Hong Kong budget 2018: strong surplus and a focus on innovation

Hong Kong’s public finances are forecast to remain one of the healthiest, if not the healthiest in the world.

The Hong Kong budget, delivered by Financial Secretary Paul MP Chan FCPA on 28 February, announces a surplus of HK$138 billion for 2017-18.

The surplus announced in Hong Kong’s budget will be used to improve livelihood of residents, diversify the economy through a large funding boost to innovation and technology, and increase support to small-and-medium enterprises (SMEs).

The very positive financial result for Hong Kong has been driven by much higher-than-expected revenue from land sales and stamp duty, as well as good economic growth in 2017.

Hong Kong’s public finances are forecast to remain one of the healthiest, if not the healthiest in the world, with reserves of HK$1092 billion – which is the equivalent of 28 months of government expenditure. The Government is forecasting a surplus of HK$46.6 billion for 2018-19.

The Hong Kong economy is expected to grow three to four per cent in 2017-18. Financial Secretary Chan stated that "the global economy remains on an upward trend, with a synchronised upturn in major economies.”

He added the following note of caution: “Yet we need to remain alert to changes in the global monetary environment and geopolitical situations, as well as policy risks of major economies.”

CPA Australia notes that the reserves such a strong surplus helps create not only provide Hong Kong with a buttress against future challenges and shocks but also the flexibility to implement further reforms, such as the Smart City initiative and investment in health infrastructure. Such reforms will help secure Hong Kong’s future and enhance the city’s liveability.

A focus on innovation and technology

One of the key announcements in this year’s Budget was the significant boost to funding set aside to support innovation and technology development.

The government has set aside an additional HK$50 billion to support innovation and technology, in addition to the HK$10 billion set aside in the last budget. The focus of this investment will be on biotechnology, fintech, artificial intelligence and smart cities.

Of this new funding:

  • HK$20 billion will be used on the first phase of the Hong Kong-Shenzhen Innovation and Technology Park in the Lok Ma Chau Loop – with the Government leaving open the option of providing additional funding.
  • the Government will inject HK$10 billion into the Innovation and Technology Fund (ITF). The ITF supports applied research and development work in Hong Kong. Of this funding, HK$500 million will be allocated to implement a Technology Talent Scheme.
  • support the establishment of Technology Research Clusters with HK$10 billion in funding. The funding will help establish two research clusters: one on healthcare technologies and artificial intelligence, and the other on robotics technologies.
  • allocate HK$10 billion to the Hong Kong Science and Technologies Corporation. Of this, HK$3 billion will be used to construct research-related infrastructure and facilities, with the remaining amount used to enhance support for the tenants of the Science Park. 

Other innovation and technology initiatives announced in the Budget include:

  • Allocating HK$200 million to Cyberport to enhance support for start-ups
  • HK$100 million to Cyberport to promote the development of e-sports.

As previously announced, the government has proposed a 300 per cent tax deduction for an enterprise's first HK$2 million in qualifying R&D expenditure, and a 200 per cent deduction for the remainder.

CPA Australia has been advocating to government various initiatives that we believe will encourage more innovation and research to be undertaken in Hong Kong.

Creating the right conditions to encourage innovation is a critical challenge faced by all governments worldwide. CPA Australia welcomes the significant increase in investment in innovation and technology in this Budget. 

This should be a key ingredient in creating a more innovative economy and stimulating job creation.

However, we believe there are other measures the Government could consider to further assist the development of a more innovative economy, including preferential tax treatment of intellectual property developed and registered in Hong Kong, and greater incentives for offshore funds and angel investors investing in Hong Kong start-ups.

