On 24 February, Financial Secretary Paul Chan delivered the 2021-2022 Budget. Across four headings, “riding out the storm,” “stimulating the economy,” “building a liveable city,” and “public finance” he set out how the government would offer prudent support necessary to ensure that Hong Kong comes out of the COVID-19 pandemic ready to seize the opportunities of the future.
Riding out the storm
Under the heading riding out the storm, the financial secretary laid out how the government would prudently support the economy in the short term and relieve some immediate impacts through a continuation of a number of tax and fee reductions including profits and salaries tax, government rates, and registration fees.
While the government will not hand out cash to the public as it did last year, it would distribute consumption vouchers in order to stimulate local economic growth, which was one of the Institute’s recommendations. Implementing this measure in a quick and simple manner should be a key priority of the government to ensure the scheme’s effectiveness. The government is also preparing a special loan guarantee scheme for individuals, which could be an alternative means for supporting the unemployed.
Stimulating the economy
Maintaining Hong Kong’s status as an international financial centre, while leveraging on the national development plan is vital for our continued prosperity. As the economic gravity of the world continues to shift from West to East, Hong Kong can continue to play an important role in bridging the two.
The continuing digital transformation and the increasing demands for a green and sustainable future creates new opportunities for Hong Kong to explore. The budget includes plans to issue green bonds on a regular basis and expand the scale of the government’s green bond programme. We believe that this will help ease the government’s financial pressure, while also being in line with the global environmental, social and corporate governance trend and supports sustainable development.
The budget also refers to rule changes and support that encourage the relocation of open-ended funds domiciled overseas to Hong Kong, including subsidies for the professional service fees they need to relocate. We believe that this will provide an incentive for overseas-domiciled open-ended funds to move to Hong Kong, and will further develop Hong Kong into a major asset and wealth management centre in Asia.
Building a liveable city
The pandemic has demonstrated the fragility of our world, and our lives. Improving the local environment and creating a more liveable city is therefore instrumental for Hong Kong’s continued prosperity. We are pleased to see that the financial secretary included measures we had proposed in this regard, promoting the wider use of electric vehicles and extending the incentives for replacing aged, commercial vehicles.
Government finances have been stressed by the pandemic. Recurrent income is no longer enough to meet the increasing expenditure, and this will not be the case anytime soon. Broadening the tax base is therefore something the government must consider. Despite a simple and low tax system – a key element of Hong Kong’s success – the government is overly dependent on salaries tax, profits tax, stamp duty, land sales and investment income, thereby putting pressure on Hong Kong’s fiscal reserves; which are less resilient to economic downturn.
The Organization for Economic Co-operation and Development made remarkable progress in 2020 on international tax reform with the Base Erosion and Profit Shifting 2.0 project. As a low tax jurisdiction, Hong Kong must ensure that it collects the “top-up tax” proposed to be levied under these rules. Otherwise, supplementary taxes will be levied by other tax jurisdictions in what is a zero-sum game. The development of international taxation has steered towards relying more on indirect taxes, thus reducing the dependence on direct taxes as the main source of government revenue. This is also another reason why it is now a good timing to revisit reforming Hong Kong’s tax system.
Increasing the stock stamp duty (from a total of 0.2 percent to 0.26 percent of the value of the transaction) is a quick way of raising government revenue as the laws and the collection mechanism are in place. This alone will, however, not provide the government with a sustained and stable of recurrent revenue. We believe that while the government could flexibly adjust the stamp duty tax rates upwards or downwards according to prevailing economic and market conditions, it should continue to explore other solutions that can broaden the tax base as the long-term solution, and be mindful of the market reactions to such changes in order to not kill the golden goose.
Into the future
The government’s budget has given us hope for the future. Securing jobs and helping graduates find jobs are vital, preparing Hong Kong for the future is the best way to ensure our continued prosperity.