Hong Kong reboots with ‘back to the future’ budget as Paul Chan splashes HK$50 billion on hi-tech spending and HK$50 billion on goodies
With a record surplus of HK$138 billion, financial secretary unveils spending blueprint that includes targeted tax reliefs, rate waivers and beefed-up allowances – and lots of money for innovation and technology
• GDP to grow 3 to 4 per cent this year
• Fiscal reserves expected to reach HK$1.092 trillion
• HK$138 billion fiscal surplus; 40 per cent to be spent on relief measures
• HK$50 billion in tax breaks; reductions on salaries and profits tax, rates
• HK$50 billion for innovation and technology development
• HK$2,000 one-off cash handout for poor students
• No tax waiver on electric cars but drivers get subsidised one-for-one replacement scheme, capped at HK$250,000
• One-off allowance to ‘N-nothings’ makes comeback
A budget with a clear eye on the future and massive expenditure to alleviate people’s burdens – these were the twin pledges from Financial Secretary Paul Chan Mo-po as he set out the Hong Kong government’s spending blueprint with a record surplus of HK$138 billion (US$17.7 billion) as its centrepiece.
A chunk of the bounty, more than HK$50 billion, will be shared with at least 2 million Hongkongers – mostly through targeted tax reliefs, rate waivers and beefed-up allowances. And in an even-handed gesture, he pledged to invest the same amount on hi-tech development to transform the economy.
“The current-term government is ready to think out of the box and act proactively to open up new horizons for Hong Kong,” Chan declared, as he delivered his first budget under the Carrie Lam Cheng Yuet-ngor administration.
Riding on 3.8 per cent growth last year, Chan’s forecast growth this year is as high as 4 per cent, with headline inflation kept at bay at 2.2 per cent.
The massive surplus – almost 8.5 times the amount projected in the last budget – also broke the 2007-08 record of HK$123.7 billion to become the biggest since the 1997 handover.
This also increased fiscal reserves to an estimated HK$1.092 trillion by end-March.
In delivering the budget, Chan, unlike his predecessor, took pains to show he was aligned with his boss’ thinking, as he explained her “new fiscal philosophy” of optimising the surplus to invest in the future and relieve people’s needs. “I agree entirely with her view,” he told the Legislative Council.
The financial secretary said he aimed to develop Hong Kong into a more diversified economy and highlighted innovation and technology as a major new growth driver that the city could not afford to lag behind in.
“The unstoppable wave of innovation and technology has swept through the world, fundamentally changing the global economic structure and the way we live and consume,” Chan said, as he presented an extra HK$50 billion in funding to boost IT development, on top of the HK$10 billion already reserved in last year’s budget.
Of the new money, some HK$20 billion will be used on the development of the planned Hong Kong-Shenzhen Innovation and Technology Park in the border area of the Lok Ma Chau Loop. Some HK$10 billion will be injected into the Innovation and Technology Fund to support the establishment of research centres for health care technologies, artificial intelligence and robotics technologies, according to Chan.
Chan also proposed allocating HK$10 billion to Hong Kong Science and Technology Parks for it to boost research infrastructure and support for incubatees.
In all these initiatives, Chan made clear the close link between the city’s economy and that of the mainland. Noting that China now contributed more than 30 per cent to the global economy, he said the mainland’s strategies have not only a global bearing but “are also the linchpin of Hong Kong’s sustained prosperity”.
To attract leading overseas and mainland internet enterprises and fintech companies to set up offices and research units in Hong Kong, Chan proposed HK$200 million in funding to Cyberport to enhance its support for start-ups.
And in a move to reform the stock exchange, he said that dual class share listings will be in place in the second quarter this year, potentially paving the way for listings by tech and biotech start-ups eager to be anchored in Asia.
To take advantage of the mainland’s growing economy, Chan asked the Hong Kong Monetary Authority to set up an academy of finance to train the city’s talent.
On the domestic front, while Chan did not heed the public’s calls for handouts, the measures he rolled out came up to 40 per cent of the surplus. They include a salaries tax rebate of up to 75 per cent, with a cap of HK$30,000, widening the tax bands, a 20 per cent rise in tax allowances for families with children, as well as rates waivers of up to HK$2,500 a quarter, and extra social security payments to the needy.
And in line with his boss’s fiscal philosophy, Chan departed from the past “small government” policy of keeping public spending at not more than 20 per cent of gross domestic product. Instead, he aimed to push the level to “slightly higher than 21 per cent” of GDP in the next few years.
The 20 per cent cap was meant to avoid overexpansion of the government, but Chan argued: “Today, while acknowledging the forces and roles of the market, we have to be more proactive in managing public finances in the face of various development needs of society and the economy.”
Asked later at a TV forum why he rejected calls for distributing cash to the people, Chan said he liked the relief measures to be aimed more specifically at the lower-income class.
Chan was made financial secretary early last year after his predecessor John Tsang Chun-wah quit the post to join the chief executive race, despite Beijing’s apparent preference for Lam. Chan, who delivered his maiden budget last February, was picked by Lam to be finance chief in her administration, though it was widely reported he was not her first choice.
