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Hong Kong: Budget handed down

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Ayesha Lau


Darren Bowdern

The Budget for 2014-15 was handed down by Financial Secretary John C Tsang, on February 26 2014. The financial secretary highlighted significant developments made to date and proposed an array of measures designed to enhance Hong Kong's competitiveness, foster growth in the economy, increase employment opportunities and maintain public finances. On the domestic front, the financial secretary noted that Hong Kong remained resilient amid the challenges facing the global economy in 2013. Key metrics such as economic growth of 2.9% for the year (versus 1.5% in 2012), an average headline inflation rate of 4.3% and an unemployment rate of 3.3% tend to support this comment.

The government has forecast a revised consolidated budget surplus of HKD12 billion ($1.5 billion) for 2013-14, which compares with an original estimate of a deficit of HKD4.9 billion, as a result of higher than estimated government revenue and lower than estimated government expenditure. Fiscal reserves are expected to reach HKD745.9 billion by March 31 2014.

Key external economic considerations cited were tepid recovery in the US and Europe. The financial secretary affirmed his view that China's robust economy is the driving force of economic growth in the region and underpins the Hong Kong economy.

In addressing Hong Kong's position as an international hub, the financial secretary said it was important to enhance transport networks and financial infrastructure. The financial secretary saw the need to make Hong Kong a more liveable city through investment in environmental infrastructure to ensure cleaner air, cleaner sea water and better treatment of solid waste.

A key theme of the Budget was competitiveness and initiatives were highlighted to bolster Hong Kong's position as an international hub. The promotion of industries, a theme of previous budgets, was again in focus this year. The innovation and technology industry, in particular, was singled out with the pursuit of innovation and making good use of technology highlighted to facilitate the development of industries and help raise the productivity of all sectors. Grants and other forms of funding have been the preferred method of facilitating this, rather than enhanced deductions for research and development expenditure.

The contribution of the four pillar industries to employment and overall GDP was again acknowledged, along with a need to continue supporting them. Indeed, the financial secretary stated that the trading and logistics, financial services, tourism and business and professional services industries are the linchpin of Hong Kong's economy.

Progress made in terms of supporting the financial services industry, in particular, was highlighted. Mention was made of developments in consolidating Hong Kong's position as the world's largest offshore renminbi business centre as well as the progress made in extending the offshore funds exemption for private equity business and the introduction of open-ended investment companies to attract more funds business. New initiatives announced include proposals to waive stamp duty on all exchange traded funds and to encourage the establishment of treasury functions in Hong Kong, all positive moves.

Support for SMEs, described as the mainstay of Hong Kong's economy and employment market, was affirmed and a series of measures announced.

As a key to development, the financial secretary focused on manpower – in particular the importance of investing in people – as well as measures to address the demand for land in the short, medium and long terms. A further key consideration identified was the ageing population in Hong Kong and associated matters such as elderly services and healthcare.

Public finances were another area of focus. The financial secretary commented on the health check undertaken by the working group on Long Term Fiscal Planning. The working group found that the government's overall fiscal position in the short to medium term remains healthy but, in the longer term, the government must seek to foster economic growth, and align the growth rates of the government revenue and government expenditure.

Key recommendations of the working group include preserving, stabilising and broadening the revenue base, as well as controlling public expenditure at or around 20% of GDP. Saving for the future, including the possible establishment of a future fund, is also a welcome initiative as a means of investing surplus revenues for future needs.

In terms of preserving the tax base, the financial secretary announced the government would be stepping up its enforcement of the tax rules to combat tax evasion and avoidance. This announcement is perhaps a reference to the OECD's global initiatives on BEPS to tackle perceived abusive tax arrangements and demonstrates Hong Kong's commitment to being a responsible member of the international community with respect to fiscal matters and combating tax evasion.

That said, while a focus on preserving the current revenue base is admirable, the financial secretary is clearly reluctant to engage in a public debate on expanding the tax base.

While no specific tax reductions were announced, proposed one-off relief measures worth HKD20 billion were announced including a reduction of salaries tax and profits tax of up to 75%, capped at HKD10,000.

Proactive measures being taken by the government to tackle the challenges of an ageing population and proposed measures to increase Hong Kong's competitiveness are also welcome.

Ayesha Lau (ayesha.lau@kpmg.com) and Darren Bowdern (darren.bowdern@kpmg.com)

KPMG

Tel: +852 2826 8028 & +852 2826 7166

Website: www.kpmg.com

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