Hong Kong 2015-16 Budget Insights
A windfall surplus and sweeteners once again highlight the need for better budget estimates
In moving his eighth budget, Financial Secretary Mr. John Tsang has clearly learnt the art of managing expectations. Many commentators may wish him to make similar progress in mastering the science of accurate estimations.
In presiding once again over an unexpected annual surplus, of a magnitude that would make his European counterparts jump with delight, our Financial Secretary may feel that his number crunching civil servants are perhaps not equipping him with the tools whereby he can develop long term fiscal goals and plan strategies to achieve those goals.
Absent an ability to accurately estimate revenues and expenses, our Financial Secretary may forever be trapped in a cycle of issuing prophecies of long term doom whilst presiding over an embarrassment of short term riches. Such a cycle also makes it harder for the Financial Secretary to pursue his stated desire to wean Hong Kong taxpayers off their addiction to the so called “one-off” sweeteners that have now become de facto requirements of any Hong Kong budget.
Given that when moving last year’s budget the Financial Secretary estimated a 2014-15 surplus of HK$9.1 billion, he would have been acutely aware that his announcement today of a revised surplus for 2014-15 of HK$91.3 billion (almost ten times his original estimate) was sure to raise some eyebrows and lead for calls for the required sweeteners.
Perhaps in the weeks preceding today’s budget the Financial Secretary chose to downplay the likely sweeteners on offer. In doing so, he may have hoped to pleasantly surprise taxpayers with today’s announcement of reductions in profits and salaries tax (capped at HK$20,000 instead of HK$10,000), a waiver of rates (subject to a ceiling of HK$2,500 instead of HK$1,500) and increased child allowance of HK$100,000. By announcing such pleasant surprises, he may have hoped to reduce the possibility of his having to face tough questions, such as: why a surplus of such magnitude arose and what he will do with the same, other than merely save it for a rainy day?
The art of managing expectations was perhaps also on display when the Financial Secretary deftly quoted his revised estimate for the 2014-15 budget surplus at HK$63.8 billon rather than HK$91.3 billion, i.e., the amount he quoted was apparently after setting aside HK$27.5 billion for the “Housing Reserve” which he created as recently as December 2014.
On a positive note, the initiatives in respect of corporate treasury centers, private equity funds and the economic development of various sectors of Hong Kong (including aerospace financing and intellectual property trading) were welcomed. Likewise, the creation of the Future Fund and the Housing Reserve are prudent steps that will at least set aside for future use a portion of the more than HK$800 billion fiscal reserves currently available.
Whilst the Future Fund has been established in the context of addressing the structural deficit forecast in the next ten years and has not been designated for any particular purpose, it is hoped that the amounts set aside can be spent on areas deemed worthy by the community.
Our Budget Insights summarizes the key proposals contained in the budget and our views thereof.
- Budget measures aim to enhance Hong Kong’s tax competitiveness
- Address the asymmetrical tax treatment faced by corporate treasury companies
- Extend the tax exemption to non-resident private equity funds
- Promote the development of aircraft leasing business
- Promote Hong Kong as an intellectual property trading hub
- Key budget assumptions, budgetary criteria and projections