EY: A Budget requiring society to indicate its choice

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Hong Kong, 26 February 2014 – The Financial Secretary John Tsang delivered the 2014-15 budget speech earlier today.

Structural deficit

Agnes Chan, Managing Partner for Hong Kong and Macau, EY, says: “Based on different assumptions and scenarios, the Working Group on Long-Term Fiscal Planning set up by the Financial Secretary warned that a structural deficit could surface in Hong Kong within 7 years. However, given that the Group forecasts that the projected government revenue for 2041/42 would be 19.8% of Hong Kong’s GDP, the dreaded structural deficit could be avoided if Hong Kong adheres to its long tried-and-tested policy of pursuing fiscal discipline.

One key plank of Hong Kong's fiscal discipline has been to maintain public expenditure within 20% of GDP. If for whatever reason future public expenditure exceeds 20% of GDP on an annual basis Hong Kong society as a whole will face a painful and difficult choice, namely whether to reduce public expenditure, increase revenue by taxation within the framework of the Basic Law, or run the risk of a structural deficit.”

Phasing out of one-off relief measures

Grace Tang, a Tax and Business Advisory Services Partner at EY, says: “The one-off relief measures worth HK$33 billion in the last budget were reduced to items worth only HK20 billion in this year’s budget. The reduction was mainly as a result of the waiver of rates being cut by half and no electricity subsidies being granted for 2014/15 as compared to last year. This phasing out of the one-off relief measures will probably continue in subsequent budgets, given the government’s commitment to increase certain recurrent expenditure programs. It remains to be seen whether the public will be satisfied that the money saved from the phasing out of these one-off relief measures will be spent on worthy causes.”

Competitiveness of Hong Kong’s tax system

Tracy Ho, Tax Managing Partner, Hong Kong & Macau at EY, says: “While the Financial Secretary stressed the importance of enhancing the competitiveness of Hong Kong by way of increasing the productivity of its manpower and land supply, we would also like the Financial Secretary to consider introducing tax incentives to promote certain targeted industries in order to diversify the economic structure of Hong Kong. In this regard, we welcome the Financial Secretary’s announcement today that, with a view to attracting more treasury activities to Hong Kong, he intends to appoint a task force to review the current restrictive rules for tax deduction in respect of interest incurred by group treasury companies.”

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This news release has been issued by Ernst & Young, China, a member of the global EY organization.