Firms will ride out storm, but Hong Kong must stick to free market principles, says chamber CEO

As presented in the 2016-17 budget, Financial Secretary John Tsang shared that the government expects Hong Kong’s real GDP growth will decelerate to 1-2 per cent in 2016, from 2.4 per cent in 2015. The government has come out with initiatives to support and provide short-term relief to SMEs and the general public during these challenging times. While the broad range of counter-cyclical programmes is welcomed, the importance of maintaining a business-friendly environment should also be stressed.

Among the many measures, the 75 per cent profit tax reduction, with a ceiling of HK$20,000, and the waiver of business registration fees for 2016-17 will ease the near-term pressure businesses face during the economic slowdown. Other notable initiatives, including the decision to establish a “single window” for trade declaration and customs clearance, as well as the launch of a HK$500 million Pilot Technology Voucher Programme under the Innovation and Technology Fund, will also enhance the competitiveness of SMEs.

We are also delighted to see that the government appears to be devoting more resources to the city’s creative and knowledge industries. Among the others, financial measures like the HK$8.2 billion budget for promotion of smart production and research by Science Park, HK$500 million for an Innovation and Technology Fund for Better Living, and HK$2 billion for setting up an Innovation and Technology Venture Fund will all enhance the competitiveness of the new economy.

On the consumption side, as a shot in the arm, the reduction of salaries taxes by 75 per cent, subject to a ceiling of HK$20,000, will benefit 1.96 million taxpayers. Waiving rates for 2016-17 up to HK$1,000 per quarter, and providing extra allowance to financially challenged citizens will also help stimulate domestic consumption. Bearing the risk of reducing the city’s already narrow sources of tax revenue, the budget also suggests to adjust two categories of allowances under salaries tax and personal assessment from 2016-17 onwards. All of these measures will likely facilitate a less dramatic deterioration of growth this year.

However, as the working public joyfully applauds the proposal to adjust two categories of personal allowances, shouldn’t the business sector receive similar treatment? We, again, urge the government to give serious consideration to our proposal for introducing a two-tiered profits tax regime that will have the twin benefits of bolstering Hong Kong’s attractiveness as a place to do business, and providing assistance to SMEs in an efficient and effective manner. All the more, our proposal will not reduce the overall tax base.

Even though the rather conservative economic outlook may justify the government’s spending spree, the projected rate of reserve depletion should be controlled. Government expenditure is expected to soar 14 per cent YoY and represents 21.2 per cent of Hong Kong’s GDP in 2016-17. With such trends, fiscal reserves are projected to decline to an equivalent of 18 months of government expenditure in five years time, compared to 24 months as of the end of the 2015-16 fiscal year. The city’s strong fiscal position has brought stability and prosperity to us, and the government should stick to its goal of keeping public expenditure at or below 20 per cent of GDP, which will allow the market mechanism to function and the private sector to play a major role in Hong Kong’s development.