Other budget highlights

Support for financial services

  • Corporate Treasury Centres – the Government announced that it will further amend the Inland Revenue Ordinance to extend coverage of profits tax concession to specified treasury services provided by qualifying corporate treasury centres to all their onshore associated corporations.
  • launching a green bond issuance program with a borrowing ceiling of HK$100 billion – with the funds raised used in green public works of the Government.
  • the government will review the existing tax concession arrangements applicable to the fund industry and examine the feasibility of introducing a limited partnership regime for private equity funds.
  • various initiatives to develop the local bond market, including attracting more corporate bond issuance through programs such as grants covering bond issuance expenses equivalent of half the costs capped at HK$2.5 million for first-time issuers in Hong Kong, and increasing the range of debt instruments that Hong Kong investors will receive a tax concession for interest income and trading profits.
  • the Hong Kong Monetary Authority is to make plans to establish an academy of finance for promoting cross-sector expertise sharing and collaboration in applied research
  • the government will continue the issuance of Silver Bonds in 2018 and 2019
  • the Hong Kong Mortgage Corporation Ltd will consider increasing the size of the issuance of its Life Annuity Scheme
  • The Insurance Authority will explore ways of enhancing the competitiveness of Hong Kong as an insurance hub

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Support for SMEs

  • reducing profits tax for 2017-18 by 75 per cent, subject to a ceiling of HK$30,000. The reduction will be reflected in the final tax payable for 2017-18. This will reduce tax revenue by HK$2.9 billion.
  • injecting HK$1.5 billion into the Dedicated Fund on Branding, Upgrading and Domestic Sales (BUD Fund) and extending the geographical scope of the Enterprise Support Programme under the BUD Fund from the Mainland to include the ASEAN countries 
  • investing HK$1 billion into the SME Export Marketing and Development Funds
  • increasing the cumulative funding ceiling for enterprises under the SME Export Marketing Fund from HK$200,000 to HK$400,000, and removing the existing condition on the use of the last HK$50,000 of grants
  • extending the application period for the special concessionary measures under the SME Financing Guarantee Scheme to 28 February 2019
  • providing HK$250 million in additional funding to the Hong Kong Trade Development Council for assisting local enterprises seize opportunities arising from the Belt and Road Initiative and the Greater Bay Area development, promoting the development of e-commerce, and enhancing Hong Kong's role as a premier international convention, exhibition and sourcing centre.

Support for individuals

  • reducing salaries tax and tax under personal assessment for 2017-18 by 75 per cent, subject to a ceiling of HK$30,000. The reduction will be reflected in the final tax payable for 2017-18. This will reduce tax revenue by HK$22.6 billion.
  • widening the tax bands for salaries tax from the current HK$45,000 to $50,000, increasing the number of tax bands from four to five, and adjusting the marginal tax rates to 2 per cent, 6 per cent, 10 per cent, 14 per cent and 17 per cent. These measures are forecast to reduce tax revenue by HK$4.1 billion a year.
  • a tax deduction for taxpayers who purchase eligible health insurance products for themselves or dependants under the Voluntary Health Insurance Scheme. The annual deduction will be capped at HK$8000 for each insured person.
  • waiving rates for the four quarters of 2018-19, subject to a ceiling of HK$2,500 per quarter for each rateable property.  This proposal will reduce government revenue by HK$17.8 billion.
  • increasing the basic and additional child allowances from the current HK$100,000 to HK$120,000.  This measure is expected to reduce tax revenue by HK$1.31 billion a year
  • increasing the allowance for maintaining a dependent parent or grandparent aged 60 or above from the current HK$46,000 to HK$50,000. The same increase applies to the additional allowance for taxpayers residing with parents or grandparents continuously throughout the year.
  • increasing the allowance for maintaining a dependent parent or grandparent aged between 55 and 59 from the current HK$23,000 to HK$25,000. The same increase applies to the additional allowance for taxpayers residing with parents or grandparents continuously throughout the year.
  • raising the deduction ceiling for elderly residential care expenses from the current HK$92,000 to HK$100,000 for taxpayers whose parents or grandparents are admitted to residential care homes
  • introducing a personal disability allowance for eligible taxpayers, at a rate on par with the current disabled dependent allowance of $HK75,000 
  • Relaxing the requirement that a husband and wife that wish to elect for personal assessment must jointly make such an election
  • providing an extra allowance to social security recipients, equal to two months of the standard rate Comprehensive Social Security Assistance (CSSA) payments, Old Age Allowance, OALA or Disability Allowance. This will involve an additional expenditure of about HK$7 billion. Similar arrangements will apply to recipients of Low-income Working Family Allowance and Work Incentive Transport Subsidy. 
  • providing a one-off grant of HK$2000 to each student in need to support learning, involving an expenditure of about HK$740 million
  • paying the examination fees for candidates sitting for the 2019 Hong Kong Diploma of Secondary Education Examination.

