Commentary on the 2007 Budget

The economy

The budget revealed a continuing robust performance by the economy in 2006/07. Real growth in gross domestic product ("GDP") was 6.8% in 2006, following an average annual increase of 7.6% over the past three years. A 4.5% to 5.5% growth in GDP in real terms is forecast for 2007 and an annual trend growth rate forecast over the period 2008 to 2011 is estimated to be 4.5% in real terms. The inflation rate was 2% in 2006, measured by the Composite Consumer Price Index, slightly lower than the 2.3% forecast in the 2006/07 budget. It is expected to drop further to 1.5% in 2007. During the year, the unemployment rate fell to a six-year low of 4.4% compared with its peak of 8.5% in mid-2003.

Public finances

Government revenue was far higher than expected, due to the strengthening economy, increased corporate profits and salaries, the buoyant stock market and a stable property market. The FS forecasted a consolidated budget surplus of HK$55.1 billion for 2006/07 (a HK$38.6 billion surplus on the operating account and a HK$16.5 billion surplus on the capital account), almost ten times surplus of HK$5.6 billion originally forecast in the 2006/07 budget. The positive outturn for 2006/07 has improved the government's financial position significantly. A consolidated surplus, of HK$25.4 billion, is also forecast for 2007/08. However, while the FS suggested that, should a decision be made on a civil service pay adjustment, it was estimated that the 2007/08 budget could meet this requirement, it is not clear that the figure for the projected surplus has taken this fully into account.

The fiscal reserves were expected to stand at HK$365.8 billion as at 31 March 2007 and to be maintained in the range of HK$390 billion and HK$580 billion over the next five years, equivalent to 19 to 24 months of government expenditure.

The Commissioner of Inland Revenue subsequently announced in May 2007 that a record HK$155 billion had been collected in tax revenue during 2006/07. This was due to increases in profits and salaries tax receipts and to a significant jump in stamp duty, which increased by HK$8 billion or 40% over 2006/07. Stamp duty on stock transactions accounted for 60%, or HK$15 billion of the total income of HK$25 billion from this source.

Tax measures

In view of the healthy fiscal situation, the FS announced around HK$20 billion in tax concessions and social welfare assistance in the 2007/08 budget, including around HK$14.8 billion in one-off measures. Specific revenue measures and concessions included:  

Salaries Tax

• Salaries marginal tax rates and tax bands restored to their 2002/03 levels (i.e. 2%, 7%, 12% and 17% for the marginal rates and HK$35,000 for the tax bandwidth).
• Child allowances increased from HK$40,000 to HK$50,000 per child, with an additional one-off child allowance of HK$50,000 for each child in the year of birth.
• Maximum amount of deduction for self-education expenses increased from HK$40,000 to HK$60,000.

Government Duties and Charges

• Stamp duty on transactions involving properties valued between HK$1million and HK$2million reduced from 0.75% to a fixed amount of $100.
• Alcohol duty on wine reduced from 80% to 40%, and on beer and other types of liquor containing not more than 30% of alcohol reduced from 40% to 20%.
• Duty-free quantities of tobacco and liquor that may be brought into Hong Kong aligned for local residents and visitors, at three packets of cigarettes and 1 litre of liquor respectively.

One-off Measures

• 50% of salaries tax and tax under personal assessment assessed for 2006/07 waived, subject to a ceiling of HK$15,000. This will be deducted from taxpayers' final tax payable for the year.
• Rates for the first two quarters of 2007/08 waived, subject to a ceiling of HK$5,000 per quarter.
• One additional month's standard rate payments for CSSA recipients and one additional month of allowance for recipients of Old Age Allowance and Disabilities Allowance.

The following were amongst other economic and social measures announced:

• HK$3.1 billion for replacement of the existing air traffic control system and new headquarters for the Civil Aviation Department
• HK$300 million to establish a new fund to help film development
• HK$29 billion a year, on average, to expedite the implementation of major infrastructure projects
• Revision of income sharing arrangements between the fiscal reserves and the Exchange Fund to reduce volatility in government revenue
• HK$210 million to provide WiFi networks in government venues for free use by the public
• About HK$900 million to help the disadvantaged, including:
  • One-year pilot Transport Support Scheme, to encourage unemployed and low-income people in remote areas to seek jobs and work across districts
  • Setting up of a child development fund

As regards other legislative proposals the FS referred to:

• A bill on producer-responsibility schemes for plastic bags expected to be introduced within the year
• Views received from the consultation on a cross-sectoral competition law to be considered

Institute's reaction

The Institute's Taxation Committee chair, Ms. Yvonne Law, commented on the 2007/08 budget at a media briefing held in the afternoon following the budget speech. The Institute considers that, while the budget is good for the short term, important long-term issues of tax policy and reform still need to be addressed. There was also some disappointment at the lack of specific measures to boost Hong Kong's business competitiveness, such as tax concessions for regional offices and HQs and group relief.

The Institute was glad to note that the government is considering healthcare financing and the proposal to allow deductions for payment of medical insurance premiums. This was one of the proposals contained in the Institute's Budget Proposals 2007/08 to the FS.

As regards environmental taxation, proposals on which were also contained in the pre-budget submission to the FS, the Institute believes that a more coordinated approach should be adopted.

The Institute welcomed the FS's proposal to structure the investment returns from the fiscal reserves for more stable returns, which should help even out some of the budget volatility, and urged the government to continue to monitor expenditure notwithstanding the present surplus.