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Hong Kong: Hong Kong introduces another cautious budget


Ayesha Lau

Darren Bowdern

On February 27 2013 the financial secretary presented the 2013-14 budget in which he forecast a consolidated budget surplus of $64.9 billion for 2012-13, well ahead of the forecast deficit of $3.4 billion. The surplus has been largely driven by increased revenues from land sales, tax collections, stamp duties and a greater than anticipated dividend from West Rail Property Development. A modest improvement in the economy is forecast with GDP growth of 1.5% to 3.5% for 2013 and a headline inflation rate for 2013 estimated at 4.5 %. Budget proposals include one-off measures worth $33 billion to ease pressure on the middle class, grass roots and small and medium enterprises and capital expenditure of $88 billion, including $70.1 billion on capital works.

With the proposed increase in government expenditure, a small deficit of about HKD4.9 billion ($630 million) is estimated in 2013-14. Hong Kong's fiscal reserves remain strong and are estimated to be HKD734 billion by the end of March 2013 which represents approximately 36 % of GDP and is equivalent to 23 months of government expenditure.

The measures introduced in the budget focus on four areas: Developing the economy, optimising human resources, investing in infrastructure and caring for people's livelihoods.

While no specific personal tax reductions were announced, one-off relief measures include a salaries tax reduction for 2012-13 of 75% capped at HKD10,000, increases in the basic and additional child allowances from HKD63,000 to HKD70,000, and an increase in the deduction ceiling for self-education expenses from HKD60,000 to HKD80,000. The government also proposed a waiver of property rates capped at HKD1,500 per quarter, a subsidy for residential electricity accounts of HKD1,800, and several initiatives for low-income earners.

For businesses, the financial secretary proposed a one-off reduction of profits tax for 2012-13 of 75% capped at HKD10,000 and a waiver of business registration fees.

Capital expenditure, mainly in the area of large infrastructure projects, is estimated to increase to over $70 billion for each of the next few years, far exceeding the average annual expenditure of around $40 billion over the past five years.

Against this, however, is the need to fund expenditure within the constraints of what remains a very narrow tax base. While this was acknowledged by the financial secretary, no clear guidance was provided as to how this might be addressed. A fundamental review of the tax base should be a priority of the government.

The financial services industry will welcome certain key initiatives announced in the budget. While the devil will be in the detail, it is extremely positive that certain key concerns of the fund management sector have been acknowledged. For example, the offshore funds exemption is to be extended to cover investments in some private companies and legislative amendments are being considered to introduce the open-ended investment company, an increasingly popular form of investment vehicle used in the funds industry. Initiatives to facilitate mainland business in or through Hong Kong should further stimulate the fund management sector. The profits tax on the offshore insurance business of captive insurance companies is also to be reduced in line with the tax concession available to reinsurance companies.

The budget was broadly in line with expectations but, in line with previous budgets, was cautious and lacking in vision for the long term.

Ayesha Lau ( & Darren Bowdern (


Tel: +852 2826 8028 & +852 2826 7166


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