development.

“In the coming year, our economy will be fraught with uncertainties arising from the complicated and volatile external environment,” Chan said. He highlighted the rise of political populism and protectionist sentiment around the world. “In 2017, the economic growth of advanced economies will be modest and patchy.”

Underlying the Budget, the government expects the United States economy to improve and interest rates to rise, the euro zone economies to be constrained by its high levels of structural debt, deflation in Japan to remain despite the fiscal stimulus measures in place, the mainland economy to be driven by domestic demand and growth in its services sector, and emerging Asian markets to propel global growth.

“If the recent growth momentum continues, our merchandise exports will see a stronger performance this year,” Chan said. “Sustaining domestic demand will remain crucial to maintaining the stable development of our economy and underpinning the employment market. In the light of the recent developments, and [granted] no severe external shocks, I forecast gross domestic product growth of 2 to 3 percent in 2017.”

Given that prices of apartments are at a record high, partly because the supply of land is tight, interest rates are low, and capital continues to flow into Hong Kong, Chan reiterated the government’s commitment to open land for development, improve housing stocks and cool the property market by curbing short-term speculation.

Deloitte: Cautious Note

Deloitte believes the Budget is forward-looking but cautious. The firm says the Budget attempts to boost competitiveness and enhance Hong Kong’s global interconnectedness. Most notable, it says, is the lack of “new and inspiring tax measures to address the pressing needs of the community.”

Many of the measures proposed to reduce salaries and profits tax reduction are the same measures taken in the past few years. Chan did call for a new government unit “to examine different tax issues [including] the long-standing problem of a narrow tax base,” but Deloitte says none of the proposals will ease long-term problems such as the shortage of housing or the aging of the population.

The firm says the focus on innovation and technology as a new engine of sustainable economic growth is pushing “in the right direction.” The government has earmarked HK$18 billion to start the engine. The measures proposed to support the growth of Fintech, or financial technology, are to be commended, it says.

EY: Premature Assumptions

EY calls the budget a “steady-as-we-go” plan, suitable both as the first Budget drawn up by Chan and the last by the administration of Chief Executive Leung Chun-ying. However, the firm says it is too early to make assumptions about the direction of fiscal spending and tax policies that “may undergo significant changes in the future.”

The firm welcomes the one-off relief measures to “help alleviate the tax burdens of individuals and enterprises, and [to] help those within the social security net to better face the uncertainties ahead.” But it suggests it is “also time to examine Hong Kong’s tax policy, given the recent changes to international tax rules.”

The proposal to develop the aircraft financing and leasing businesses through tax incentives will allow the city to compete with two leaders in the field, Singapore and Ireland, while the proposal to extend tax exemption to the asset management industry will enhance the city’s stature as an international financial center.

KPMG: Stay the Course

In KPMG’s view, the Budget is “a continuation of policy from one financial secretary to another” in maintaining a status quo despite having “resources available to consider a change of course.” That there was “little new in terms of approach, with similar themes adopted in previous years” was no surprise given Chan’s January appointment.

The focus on small- and medium-enterprises through a one-off deduction of Profits Tax and in measures to promote key industries are recurring themes that reflect Hong Kong’s economic strengths. KPMG notes that there are challenges in changing course too dramatically.

However, it is also Chan’s view that “the government must be appropriately proactive in developing the economy and improving people’s livelihoods...that it must be forward-looking and invest continuously for the future, and that it must make good use of financial resources, with a view to building a fair and just society.”

PwC: Comprehensive Agenda

PwC considers the Budget “a comprehensive agenda for the incoming administration” in July. Although there were no surprises, it presented “a detailed overview of recent government achievements and ongoing programs in a wide range of fields” and “suggested a thorough to-do list for the next administration.”

The 71-percent rise in spending on social welfare in the five years to 2017-18 may exacerbate the need to broaden the city’s narrow tax base. Combined spending on social welfare and healthcare next year is estimated to be 34.6 percent of recurrent expenditure, up from 24.8 percent in 2002-03.

The proposed Tax Policy Unit within the Financial Services and Treasury Bureau will encourage innovation and technology through the concept of smart city development, thereby improving livability, PwC notes. This should have a tangible, direct impact on Hong Kong’s competitiveness.