Hong Kong posts budget surplus as economy set for stronger growth

HONG KONG Wed Feb 27, 2013 5:54am EST

A protester dressed as the Chinese God of Fortune demonstrates, along with other protesters, to demand that the retirement scheme are protected outside the Legislative Council in Hong Kong February 27, 2013 before Hong Kong's Financial Secretary John Tsang gives his annual budget report. REUTERS/Tyrone Siu

A protester dressed as the Chinese God of Fortune demonstrates, along with other protesters, to demand that the retirement scheme are protected outside the Legislative Council in Hong Kong February 27, 2013 before Hong Kong's Financial Secretary John Tsang gives his annual budget report.

Credit: Reuters/Tyrone Siu

HONG KONG (Reuters) - Hong Kong launched a relatively modest series of economic stimulus and relief measures in its annual budget on Wednesday to combat an uncertain external environment with its economy likely to recover to between 1.5 percent to 3.4 percent in 2013.

"The intricate external environment will remain unstable in the year ahead," said Financial Secretary John Tsang, warning of potential instability from currency wars and a trade slowdown to the financial hub's small and open economy.

A poll of eight banks estimated that Hong Kong's GDP this year would grow 3.1 percent, accelerating from GDP growth of 1.4 percent in 2012, its slowest rate since 2009 and well below the financial hub's average 4.5 percent growth over the past decade.

In a budget short on bold steps, Tsang offered a mixed bag of relief measures for the poor and elderly, a marginal corporate tax and salary rebate, and moves to bolster the city's financial sector and private equity industry.

While soaring land revenues and profits taxes swelled public coffers to a bumper HK$64.9 billion ($8.37 billion) fiscal surplus in 2012/13, the coming fiscal year that begins on April 1 will likely see a HK$4.9 billion deficit.

Despite registering a large fiscal surplus of HK$64.9 billion, however, Tsang sounded a warning on the sustainability of the city's feted low and simple tax regime given an ageing population and slowing long-term economic growth.

"I expect that the growth of government revenue will drop substantially if our tax regime remains unchanged. Moreover, expenditure on welfare and healthcare will soar. We may not be able to make ends meet," Mr Tsang cautioned, adding that a treasury working group would examine ways of better planning its long-term finances.

Anthony Lau, deputy chairperson of Taxation Committee, CPA Australia, Greater China, said Hong Kong needed to consider broadening and evolving its tax base through possible sales taxes including on luxury goods.

"Instead of just providing one-off measures, we believe the government should consider performing a comprehensive tax review to improve the sustainability of government revenue and see how to enhance our competitiveness here," Lau said.

FINANCIAL SECTOR STIMULUS

To lure more private equity funds amid competition with Singapore -- that has signed a raft of tax treaties granting exemptions to the industry there -- Hong Kong said it would extend profits tax exemption for offshore funds to include transactions in private companies which are incorporated or registered outside Hong Kong.

"This will allow private equity funds to enjoy the same tax exemption as offshore funds," Tsang said.

Hong Kong is also considering laws to allow the Open-ended Investment Company (OEIC) structure for funds popular in mature markets such as the United Kingdom. Investment funds established in Hong Kong can only take the form of trusts presently.

The OEIC structure, allowing managers to create and redeem shares when money is invested or pulled out, scores over trusts by being cost effective as well as faster to launch products.

"The OEIC proposal is a direct response to Singapore moving ahead as a choice of fund domicile but is more problematic as alternative managers probably want other structures as well," said Philippa Allen, head of ComplianceAsia Consulting.

Stressing the importance of continued financial integration with China, Tsang said it would aim to deepen the city's offshore yuan market, but gave no specifics of fresh measures.

The government also said it would expand the size of its government bond program from HK$100 billion to HK$200 billion in the next five years, while proposing a new inflation-linked retail "iBond" issue worth HK$10 billion.

Authorities granted a relatively modest corporate tax rebate of up to HK$10,000 per business for the 2012/13 financial year. Individuals, meanwhile, would also enjoy a salaries tax reduction of up to HK$10,000 for the same period.

With Hong Kong facing one of Asia's worst income gaps, Tsang pledged a HK$33 billion package of measures including elderly allowances, poverty alleviation fund, two-month public housing rent wavers and electricity subsidies, though the handouts were far less than the previous year's budget.

On the property front, Tsang unveiled no major new cooling measures in his address, pledging instead to continue bolstering land supply by offering 28 new sites, while earmarking HK$4.5 billion in the coming five years to explore potential new areas for land reclamation outside of Victoria Harbour "on an appropriate scale" in the densely populated city.

Last week, the government announced a new round of property moves including higher stamp duties and home loan curbs to ease some of the world's most expensive home prices.

Asian economies are battling against rising inflation partly caused by hot money flows from loose monetary policies at home and abroad, with governments raising stamp duties and tightening lending in response to the threat of a property bubble.

(This story corrects to clarify title of Anthony Lau in paragraph eight) (Additional reporting by Anne-Marie Roantree, Grace Li, Lee Chyen Yee and Nishant Kumar; Editing by Jacqueline Wong)

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