Support for other industries

  • the Government will continue to actively seek Free Trade Agreements, Investment Promotion and Protection Agreements and Double Tax Agreements
  • the Government has set aside HK$5 billion to redevelop the Air Mail Centre at the Hong Kong International Airport, although a final decision on whether to undertake the project has not been made
  • the government will provide HK$226 million to the Hong Kong Tourism Board to implement the Development Blueprint for the industry
  • the Government will continue to seek to expand its network of economic and trade offices around the world
  • establish a HK$1 billion Construction Innovation and Technology Fund to boost the capacity of the industry to adopt new technology through financial support of the industry to acquire the software and hardware required for using innovative construction technologies
  • the government will invest a further HK$1 billion into the CreateSmart Initiative to further support the creative industries.

Education

The Government intends to increase recurrent expenditure on education by 4.9 per cent in real terms in 2018-19 to HK$84.6 billion.

This includes HK$2 billion in funding to improve the quality of education through, for example, enhancing the professional development of teachers, and HK$800 million to enhance the development of gifted students.

Healthcare

The Government intends to increase recurrent expenditure on healthcare by 12.5 per cent in real terms in 2018-19 to HK$71.2 billion.

The increase in spending on health includes nearly HK$6 billion to increase the number of hospital beds and operating theatre sessions, HK$100 million to promote healthy lifestyles, HK$796 million to increase the Elderly Health Care Vouchers from HK$4000 to HK$5000 and HK$500 million to promote the development of Chinese medicine including applied research.

Housing supply

The Government estimates that public housing production in the next five years will be about 100,000 and that the private sector will add just over 100,000 units as well.

The Government’s 2018-19 Land Sale Programme will include sites capable of providing 15,200 residential units. Together with other projects, the government estimates that land supply for the entire year can produce about 25,500 units.

In the first half of this year, the Task Force on Land Supply will begin a public engagement exercise on options and priorities for increasing land supply.

 Other

  • the Government will set aside HK$20 billion for the improvement and development of cultural facilities such as the proposed New Territories East Cultural Centre and the expansion of the Hong Kong Science Museum
  • the Government will set aside HK$1 billion to support the work of the Youth Development Commission, which will be established in the first half of this year
  • the Government will set aside HK$1 billion to improve vacant government sites and school premises for use by non-government organisations
  • inject a HK$ 5 billion into the Elite Athletes Development Fund (bringing total funding to HK$6 billion)
  • HK$800 million to further promote the installation of renewable energy facilities at government buildings, venues and community facilities
  • allow businesses that purchase eligible energy-efficient building installations and renewable energy devices to claim a deduction in the year of purchase rather than depreciating it over the current five years
  • give current private car owners who replace their current vehicle with an electric vehicle a first registration tax (FRT) concession of up to HK$250,000
  • setting aside HK$8 billion to increase and improve local facilities of district councils
  • HK$2 billion to implement a Market Modernisation Programme over 10 years for the nearly 100 markets in Hong Kong
  • HK$500 million to strengthen support for ethnic minorities
  • setting aside HK$15 billion to help fund the abolishing of the “offsetting” of severance payment or long service payment against MPF contributions.

Read next: Safeguarding work-related expense claims on budget wishlist


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