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Budget commentary

Budget commentary

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In a typical Hong Kong Budget speech, the Financial Secretary announces a big surplus, proposes a few new spending projects, then adds the surplus to reserves. Today’s Budget speech was no exception. Having another year of healthy fiscal surplus gave the Financial Secretary, Paul MP Chan, additional room to spend a bit more than usual on ‘giveaways’.

The three main stated objectives of the Budget were:

  • Diversified economy: To better support and provide a broader range of industries for the future development of Hong Kong
  • Investing in the future: To address the needs of the ageing population and ensure that Hong Kong’s living environment is improved environmentally and technologically, making it an ideal location in which to live and work
  • Caring and sharing: To better support children and young people with care, protection and opportunities; relieve the financial burden of middle-class families; and support the underprivileged and vulnerable in Hong Kong

Looking at the numbers, the Financial Secretary’s estimate of Hong Kong’s fiscal surplus for 2017-18 of HKD 16.3 billion in last year’s budget was significantly lower than the current estimated fiscal surplus of HKD 138 billion. The primary drivers of the government’s higher than expected fiscal surplus are the unexpected increases in revenue from land sales and Stamp Duty.

Hong Kong’s fiscal reserves are expected to reach HKD 1,092 billion by 31 March 2018 and represent almost two years of government expenditure. This is some ‘rainy day’ that Hong Kong is saving for!

Pointing out Hong Kong’s conservative fiscal prudence is by no means a criticism. The approach of maintaining a perennial fiscal surplus has served Hong Kong well in the past and is the envy of many developed economies globally. With the new Chief Executive, Carrie Lam Cheng Yuet-ngor, and the new Financial Secretary, we were interested to see if things would change much this time around, but it turned out to be more of the same. The theory seems to be – “if it ain’t broke, don’t fix it”. Many people will like that.

There had been calls for the government to plough back more money for social development projects. Those people might be disappointed, but perhaps placated by the increased spending, especially on health, education, elderly and disabled care, sports, culture, and community. The disadvantaged and vulnerable members of Hong Kong society are also receiving needed attention from the government.

The real winner is the innovation and technology (I&T) industry. The government is clearly keen to develop this as a pillar industry. Significantly, the government has specifically targeted four aspects of I&T as likely winners, namely biotechnology, artificial intelligence (AI), smart city development and financial technologies (fintech).

For business generally, there was not much to get excited about, as no significant tax incentives or reductions were announced.

The Financial Secretary did highlight in his speech that support would be given to strengthening Hong Kong’s pillar industries. However, while some of the Budget measures discussed were new, they were by no means unexpected or radical.

For the financial services sector, there was some tinkering and enhancement. The highlights include measures to support the Hong Kong bond market, as well as the insurance and asset management sectors. While the details are limited, it is nevertheless welcome.

Financial support and investment was also pledged for the pillar industries of tourism and transportation & logistics, as well as the construction, professional services and creative industries.

Increased access to funding, and assistance for small and medium-sized enterprises (SMEs) was also discussed. Noteworthy support was the pledging of financial assistance to SMEs to enable them to seize opportunities from the ‘Belt & Road’ and Greater Bay Area initiatives.

To address the issue of employment shortages, the Financial Secretary suggested that labour could be imported. This would no doubt be welcomed by the business sector, but one wonders whether this is viable given the high costs of housing and living in Hong Kong.

For the ordinary person on the street, there were the usual tax band adjustments and rebates, but this is nothing new.

Interestingly, parts of the Budget rewarded and encouraged sustainability. These initiatives include green bonds to support the government’s green public works, enhanced tax deductions for energy efficient buildings, the promotion of public transport, and concessions for electric vehicles. For electric cars, new concessions apply where the buyer scraps an existing non-electric car; this is likely to be more effective from an environmental perspective than just a pure exemption as before. Overall, it is difficult to tell whether the new green measures will confer any real environmental benefit.

Finally, the Financial Secretary disclosed that Hong Kong will be departing from the benchmark whereby government expenditure was traditionally linked to 20% of gross domestic product (GDP), rising in the coming year to 21%. This perhaps reflects what he described as the Chief Executive’s “new fiscal philosophy” of focusing on new financial management principles to optimise the use of the surplus for Hong Kong and relieving people’s burdens. As the government copes with these new demands, it needs to be resourced accordingly.

Overall, this was a ‘safe’ Budget. Although it may represent ‘more of the same’, it gives a big win to the I&T sector. The Budget is difficult to object to. It is directionally safe. Some people would have wanted higher expenditure on social and community initiatives, and it is they who might be disappointed. The Budget did not tangibly address some core issues the population faces such as housing affordability and pollution (despite the green initiatives above). The Financial Secretary did mention that financial resources alone would not solve Hong Kong’s housing problem and that the Task Force on Land Supply was considering matters in further detail; his solution for now appears to be that increasing land supply and the coming increases in interest rates will help dampen real estate prices over time.

The projections for the future indicate that the government’s fiscal policy of conservative prudence is unlikely to change in the coming years.

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