Financial Secretary delivers 2017-2018 Budget - 22 February 2017
Budget to boost Hong Kong's pillar industries and promote diversified economic development
Hong Kong's Financial Secretary, Mr Paul Chan, presented his 2017-2018 Budget to the Legislative Council on Wednesday 22 February 2017.
He announced that the overall revenue for the Hong Kong Special Administrative Region Government in the financial year 2016-2017 is estimated to be HK$559.5 billion (EUR 68.66 billion) while the expenditure is expected to reach HK$466.7 billion (EUR 57.27 billion). With a fiscal surplus of HK$92.8 billion (EUR 11.38 billion), the fiscal reserves are expected to reach HK$935.7 billion (EUR 114.82 billion) by 31 March 2017. All of the surplus will be returned to the people through one-off relief measures including tax breaks and rates rebates worth HK$35.1 billion (EUR 4.30 billion) and longer-term investments of HK$61 billion (EUR 7.48 billion) for community benefit in areas such as elderly services, sports and recreation facilities, innovation and technology as well as youth development.
Mr Chan pledged to boost pillar industries, promote diversified economic development and invest in the future. While recognising the effect of market forces, the Government should play an active role as a facilitator by taking forward appropriate policies with the optimal use of public resources.
Economic Performance in 2016
- Hong Kong's economic growth picked up over the course of 2016, after a weak performance in the first quarter. Exports improved in the latter part of the year and domestic demand was stronger. GDP grew by 1.9% for the year as a whole, compared to 2.4% in 2015. The labour market was in full employment, with the unemployment rate staying at a low average of 3.4%. Inflation pressure was moderate at 2.3%.
- Hong Kong is one of the most advanced economies in the world, despite the relatively small scale of its economy. Its GDP per capita has now reached US$ 44,000 (EUR 41,899), overtaking Japan and many advanced economies in Europe.
Economic Outlook for 2017
- Granting no severe external shocks, Mr Chan said he expected Hong Kong's economy to grow by 2% to 3% in 2017. Favourable conditions in the job market and rising labour earnings are bolstering consumer confidence. Sustained increases in infrastructure and other building and construction activities should provide momentum for domestic demand. The inflation rate for 2017 as a whole will be 1.8%.
- He said the growth of the Mainland economy is increasingly driven by domestic demand and the service sector, and is moving towards a pattern of sustainable development. It should be able to maintain a medium-high pace of growth, remaining a mainstay supporting global economic growth. Emerging markets in Asia will remain the main propellers of global economic growth. Mr Chan warned of uncertainties brought about by global political changes and rising populist and protectionist sentiments. There is increasing market concern over whether the United States will roll out a number of trade protection measures, which may disrupt the improving growth momentum in global trade. Mr Chan warned of potential risks to the Hong Kong property market, should the US Fed normalise interest rates at a faster pace this year. The HKSAR Government is committed to increasing land and housing supply, and expects the supply of residential flats will increase 'substantially'; in the next few years. In Europe, Brexit developments and the general elections in some major EU countries this year will add uncertainties to the political and economic outlook. This may weigh on the global monetary and financial stability as well as on the European economy, Mr Chan said.
- A set of tax and short-term relief measures, together with other spending initiatives in the Budget, will have a fiscal stimulus effect of boosting GDP by 1.1% in 2017. One-off relief measures include reducing salaries tax and profits tax by 75%, subject to a ceiling of HK$ 20,000 (EUR 2,454). These proposals will benefit 1.84 million and 132 000 taxpayers respectively and reduce government revenue by HK $18.3 billion (EUR 2.24 billion).
- As a responsible government, we have to cope with the huge expenditure needs under different economic scenarios, examine the international competitiveness of Hong Kong's tax regime and address the problem of a narrow tax base. Mr Chan planned to set up a tax policy unit in the Financial Services and the Treasury Bureau to comprehensively examine these tax issues from a macro perspective. The unit will seek to align tax practices with international standards and actively study ways to foster the development of pillar industries, industries over which Hong Kong has advantages and emerging industries through tax measures including enhanced deductions for I&T expenditure, so as to ensure that Hong Kong remains competitive and can create wealth.
- The international community has proposed a number of new initiatives to enhance tax transparency and combat cross-border tax evasion. Regarding the package of measures put forward by the Organisation for Economic Co-operation and Development to tackle 'base erosion and profit shifting'; (BEPS), Hong Kong has joined the inclusive framework set up by the international community for implementing the BEPS package.
Enhancing pillar industries
Mr Chan announced a series of measures to enhance Hong Kong's pillar industries (trade and logistics, financial services, tourism, and business and professional services, which together account for 60% of Hong Kong's GDP).
Trade and Logistics
- The value of Hong Kong's external merchandise trade amounted to about HK$7.6 trillion (EUR 932 billion) in 2016, a rise of 50% over the past decade. In terms of the total value of trade, Hong Kong was ranked the eighth largest trading entity in the world in 2015, up three places from its position ten years ago.
- Hong Kong is discussing with the Central Government further expansion and enhancement of the Mainland Hong Kong Closer Economic Partnership Arrangement (CEPA), with the aim of achieving some concrete results by the middle of this year. In addition, Hong Kong will continue free trade agreement negotiations with the Association of Southeast Asian Nations (ASEAN) as well as Georgia on the land route and Maldives on the maritime route of China's Belt and Road Initiative.
- The establishment of a Trade Single Window will provide a one-stop electronic platform for the lodging of trade documents, promote cross-border customs co-operation and expedite trade declaration and customs clearance with a view to facilitating trade.