The budget Chan delivered last year was mainly based on a nearly finalised draft prepared by Tsang. Wednesday’s was widely seen as the first blueprint of his as well as Lam’s philosophy on public financing.
In his speech, a more confident-looking Chan, compared to last year, said his budget strategies also aimed to take care of the long-term needs of society and enhance health care and social welfare services.
On health care, Chan noted the government had increased its recurrent expenditure by an average of 7 per cent over the past decade. Spending on public health care services will increase by 13.3 per cent to HK$71.2 billion in 2018-19, accounting for 17.5 per cent of total recurrent expenditure.
An additional recurrent funding of nearly HK$6 billion will be allocated to the Hospital Authority in 2018-19 to increase the number of beds, operating theatre sessions and manpower.
The limit on Elderly Health Care Vouchers will also be raised by HK$1,000 to HK$5,000 in 2018, which will involve expenditure of about HK$796 million.
Chan also proposed to establish a HK$500 million fund to promote the development of Chinese medicine by providing support in areas such as applied research and knowledge exchange.
To support the second 10-year hospital development plan, HK$300 billion would be set aside as an initial provision.
The finance chief also set aside HK$20 billion for the improvement and development of cultural facilities, and another HK$500 million for the acquisition of museum collections and holding exhibitions.
On education, Chan also planned to increase recurrent expenditure by another HK$2 billion, on top of the HK$5 billion that Lam already pledged.
He said the extra spending will be aimed at achieving quality education, through enhancing the professional development of teachers, strengthening support for kindergartens, and supporting schools in enhancing the promotion of life-wide learning, or education in real-life settings.
Chan proposed to allocate some HK$504 million to launch a three-year pilot scheme to provide social work services in phases for about 150,000 children and their families in all aided childcare centres, kindergartens and kindergarten-cum-childcare centres.
He also promised more resources from the 2018-19 school year to achieve “one social worker for each school”.
There will also be a one-off grant of HK$2,000 to each student in need to support learning, involving an expenditure of about HK$740 million.
Largely following the footsteps of his predecessor, Chan offered a number of one-off “sweeteners” to ease the burdens of taxpayers and the needy.
In addition to higher tax allowances for children and dependent parents and grandparents, there will also be tax rebates of 75 per cent for salaries taxpayers, with the cap being lifted by 50 per cent from last year to HK$30,000. That is expected to benefit some 1.88 million taxpayers and see tax revenue reduced by HK$22.6 billion.
For landlords, property rates will be waived for four quarters of 2018-19, subject to a ceiling of HK$2,500 per quarter for each property. That is estimated to benefit 3.25 million properties and reduce government revenue by HK$17.8 billion.
And there will be two extra months’ pay to recipients of Comprehensive Social Security Assistance, Old Age Allowance, Old Age Living Allowance or Disability Allowance. That will involve an additional expenditure of about HK$7 billion.
The government will also set aside HK$15 billion for arrangements for offsetting severance payments or long service payments against Mandatory Provident Fund contributions – almost doubling the HK$7.9 billion proposed previously by Lam’s predecessor, Leung Chun-ying. Details of the new mechanism are expected to be released soon.
The Chinese Manufacturers’ Association welcomed the budget measures but said the HK$15 billion the government set aside for the MPF offsetting mechanism was “still some distance away” from what the business sector had expected. It urged the government to increase its financial commitment.
In his speech, Chan noted that the property boom had resulted in land premiums increasing by HK$62.6 billion to HK$163.6 billion, or 62 per cent higher than estimated, but he did not touch much on cooling the market.
He only urged caution, saying the “key factors underpinning soaring property prices over the past few years are gradually undergoing fundamental changes”, citing the increased supply and possible US rate hikes.
“The private sector will, on average, produce about 20,800 residential units annually in the coming five years [from 2018 to 2022], an increase of 50 per cent over the annual average in the past five years,” Chan said.
“Besides, as at end-December 2017, the projected supply from the first-hand private residential property market in the next three to four years will remain at a high level of about 97,000 units.
“Besides, as the US interest rate normalisation process continues, the ultra-low interest rate environment of the past few years will no longer persist.”
Sharmaine Lau Yuen-yuen, chief economic analyst at mReferral Mortgage Brokerage Services, expressed disappointment that Chan had not come up with measures to cool the market or help people own homes. She urged the government to ease the loan-to-value ratio to 90 per cent for flats priced up to HK$8 million to help first-time buyers.
Chan, possibly to help Lam honour her promise that there would be “surprises” in the budget, put forward some unexpected measures, including giving out 10,000 free tickets to primary and secondary students to Ocean Park, and HK$2 billion to expedite installation of lifts in schools, and HK$100 million for the promotion of e-sports.
Labour Party lawmaker Fernando Cheung Chiu-hung criticised Chan for failing to roll out any plans to address the income gap problem. “One-off relief measures cannot solve any deep-rooted social problems,” he said.
However, Kenny Shui Chi-wai, senior researcher at the policy think tank Our Hong Kong Foundation, welcomed the government’s move to inject resources into innovation and technology.
But Shui said the government should also increase funding for university research so as to “consolidate the world-class status of local universities and continue to train local talents”.