Hong Kong’s 2018-19 Budget Targets a Diversified Economy

By I-Ting Shelly Lin

On February 28, the Financial Secretary of Hong Kong released the 2018-2019 Budget, confirming the government’s new fiscal policy and budget strategies for the coming financial year. Hong Kong authorities say the budget’s primary goals are to create a more diversified economy, invest for the future, and address the needs of the people.

The budget featured four main themes: “a diversified economy”, “caring and sharing”, “enhancing livability”, and “manpower training”. Critics, however, point to the insufficient attention given to quality of life issues, such as housing affordability and income inequality, and the overall effort to transform the city’s economy. Many observers have said the budget lacked ambition.

A diversified economy

Stimulating the economy and supporting pillar industries

The government proposed measures to stimulate the economy and support pillar industries, highlighting Hong Kong’s ambition to consolidate its status as Asia’s international trade and investment hub.

These measures include aiding SMEs to extend the scope of their business to mainland China and ASEAN along the Belt & Road and Greater Bay Area, injecting HK$1 billion (US$127.54 million) to strengthen the creative industry by training youth and helping startups, promoting green business, and launching a three-year pilot bond scheme to attract local, mainland, and overseas enterprises to issue bonds in Hong Kong.

For the information technology (IT) industry, the budget sets aside HK$50 billion (US$6.37 billion) to encourage R&D investments in biotechnology, artificial intelligence, smart city, and fintech. This is much more than last year’s HK$10 billion (US$1.27 billion), implying that the sector is a key priority for the government.

Tax incentives and reductions

The government agreed to provide additional tax deductions for local R&D spending, saying that the first HK$2 million (US$255,000) invested for R&D in a business can be deducted by 300 percent, with the balance able to be deducted by 200 percent. For businesses more generally, there were no significant tax incentives or reductions.

International cooperation

The budget states that Hong Kong is actively seeking opportunities to sign free trade agreements, investment treaties, and comprehensive double taxation avoidance agreements with other economies, including those along the Belt & Road Initiative.

Some analysts believe that the government should provide clearer guidance for taxpayers and consider more tax incentives to develop R&D in Hong Kong. Analysts also suggest providing concessionary tax exemptions to attract foreign talent.

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Caring and sharing

Relieving individual tax burdens and social welfare

A number of tax measures targeted at relieving tax burdens of middle-income families are proposed in the budget, all of which require legislative amendments before implementation.

Regarding the profits tax, the salaries tax, and tax under personal assessment, one-off reduction measures offer 75 percent reduction up to a maximum of HK$30,000 (US$3,827) for 2017/18, with reductions reflecting in the final tax for the year of assessment 2017-18, which will generally ease the burden of doing business in Hong Kong.

The budget widens the salaries tax band from the current HK$45,000 to HK$50,000 (US$5,740 to US$6,378) and changes the number of tax bands from four to five, with marginal tax rates adjusted to two percent, six percent, 10 percent, 14 percent, and 17 percent, respectively.

Child, parent, and grandparent allowances have been increased, and range from HK$20,000 to HK$40,000 (US$2,551 to US$5,102). Rates are waived for each ratable property for the four quarters of 2018-19, capping at $2,500 (US$318) per quarter. The Financial Secretary further described measures to improve support for the unemployed, elderly, youth, and minorities.

While the government has made an effort to reduce long-term tax burdens on individuals, and respond to problems arising from an aging population, some recommend a broader range of solutions to combat these issues.

Enhancing livability

Environmental challenges

The government will continue its effort to manage environmental problems. Enterprises investing in eligible energy efficient building installations and renewable energy devices can have their capital expenditures fully deducted within one year, for which the Environment Bureau will provide more details.

In addition, to promote the use of electric vehicles, the “one-for-one replacement” scheme allows tax concessions up to HK$250,000 (US$31,888) when traditional car owners purchase new private electric vehicles.

Responding to land and healthcare problems

Long-term land and housing problems, along with public healthcare issues, are also addressed in the budget. The budget commits to an estimated 100,000 new public housing supply units in five years.

The government is also promising to release industrial and commercial resources for up to 530,000 square meters of floor area. As for healthcare, HK$71.2 billion (US$9.08 billion) will be injected, a 13 percent increase compared with last year.

Despite these measures, analysts argue that this budget does not have adequate measures to cool market prices or help people into home ownership.

Manpower training

Continuing education and youth development

The budget allocated HK$5 billion (US$637.73 million) on a regular basis to education, along with an expenditure increase of another HK$2 billion (US$255.09 million). The government injected an additional HK$8.5 billion (US$1.08 billion) in the continuing education fund, which is estimated to benefit 610,000 people. The government also earmarked HK$2 billion (US$255.09 million) to promote youth development.

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A safe budget

Hong Kong’s 2018-19 budget shows the government‘s determination to maintain local sustainability while seizing opportunities overseas. Of the estimated surplus of HK$138 billion (US$17.63 billion) in 2017-18, 40 percent is shared with the public, with the remaining 60 percent invested for the future.

The Financial Secretary estimates three to four percent GDP growth in this year, similar to last year, and that the revenue and expenditure of the government – over the next five years – will record a surplus.

Paul Dwyer, Director for International Tax and Transfer Pricing at Dezan Shira & Associates, said, “It was a safe budget. The biggest winner is the IT industry; the government is keen to develop this industry. The government also set aside HK$500 million (US$63.77 million) for the development of the financial services industry”.

In terms of the challenges and opportunities going forward, Dwyer said that extremely high costs and poor infrastructure have translated into a low quality of life for most people. Alberto Vettoretti, Managing Partner at Dezan Shira & Associates, elaborated, “The budget has not really addressed the biggest issues: keeping runaway real estate costs under control and attracting foreign professionals to the city.”

Vettoretti said, “High real estate costs are very welcome by the Hong Kong government, as real estate is its biggest source of income.” Further, Vettoretti argued that compared to competing economies like Singapore, Hong Kong has not done enough to attract foreign professionals.

To improve these conditions, Dwyer recommends that “Hong Kong must become an easier and more attractive place to do business. Hong Kong must become more international and should start to attract new investment from a variety of overseas sources in industries, other than financial services, and take significant steps to attract and retain international workers.”

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