Hong Kong 2018-19 Budget Insights

Early days for the new fiscal philosophy

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Whilst the Financial Secretary concluded his 2018-19 budget speech by noting his belief that Hong Kong can brave stormy winds and turn its dreams into reality, a portion of his audience may have hoped for more.

Talk around town for several weeks has focused on the likely magnitude of the 2017-18 fiscal surplus and what should be done to share this bounty with Hong Kong taxpayers and the general public alike. The usual pressure groups have been making suggestions on behalf of their stakeholders, whilst the general public hoped for a cash handout that they could spend in ways that are most appropriate to their individual circumstances. Combined with the Chief Executive’s declaration of a new fiscal philosophy aimed at making better use of fiscal reserves, there was perhaps a heightened optimism that the 2018-19 budget would be something special bringing together a raft of tax breaks with a detailed plan for implementing the government’s declaration of a new philosophy.

Based on the Financial Secretary’s budget speech, we may need to wait a little longer to see the full implementation of the new fiscal philosophy, at least in terms of dipping into our fiscal reserves to fund future investment and of using those reserves to substantially increase the provision of government services in the medium term.

Prudence would however appear to have the upper hand in the 2018-19 budget. Whilst touting the intention to make better use of the 2017-18 surplus, the Financial Secretary nonetheless forecast that public expenditure within the next five years will still be in the range of 21.2% to 21.8% of GDP, a figure not too dissimilar from that appearing in the mid-range forecast contained in last year’s budget. In fact, Hong Kong’s fiscal reserves are projected to increase from the current level of HK$1,091 billion to HK$1,222 billion as at 31 March 2023. Listeners may therefore wonder how better use of a fiscal reserve can be achieved if the absolute fiscal reserve does not reduce.

Furthermore, whilst the planned increased expenditure on innovation and technology is to be applauded, there remains a question of measuring the effectiveness of such expenditure and ensuring that Hong Kong gets the best bang for its tax dollars.

On a more positive note, the Financial Secretary appears to have come up with a couple of novel ideas to address the ageing population concern. Both the annuity scheme and the tax deduction for voluntary MPF contributions should incentivize people to prepare for their retirement. The ultimate success of these two ideas may depend on the final operational details which will be forthcoming.

Alas, the wished-for cash handouts failed to make an appearance in the budget speech. However, the middle class should be pleased with the reasonably generous salaries tax rebate, amended marginal tax rates and increased personal allowances, whilst small or medium sized businesses should be pleased to receive a similar tax rebate.

The Financial Secretary has frequently noted his desire for a caring and just society. In his budget speech, he has to a degree included steps to achieve the same by way of the extra two months of social security payment. The HK$2,000 handout per annum to students from less privileged backgrounds would however appear somewhat on the low side.

In conclusion, the proposals outlined by the Financial Secretary in the 2018-19 budget would appear to be first steps toward a wider implementation of the government’s new fiscal philosophy. We await, with interest, the full roll-out of the new philosophy.

Highlights

  • Reduce profits tax, salaries tax and tax under personal assessment for 2017-18 by 75%, capped at HK$30,000
  • Widen the marginal bands for salaries tax from HK$45,000 to HK$50,000
  • Adjust the marginal tax rates for salaries tax from 2%, 7%, 12% and 17% to 2%, 6%, 10%, 14% and 17%
  • Introduce personal disability allowance of HK$75,000
  • Introduce a tax deduction of up to HK$8,000 per person (including dependents) for premium paid for qualified health insurance products
  • Raise basic and additional child allowances from HK$100,000 to HK$120,000
  • Raise basic and additional dependent parent or grandparent allowances from HK$46,000 to HK$50,000 (aged 60 or above) and from HK$23,000 to HK$25,000 (aged 55 to 59)
  • Raise deduction ceiling for elderly residential care expenses from HK$92,000 to HK$100,000
  • Relax the requirement for election of Personal Assessment by married persons
  • Waive government rates for 2018-19, capped at HK$2,500 per quarter for each rateable property
  • Provide two additional months of various social security payments

Our Budget Insights summarizes the key proposals contained in the budget and our views thereof.