Hong Kong: Budget 2014: Fiscal, Competitive and International Sustainability – March 2014
British Consulate General Hong Kong
Budget 2014 projects growth at 3.5 per cent for next five years but warns of impending fiscal deficit. Budget handouts are on the way out and the fiscal balancing act begins. A continued focus on competitiveness and major infrastructure investments means opportunities abound for UK business.
Financial Secretary John Tsang projected 2014 growth at 3-4 per cent, and average 5-year growth of 3.5 per cent, spurred by improving prospects in developed economies and confidence in Chinese growth above 7 per cent. Inflation was expected to moderate to 3.7 per cent, unemployment to remain at its post-1997 low of 3.1 per cent.
Competitive International City
Tsang announced a battery of measures to defend Hong Kong’s status as one of the world’s most competitive cities:
Infrastructure – capital works commitments to reach HKD340billion (£42.5billion) over the next five years, including the Hong Kong-Zhuhai-Macau bridge and rail upgrades with more to come. There were modest initiatives to ‘digitalise’ Hong Kong.
Financial services – commitment to improving electronic payment systems; stamp duties waived on Exchange Traded Funds and taxes lowered on banking treasury services.
Environmental measures – HKD30 billion (£2.4 billion) committed to waste recycling and treatment infrastructure facilities. Phase out of polluting ‘Pre-Euro IV’ engines for commercial vehicles.
Support for ‘pillar’ service industries – new dedicated logistics sites; new hotel sites and larger fund for tourist ‘ mega events’; a further push on market access to the mainland for professional services; and increased credit support for SMEs.
Tackling Limitations to Hong Kong’s Potential
Manpower, land supply and ageing population were “major constraints to Hong Kong’s future development”. To overcome them, Tsang proposed:
Boosts to vocational training and funding for undergraduate programmes.
Over HKD1.5billion (£116million) of new commitments for older people, from transport subsidies to tax breaks for carers. HK$55bn will be spent on hospital builds and redevelopment.
Land supply – as well as sticking to the existing demand-dampening policies, new commitments made to boost land sales and re-designate 150 sites for residential purposes.
Tsang shared initial findings of his Working Group on Long-Term Fiscal Planning. The fiscal reserves reached HKD755bn by December 2013 (equivalent to 22 months of Government spend). The Budget will continue to return a surplus in the near future, and reserves will reach HKD800bn by 2018.
Under existing policy and economic conditions, Government revenues would grow a robust 4.5 per cent annually over the next 20-30 years; but in the same period Government spend was expected to climb 5.3-7.5 per cent annually. Absent reforms to the revenue base and depending on the rate of expenditure increase, a structural deficit was forecast to emerge within seven to fifteen years.
The Group’s interim recommendations were to control spend (consolidate departmental spend and cap expenditure at 1/5 of GDP); preserve the revenue base (broaden tax base, step up enforcement, consider long-term options); save more for the future.
“Sweeteners” on the Wane
Tsang had pre-briefed on the likelihood of cuts in relief measures . Nonetheless, Budget 2014 included reliefs worth HKD20billion (£155m), including discount on profits and salaries tax and a rates waiver on property rates. For the poor, one additional month of welfare payments was granted alongside one month’s rent for public housing tenants.
Public and media reaction to the Budget has been split along predictable lines: businesses have welcomed the continued focus on infrastructure investment and the longer-term approach to planning the public finances. Some have said they would like to have seen more action to support SMEs and a bigger investment in pillar industries. The media has homed in on disappointment at the reduction in “hand-outs”. Legislators, including some from pro-government parties, have bemoaned an absence of wider support measures for the middle-class.
Despite the tighter fiscal conditions, it is clear that infrastructure investment will remain a focus. HVOs in Hong Kong are already worth £50bn to 2025; as the attached map from the Budget briefing shows, this figure is only set to grow.
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