Hong Kong Economic and Trade Office, Washington DC
Hong Kong
Financial Secretary Unveils 2017-18 Budget

In delivering his 2017-18 budget, Hong Kong’s Financial Secretary Paul Chan warned that risk factors in the external environment may threaten export trade in Asia. He stressed that sustaining domestic demand was crucial to maintaining the stable development of the city’s economy and underpinning the employment market.

For 2016 as a whole, there was modest growth of 1.9 percent. Mr. Chan forecast GDP growth of 2 to 3 percent in 2017. The unemployment rate averaged 3.4 percent in 2016, sustaining a state of full employment. Inflation pressure was moderate. The underlying inflation rate was 2.3 percent in 2016.

New measures
Mr. Chan introduced a set of tax and short-term relief measures, together with spending initiatives, which will have a fiscal stimulus effect of boosting GDP by 1.1 percent in 2017. Among the one-off relief measures are:

* Reducing salaries tax and tax under personal assessment for 2016-17 by 75 percent, subject to a ceiling of HK$20,000 (US$2,564);

* Reducing profits tax for 2016-17 by 75 percent, subject to a ceiling of HK$20,000 (US$2,564).

Hong Kong tourism industry, which makes up 5 percent of GDP, has been driving the growth of other related industries including retail, hotel and catering industries. The Financial Secretary announced a number of initiatives to boost the industry.

On tax policy, Mr. Chan said Hong Kong has a low and simple tax regime but the global competitive environment was fast-changing. “As a responsible government, we have to cope with the huge expenditure needs under different economic scenarios,” Mr. Chan said. “We cannot propose a tax cut which erodes our revenue base. Neither can we adjust our tax rates frequently as this would affect the predictability of our tax regime and dent investor confidence.”

The government will set up a dedicated tax policy unit to comprehensively examine tax issues from a macro perspective – from considering measures to ensure the city’s competitiveness to exploring broadening the tax base.

Diversifying the economy
Mr. Chan said Hong Kong would continue to build on its status as the global offshore Renminbi (RMB) business hub and will explore with Mainland authorities ways to open up more two-way cross-border channels for RMB fund flows.

To develop the asset and wealth management sectors, the government proposes extending the profits tax exemption to onshore privately offered open-ended fund companies. This would help attract more funds to domicile in Hong Kong and build Hong Kong’s fund manufacturing capabilities.

The government would continue efforts to explore new markets 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 Financial Secretary said he would set up a new committee on innovation and technology (I&T) development and re-industrialization to coordinate efforts. To enhance Hong Kong’s competitiveness, US$1.3 billion will be reserved to support innovation and technology development.

Start-ups will continue to be supported, for example via the HK$2 billion (US$256 million) Innovation and Technology Venture Fund. The fund will inject new capital and energy into technology start-ups in Hong Kong.

To help the development of financial technologies (fintech), the Hong Kong Monetary Authority is developing 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.

Fiscal position
On the fiscal front, Mr. Chan forecast a surplus of HK$92.8 billion (US$12 billion) for 2016-17. Fiscal reserves are expected to reach HK$935.7 billion (US$120 billion) by March 31, 2017.

Total government revenue in 2017-18 is estimated at HK$507.7 billion (US$65 billion). The overall expenditure of the government for 2017-18 is estimated to be HK$491.4 billion (US$63 billion).

Recurrent expenditure, which accounts for over 90 percent of operating expenditure, will reach HK$371 billion (US$47.5 billion), reflecting a year-on-year increase of 7.4 percent. In 2017-18, the estimated recurrent expenditure on education, social welfare and health care accounts for about 60 percent of government recurrent expenditure.

"The fiscal position will be broadly-balanced in the next five years,” Mr. Chan said. “However, pressure on government expenditure is considerably high in the face of an aging population, a shrinking work force, economic volatility and the government’s long-term commitments. We ought to be prudent and vigilant about the long-term sustainability of public finances.”

2017-18 Budget: http://www.budget.gov.hk/2017/eng/index.html


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