In the 12 months since the Financial Secretary, Mr John Tsang Chun-wah, delivered his maiden budget, there has been a dramatic change in fortune for the global economy. The theme of last year's budget was "leaving wealth to the people". That budget rode off the back of a buoyant economy that generated a record surplus to the Government and allowed the Financial Secretary to deliver a generous package of tax cuts and subsidies. However, perhaps with some foresight and knowledge of what was to come, the Financial Secretary noted that with the rapid changes in the global economy, Hong Kong was likely to encounter challenges going forward and would need to face such challenges "head on".
Since then, the changes in the global economy could not have been more dramatic. The meltdown that has occurred in global financial markets has had a severe impact on global growth and in particular, on the fortunes of Hong Kong.
Hong Kong has gone from a growth rate of 6.3 percent in 2007 to record negative growth in the last quarter of 2008. GDP growth fell from 7.3 percent in the first quarter of 2008, to 4.3 percent in the second quarter, 1.7 per cent in the third quarter, and negative 2.5 percent in the fourth quarter. For 2008 as a whole, GDP grew by 2.5 percent, lower than the growth rate trend over the past 10 years.
The global credit crisis has caused a sharp decline in demand for goods manufactured in Asia, which has had a negative impact on goods exported through Hong Kong. Many economists are predicting that the Hong Kong economy will officially slip into recession in 2009, with many not anticipating a rebound until sometime in 2010. Furthermore, the decrease in consumer confidence in Hong Kong, led principally by a surge in job losses and reducing asset and property values, has had a similarly negative impact on domestic demand.
Although inflation was a key concern of the Government this time last year, the current concern is with the risk of deflation as a result of the combined impact of declining growth, decreasing asset values and the crisis in the banking sector.
Despite the downturn in economic fortunes, Hong Kong's fiscal reserves remain strong, which should enable it to come through the global crisis faster and in better financial shape than many of its global counterparts. Hong Kong's fiscal reserves are expected to be HKD 488 billion by the end of March 2009, equivalent to 18 months of government expenditure.
With strong fiscal reserves supporting the Government, the focus of this year's budget has been on stabilising the financial system and job creation, especially with respect to our four pillar industries, namely financial services, logistics, tourism, and business support and professional services. These sectors employ the vast majority of people in Hong Kong and therefore naturally should be the focus of the Government's spending initiatives.
The financial services sector remains a key part of Hong Kong's economy, both in terms of providing the necessary funding for businesses to operate and in terms of the number of people it employs either direcly or indirectly. The sudden deterioration in the global financial system and its impact on the Hong Kong economy perhaps took many industry observers by surprise. In response, the Government has taken or announced a number of measures to strengthen the financial sector, including:
These measures are all part of an economic rescue strategy, which involves "stabilising the financial system, supporting enterprises and preserving employment". The Government has also acknowledged that measures are needed to improve Hong Kong's regime as a platform for Islamic finance. The Government will introduce provisions to create a level playing field for Islamic financial products vis-a-vis traditional financial products.
Job creation is a major focus of the Government, and it will continue to focus on initiatives to create opportunities for employment in Hong Kong to ease the pressure of economic contraction and boost domestic demand. Some of these initiatives include:
The Government's measures aim to create about 62,000 jobs and internship opportunities in the next three years. We would expect that many university graduates will benefit from the scheme through employment opportunities that otherwise would not exist in the absence of the internship subsidy.
The Government is also promoting sustainable economic development, focusing on the integrated economies of Hong Kong, Guangdong and Macau and intends to speed up the development of key capital infrastructure projects. These developments are also expected to boost employment opportunities in Hong Kong.
The specific tax incentives and concessions announced by the Financial Secretary are somewhat limited in comparison. They include a 50 percent tax rebate of up to HKD 6,000 for Salaries Tax and a waiver of rates for the first two quarters of 2009/10. As with last year, the tax rebate will be given when the final 2008/09 tax liabilities are payable in early 2010. Government charges have also been frozen at the current level and public-housing rents will be reduced by 20 percent.
One positive development in the area of tax is the Government's confirmation that it will continue to pursue double taxation agreements with our major trading partners. Such agreements are seen as vital to enhance Hong Kong's position as a global financial and trading centre. However, to facilitate the execution of new agreements, Hong Kong will need to align its arrangements for the exchange of tax information with international standards. The Government will therefore propose new legislation to provide for this to be implemented.
With the planned stimulus packages, the Government is estimating an operating budget deficit for the next three fiscal years. A deficit of HKD 9.8 billion is expected in 2009/10, reducing to HKD 4.4 billion in 2011/12. A return to operating surplus is predicted in 2012/13. Although it is important for the Government to implement the necessary spending measures to assist the economy during this economic downturn, the longer Hong Kong remains in a deficit position, the more questions will again be asked whether its narrow tax base can continue to support the levels of public expenditure needed to run the economy. However, it remains unlikely that the Government will reconsider new indirect taxes, such as a GST, in the near furture.
Finally, last year, we noted in our commentary that the Government will need to closely monitor the impact that the US sub-prime mortgage crisis and a possible US recession could have on Hong Kong??s economic prospects. Although the financial crisis is clearly more severe than most observers would have predicted 12 months ago, Hong Kong does have the financial resources, skilled workforce and legal and regulatory framework to come through the downturn stronger than many other economies. Hong Kong remains the gateway to China, and continues to position itself to benefit from its growth and economic success.
As in prior years, the Government's mantra has been that if we work together, we will reap the rewards of our efforts and eventually overcome difficulties. This is what they refer to as the "Hong Kong Spirit".
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