Commentary on the 2008 Budget
The economy
Real GDP growth in 2007 was 6.4%, compared with the original forecast of 4% - 5%. Although expected to slow in 2008, due to external economic factors, GDP growth this year was still forecast to be in the range of 4% to 5%, and the annual trend growth rate over the period 2009 to 2012 is projected to be 4.5% in real terms.
The inflation rate, as measured by the Composite Consumer Price Index, was 2% in 2007, which is slightly higher than the 1.5% forecast in the 2007/08 budget. The underlying inflation rate is expected to increase further, to 4.5%, in 2008, although the various one-off measures proposed in the budget, are expected to bring this down to 3.4%.
The unemployment rate announced during the budget fell to 3.4%, the lowest since the first quarter of 1998.
More recently the first quarter 2008 GDP figures showed a healthy 7.1% growth but due to uncertainties in the world economy, the government remains cautious about the outlook for the rest of the year. Unemployment for the period February – April 2008 dropped further to 3.3%, but, for the same reasons, the expectation is not necessarily that this trend will continue.
Public finances
In terms of the overall fiscal position, the budget figures revealed buoyant performance of Hong Kong's economy in 2007/08. Government revenues exceeded previous budget forecasts substantially, due to significantly higher than expected income from stamp duty on stock and property market transactions, land premiums and profits and salaries taxes. The Financial Secretary (“FS”) predicted a record high surplus of HK$115.6 billion for 2007/08, more than four times the forecast of HK$25.4 billion at the time of last year's budget. The positive outturn for 2007/08 enabled the FS to provide a range of concessions from which most sectors of the community will benefit.
A consolidated deficit of HK$7.5 billion is forecast for 2008/09, due largely to the major one-off and other revenue concessions contained in the budget, which will take effect during the next fiscal year. The fiscal reserves are expected to stand at HK$484.9 billion by 31 March 2008 and to be maintained in the range of HK$470 billion and HK$720 billion over the next five years, equivalent to between 18 and 25 months of government expenditure.
On 5 May 2008, the Commissioner of Inland Revenue announced that around HK$200.6 billion in revenue was collected in 2007/08, up 29% on 2006/07, with stamp duty and profits tax increasing by 106% and 27% respectively.
Tax measures
In view of the very healthy fiscal situation, in the 2008/09 budget, the FS announced a series of specific tax and other benefits, costing over HK$42 billion. Most of these are one-off measures and they include:
| Concessions | Cost to government (HK $million) |
|---|---|
| Restore standard rate of salaries tax and personal assessment to 2002/03 levels (i.e. 15%) | 960 |
| Return basic personal and single parent, and also the married person's, allowances to 2002/03 levels (i.e. HK$108,000 and HK$216,000 respectively) | 1,310 |
| Widen tax bands from HK$35,000 to HK$40,000 | 1,000 |
| Lower profits tax rate from 17.5% to 16.5% | 4,400 |
| Rebate 75% of tax payable on the final 2007/08 assessment (with a ceiling of HK$25,000 in each case) for: - salaries tax and tax under personal assessment - profits tax - property tax |
12,400 1,730 680 |
| Waiver of business registration fee for 2008/09 | 1,600 |
| Waiver of rates for 2008/09 (ceiling of HK$5,000 per quarter for each rateable tenement) | 11,200 |
| One additional month of standard rate payments for CSSA recipients and allowance for recipients of Disability Allowance | 1,200 |
| One-off grant of HK$3000 for recipients of Old Age Allowance | 1,500 |
| Subsidy of HK$1,800 for each domestic electricity account | 4,300 |
In addition to the above measures, the FS increased the ceiling on taxable donations from 25% to 35% of assessable profits or income. Funds were earmarked to provide for the future, including for a HK$6,000 injection into the MPF accounts of employees and self-employed persons earning not more than HK$10,000 per month (at a cost of HK$8.5 billion) and HK$50 billion fund to assist the implementation of health care reform.
One surprise in the budget was the complete removal of duty from alcohol, other than spirits, with the aim of generating a range of new and increased economic activities associated with the wine appreciation and trade, including trade, storage, distribution, auctions and exhibitions. The FS estimated that this could increase business volume by up to HK$4 billion. Meanwhile, the cost to the government of introducing this measure is expected to be around HK$560 million annually.
As regards other proposals, the FS indicated that the government will:
- Continue to study options on broadening the tax base
- Conduct a public consultation on health care reform
Institute's reaction
The Institute's Taxation Committee chair, Mr. David Southwood, deputy chair, Ms. Ayesha Macpherson, and past president and chair of the Current Issues Task Force, Mr. Paul Chan, hosted a media briefing in the afternoon following the FS's budget speech. While they welcomed many of the concessions, they also pointed to various measures recommended in the Institute's budget submission, which they would have liked to see in the budget, including measures to enhance Hong Kong's longer term competitiveness.
In addition to specific tax measures proposed by the Institute that were echoed in the budget, such as widening of the marginal tax bands, it was also pleasing to see that at least one proposal that the Institute has advocated for many years was introduced this year, namely, the incentives for capital expenditure on environmentally-friendly machinery and equipment. It is clear that the community as a whole is increasingly concerned about the quality of the environment in Hong Kong and government policy, in addition to education and other means, should be used to help effect the changes necessary to improve the situation.
The budget speech also touched on a number of other themes contained in the Institute's proposals to the government, such as healthcare financing, incentives for the renovation of old building stock, improving the lot of Hong Kong's more isolated communities, such as Tin Shui Wai, heritage conservation and promotion of sports and recreation in the year of the Olympics in China, even though the specific measures put forward in the budget may have taken a different form for those proposed by the Institute.
