KPMG's Hong Kong Budget Commentary

KPMG's Hong Kong Budget Commentary


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The Financial Secretary presented the 2011 - 12 Budget off the back of a strong rebound in the economic fortunes of Hong Kong. 

Like previous years, there again appeared to be a lack of a central theme to this year's Budget. Somewhat surprisingly, despite the strong financial position Hong Kong finds itself in, the Government was rather conservative in their handouts and fiscal incentives. Although the Government announced some improved benefits to the less advantaged members of the community, the rest of the population may feel that they have been short-changed. No specific tax reductions were announced. Instead, the Government announced a 20 percent increase in child and dependant parent/grandparent allowances and the deduction ceiling for elderly residential care expenses; a one year waiver of rates capped at HKD 1,500 per tenement per quarter; a HKD 1,800 electricity subsidy; and a one-off injection of HKD 6,000 into MPF accounts to increase retirement savings. 

Actual GDP growth for 2010 came in at 6.8 percent. The unemployment rate also significantly dropped by 1.7 percent to 3.8 percent. Both outcomes were well ahead of forecasts. For 2011, GDP is forecast to grow between four to five percent for the year. Hong Kong's fiscal reserves are estimated to be HKD 591.6 billion by the end of March 2011, representing approximately 34 percent of GDP and equivalent to 23 months of government expenditure. 

However, the Government remains conscious of the challenges presented by the rapid economic recovery, fuelled by abundant liquidity, record low interest rates and a continuing influx of capital into Hong Kong. The Government's principal concerns are an overheated property market and increased inflationary pressures. 

The Government announced measures in the previous Budget to rein in speculative activity. These measures have been put in place throughout 2010 to curb the inflationary pressures seen in the property market. In addition to these measures were the introduction of additional stamp duties, and the tightening of the loan-to-value ratio for mortgage lending, which are likely to be retained The Government also announced that it would look to increase the supply of land as a further measure to cool price increases in the property market. The Government will also introduce an inflation-linked retail bond or 'iBond' to provide another investment option to reduce the impact of inflationary pressures whilst promoting the development of the local retail bond market. However, with the continued influx of capital and the availability of cheap funding, it remains to be seen whether these measures will be enough to stem continued asset price increases.  

The Government again focused its support on the four pillar industries, namely Trading and Logistics, Financial Services, Business and Professional Services and Tourism. However, there was no clear mention in the Budget as to what form this support would take and how it would be implemented. This is in stark contrast to the recent Singapore budget announcement, which, even though it has a similar corporate tax rate to Hong Kong, offers a spectrum of tax incentives to encourage investment in key focus areas. Hong Kong, on the other hand, seems reticent to use tax as a leverage to promote investment. It is not clear what other competitive advantages are being offered by the Government to attract investment into Hong Kong. 

Government spending seemed to be principally confined to investment in infrastructure projects followed by investment in the health and education sectors. However, even though Hong Kong finds itself in a relatively prosperous financial position, this budget seems to lack concrete proposals to address and improve key concerns affecting the quality of life in Hong Kong, such as the rising cost of living and the environment. Though limited measures have been introduced, it remains to be seen whether these initiatives go far enough to make a significant improvement in these areas. As a whole, one may question whether this Budget will leave the Hong Kong public wanting more.


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