- Rapid development of the civil aviation industry in Asia in recent years has generated a long-term demand for aircraft leasing in the market. The Government intends to offer a tax concession to attract aircraft leasing companies to develop their business in Hong Kong.
- The Government and the Airport Authority will actively examine facilitation measures to promote air-to-air transhipment in Hong Kong, with a view to enhancing the HKIA's competitive edge as an international air cargo hub.
- In view of the rapid development of high value-added third-party logistics services over the past decade, the Government has reserved two sites in Tuen Mun West totalling around ten hectares for high value-added logistics services. It will endeavour to release the land for use by the industry as early as practicable.
- Last year, for the second year in a row, Hong Kong ranked first globally in terms of funds raised through initial public offerings (IPO). The funds so raised amounted to US$25.1 billion (EUR 3.07 billion). To better respond to rapid developments in the market, the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEX) jointly conducted a consultation on proposed enhancements to the decision-making and governance structure for listing regulation last year, and are considering and analysing the views carefully. The HKEX is also reviewing the positioning of Growth Enterprise Market (GEM) stocks and making an assessment of the feasibility of introducing a new board. Once more concrete progress is made, public consultation on the relevant conceptual proposals will be launched to map out the direction for long-term development.
- The launch of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect are of groundbreaking significance to mutual capital market access between Hong Kong and the Mainland. The implementation of the Mainland-Hong Kong Mutual Recognition of Funds Arrangement since 2015 has brought about a wider range of products for the fund business and fuller mutual access between financial markets in both places. Last year, the SFC signed a Memorandum of Understanding on mutual recognition of funds with the Swiss Financial Market Supervisory Authority, which allows eligible public funds in Hong Kong to gain direct access to the investing public in the Swiss market through a streamlined vetting process. The SFC is actively negotiating similar arrangements with other jurisdictions and we hope that more agreements can be concluded.
- To facilitate Hong Kong's development into a full-fledged fund service centre, we propose to extend the profits tax exemption to onshore privately-offered open-ended fund companies. The proposal will help attract more funds to domicile in Hong Kong and build up Hong Kong's fund manufacturing capabilities.
- Today, around 70% of the world's Renminbi (RMB) payment transactions are processed via Hong Kong. The Government will continue to explore with the Mainland authorities ways to open more channels for two-way cross-border RMB fund flows.
- As a member of the Financial Action Task Force, Hong Kong has been actively involved in global actions against money laundering. The Financial Services and the Treasury Bureau is conducting consultations on legislative proposals to enhance the regulatory regime for combating money laundering and terrorist financing, and will introduce the relevant amendment bills into the Legislative Council for scrutiny in the middle of this year.
- The Government is pressing ahead with the work of reforming the regulatory regime for listed entity auditors to make the oversight regime independent from the audit profession. The relevant amendment bill, to be introduced into the Legislative Council in the second quarter of the year, will strengthen the functions of the Financial Reporting Council (FRC), enabling the FRC to become an independent oversight body of listed entity auditors.
- The Government will continue to support SMEs through various existing programmes and funds, and proposes to strengthen the underwriting capacity of the Hong Kong Export Credit Insurance Corporation.
- The Government would continue efforts to explore new markets for the commercial sector and professionals, with the opening of a new Hong Kong Economic and Trade Office (HKETO) last year in Indonesia, and new HKETOs planned for Korea, India, Mexico, Russia, South Africa and the United Arab Emirates. The network of liaison offices in the Mainland will also be strengthened to provide a more even spread throughout the country.
- Over the past decade, the number of visitor arrivals has more than doubled from 25 million in 2006 to over 56 million in 2016, making Hong Kong one of the most popular cities in the world in terms of visitor arrivals. The number of overnight visitor arrivals for Meetings, Incentive Travels, Conventions and Exhibitions (MICE) grew by 9.9% in the past year. As regards cruise tourism, the number of ship calls at the Kai Tak Cruise Terminal last year was close to 100, an increase of around 70% compared with 2015. The number of ship calls is estimated to further rise to about 200 this year. The cruise passenger throughput at the Kai Tak Cruise Terminal last year also reached about 420,000, representing an increase of around 60% as compared with 2015. While the situation in the tourism industry has become more stable, the outlook for the coming year remains challenging and an additional sum of HK$ 234 million (EUR 29.79 million) would be allocated to supporting the tourism industry in 2017-18.
Supporting other industries
The Financial Secretary said that while strengthening its pillar industries, Hong Kong will seize the opportunities and support the development of industries where it has advantages, as well as emerging industries, to further diversify its economy.
- To help the development of financial technologies (Fintech), the Hong Kong Monetary Authority is developing a new Faster Payment System to provide a round-the-clock inter-bank real‑time payment platform. The Government will also encourage the industry to make good use of the trial environment provided by the Fintech Supervisory Sandbox, so as to deliver more products and services based on different kinds of new technology.
- The Government will reserve HK $10 billion (EUR 1.22 billion) to support innovation and technology (I&T) development in Hong Kong. A new committee on I&T development and re-industrialisation would be set up to co-ordinate the I&T development and re‑industrialisation of Hong Kong. A new tax policy unit will also explore enhanced tax deductions for I&T expenditure.
- The Government fully supports the Hong Kong Productivity Council (HKPC) in facilitating industrial upgrading and transformation for a shift towards high value-added production. The Government has also commissioned the HKPC to establish an Inno Space to turn innovative and technological ideas into industrial designs or products, with a view to expanding the start-up culture in Hong Kong and supporting re-industrialisation.
- The Government will sponsor a series of celebration events at home and abroad to showcase the robust development of Hong Kong's creative industries during the 20th anniversary of the establishment of the Hong Kong Special Administrative Region in 2017.
Full details of the 2017-2018 Budget here.