Tax cuts to benefit sandwich class most

PUBLISHED : Thursday, 03 March, 1994, 12:00am
UPDATED : Thursday, 03 March, 1994, 12:00am

THE Budget contains a number of surprises.

The corporate profit tax rate is cut to 16.5 per cent from 17.5 per cent and personal salary tax allowances are raised by 28 per cent, much more than the inflation rate of 8.5 per cent last year.

Although the standard rate of salary tax remains unchanged at 15 per cent, the top marginal tax rate is reduced to 20 per cent from 25 per cent and stamp duty for low-end property transactions is cut substantially.

The cut in corporate tax rates reduces the tax burden for a company which has full exposure in Hong Kong by 5.7 per cent.

The change should help to reinforce Hong Kong's reputation as a low-tax region. However, its impact on the earnings of individual listed companies will depend on the effective tax rate of the company.

Nevertheless, it is positive news for business.

The tax concessions given to salaried taxpayers are substantial. According to Sir Hamish MacLeod's estimation, an amount of $3.2 billion will be put back into the pockets of taxpayers - roughly equal to 0.6 per cent of 1993's private consumption expenditure.

A significant portion of this is likely to go to consumer spending. But the expansionary effect of the additional consumption will be limited because consumption expenditure usually has a strong import leakage.

However, the sharp reduction in the number of people liable for tax may well be too great for comfort. About 420,000 existing taxpayers will have no tax liabilities in 1994/95. The fact that fewer people will bear the tax burden means that tax revenue is likely to become more volatile and sensitive to business cycles.

The main beneficiary will be the sandwich class where annual income is about $240,000, because they benefit most from the salary tax concessions. In fact, on the new scale a single person will not need to pay the standard rate until his income reaches $444,000, as compared to $258,000 at present.

In addition, the cut in stamp duty on a typical $3 million flat also benefits the sandwich class home-buyer.

Although the surplus Budget proposed by Sir Hamish should in theory be deflationary, the Financial Secretary admitted that its impact on inflation was minimal.

Furthermore, no substantial increase is seen in duties on commodities. Even the increase in fuel duty is also only in line with inflation, so the Budget should be neutral to the domestic inflation trend.

For the economy, an interesting aspect of the Budget is that the Government expects a fiscal surplus of $7.7 billion in 1994/95, rather than a deficit of $16.7 billion as projected in the previous Budget. The projected revenue growth remains buoyant, even with a number of major concessions in taxes.

The Government's assumption on the economy is optimistic. The Government projects gross domestic product (GDP) will grow by another 5.5 per cent this year.

Two points should be noted in the official economic forecast: Export growth is expected to be strong at 16.5 per cent, compared to 13 per cent last year. However, it is assumed that shipments to China will continue to be robust this year, despite the fact that the Chinese Government is trying to slow economic growth on the mainland.

Even with a strong US recovery, it seems likely that Hong Kong can only benefit to a limited extent. It is possible that the official forecast is slightly too optimistic.

The inflation trend is flat, with the official forecast of 8.5 per cent for this year, the same as last year. However, it contradicts the observation that the underlying inflation trend has been moderating continuously.

But, the optimistic forecasts do explain why the Government expects inflation to be flattening off.

Nevertheless, it is probable that GDP growth will slow to 4.7 per cent this year. Our inflation forecast of eight per cent for the year is below the official forecast.

Tax concessions are always welcome, but the official forecasts for the economy should be treated with caution.

If the economy really slows this year, as we predict, the expected surplus of $7.7 billion will be reduced, or even turn into a deficit.

However, we still believe that given a healthy fiscal reserve base, the Government is unlikely to raise taxes in the three years to 1997.