“Good things come in threes” – government considers some of our address their needs amid the burden of an old saying and one which proposals, such as providing tax initiatives high property prices and an ageing the Financial Secretary Paul Chan will be disappointed to have not been able to realize as he gave his third budget speech amid a challenging global macroeconomic and local business environment. Despite the global uncertainties (e.g. Brexit, United States-China trade tensions) and a slowdown in Hong Kong’s gross domestic product (GDP) growth, the financial secretary still forecasts a healthy surplus of HK$58.7 billion for 2018-19. This was lower than for his previous two years, particularly last year’s record surplus of HK$138 billion.
Unsurprisingly then, this year’s budget was more cautious than his previous, with more focus on addressing long-term socio-economic and business needs rather than short-term one-off relief measures or tax incentives. Although the financial secretary was not able to achieve his third “good thing,” the budget can still be divided into another trio.
Giving with one hand
As anticipated, the budget has set aside substantial funding for healthcare, including earmarking HK$10 billion to ensure stable funding for Hong Kong’s much strained public healthcare services. While these measures were generally welcomed by the public, no details were provided on how these funds will be used to solve immediate problems such as manpower and hospital bed shortages, which put significant pressure on healthcare services over the busy winter period.
Maintaining Hong Kong’s role as “Asia’s World City” in the digital age requires it to invest in its smart capabilities. As such, the funding for the Smart Government Innovation Lab to investigate the use of technology to improve public services, and creating business opportunities for start-ups and other Hong Kong businesses, is welcomed.
We are also pleased to see that the government considers some of our proposals, such as providing tax initiatives to develop the ship leasing and marine insurance sectors.
Taking with the other
It has been a busy time for tax policy developments over the last two years, with 12 new tax bills proposed and many of them implemented. However, it was still disappointing that the government did not propose new tax incentives that would benefit a wider spectrum of industries and taxpayers, such as:
- Expanding the scope of the research and development (R&D) super tax deductions of 300 and 200 percent to include R&D work subcontracted to group entities and third parties;
- Group tax loss relief and loss carry back, which are available in a number of other jurisdictions; and
- Home rental tax deductions, which had appeared to be in the pipeline last year but no measures were announced.
Indeed, this year’s budget contained bad news for residents, with the reductions in a number of the recurring sweeteners, which many of the middle class have long relied upon. The measures reduced include:
- Lowering of the profits tax and salaries tax rebate cap, from HK$30,000 last year to HK$20,000 this year;
- Lower ceiling per quarter for waivers of rates, reduced from last year’s HK$2,500 per quarter to HK$1,500 per quarter; and
- An extra one month (as opposed to two months last year) allowance to recipients of Comprehensive Social Security Assistance, Old Age Allowance, Old Age Living Allowance or Disability Allowance.
Many of the middle class were disappointed at a reduction in concessions, which were intended to specifically address their needs amid the burden of high property prices and and ageing population.
And leaving untouched
There are outstanding concerns from the general public that the proposed vacancy tax will not be an effective means of freeing up more vacant flats to the public, as developers may simply resort to various tactics to counteract the effects of the tax. With this proposal tabled for discussion by the Legislative Council’s housing panel on 1 April, it will be interesting to see how this proposal will evolve or, indeed, if it even gets approval in its current format.
With Hong Kong’s substantial fiscal reserves continuing to grow, and now standing at over HK$1.1 trillion (almost 40 percent of GDP), the financial secretary has ruled out the possibility of expanding Hong Kong’s tax base to raise government revenue in the near future. While this may be prudent now, anticipated significant expenditure such as the Lantau Tomorrow Vision reclamation work may put heavier pressure on Hong Kong’s current narrow tax base in the coming years.
Moving the Tax Policy Unit (TPU) to report directly to the office of the financial secretary may allow greater focus and resources on new and improved tax measures. We hope this will include investigating more strategic tax issues that could help support Hong Kong’s economic development and competitiveness, including a review on the effectiveness of the new tax policies. We would also like to see the financial secretary expand the expertise of the TPU through hiring taxation and industry experts, economists and academics, as well as government representatives.
Overall, this was a fairly prudent approach to managing the budget in order to meet society’s expectations while solidifying the city’s position in the face of increasing global competition.
