Hong Kong 22 February 2017 - Financial Secretary, Mr Paul Chan, explained that he begins his job by asking himself: "What does Hong Kong need most now? What are citizens' expectations of the Government? What is our ideal way of life? How can we attain a sense of well-being? How do we position Hong Kong as an international city?"
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Economic Performance in 2016
Overall, the local economy picked up progressively from a marginal growth rate of 1% in the first quarter to 3.1% in the fourth quarter. For 2016 as a whole, there was a modest growth of 1.9%.
The unemployment rate averaged 3.4% last year, sustaining a state of full employment in general. Inflation pressure was moderate. The headline inflation rate for 2016 was 2.4%. The underlying inflation rate was 2.3% in 2016, the fifth consecutive year of easing.
Economic Outlook for 2017
Looking ahead, in 2017, the economic growth of advanced economies will be modest and patchy.
Economic growth in Europe is still constrained by its structural debts. This, together with the Brexit developments and the upcoming general elections in some major European countries this year, will complicate and add uncertainties to the political and economic outlook for Europe. This may weigh on the European economy as well as global monetary and financial stability.
The growth of the Mainland economy is increasingly driven by domestic demand and the service sector, and is moving towards a pattern of sustainable development. With stable and appreciable economic growth as well as ample policy room, the Mainland economy should be able to maintain a medium-high pace of growth, remaining a mainstay supporting global economic growth.
Inbound tourism has improved recently, with fresh growth in the number of visitors. If this continues, the retail sector should be set to stabilise further.
In the light of the recent developments and granting no severe external shocks, the Financial Secretary forecasts GDP growth of 2-3% in 2017.
The introduction of the Special Stamp Duty and Buyer's Stamp Duty, together with the earlier increase in Ad Valorem Stamp Duty, has achieved significant results in combating short-term speculation, curbing external demand and reducing investment demand. The government expects that the supply of residential flats will increase substantially in the next few years.
Forecast of headline inflation rate for 2017: 1.8 % with an underlying inflation rate at 2%.
Public Finance: Objectives and Approach
GDP per capita has reached US$44,000, overtaking Japan and many advanced economies in Europe.
Achievements are also attributable to the unique advantage of "one country, two systems", the fair and corruption-free system, rule of law, and the open and efficient market that we have.
The Government's annual expenditure on capital works projects has increased significantly from $62.4 billion in 2012-13 to $86.8 billion in 2017-18, allowing the construction industry to contribute 4.7% to GDP.
Establishment of the Innovation and Technology Bureau in November 2015 allocated over $18 billion so far to enhance the I&T ecosystem.
Recurrent expenditure on social welfare has increased by 71% in five years, from $42.8 billion in 2012-13 to $73.3 billion in 2017-18. Over the period, poverty figures have edged downward.
The Government will enhance the Old Age Living Allowance (OALA) through two measures. a higher monthly allowance of $3,435 will be provided for eligible elderly persons with more financial needs and the existing asset limits will be relaxed to benefit more elderly persons.
Estimated that about 500 000 elderly persons, each receiving approximately $10,000 to $30,000 more a year, will benefit from these measures in the first year upon full implementation. The Government will lower the eligibility age for Elderly Health Care Vouchers from 70 to 65, so that about 400 000 more elderly persons will receive $2,000 a year to purchase primary care services from the private sector.
The Government is discussing with major stakeholders the proposal to progressively abolish the "offsetting" of severance payments or long service payments with Mandatory Provident Fund (MPF) contributions.
Over the past decade, land revenue varied considerably from a low level of less than $17 billion in 2008-09 to over $117 billion in 2016-17.
The total expenditure of the Government has increased year after year from $380 billion in 2012-13 to over $490 billion in 2017-18. Total and recurrent expenditure of the current-term Government would have respectively grown on average by 5.4% and as much as 7.2% per annum between 2012-13 and 2017-18. Compared with the nominal GDP growth of 5% and government revenue growth of 3.4% for the same period, expenditure growth of the current-term Government is considerable.
However, the growth of government expenditure cannot keep outpacing economic growth for an undue period, lest the risk of a structural deficit would emerge.
The Housing Reserve, which was established in 2014 to support large-scale public housing development programme, now stands at $77 billion.
Financial Secretary stated his belief that the two objectives of the fiscal policy are maintaining healthy public finances and strengthening resilience to withstand economic fluctuations.
2015-16: revenue from land sales and profits tax accounted for 14% and 31% of government revenue respectively, with the financial and real estate industries contributing over 40% of the profits tax receipts.
The announcement of plan to set up a tax policy unit in the Financial Services and the Treasury Bureau to comprehensively examine tax issues from a macro perspective.
It will seek to align tax practices with international standards and actively study ways to foster the development of pillar industries, industries over which Hong Kong has advantages and emerging industries through tax measures including enhanced deductions for I&T expenditure. Also it will enhance the tax regime and explore broadening the tax base and increasing revenue.
Revised Estimates for 2016-17
2016-17 revised estimate on government revenue is $559.5 billion, 12% or $61.3 billion higher than the original estimate. This is due mainly to the increase in revenue from land sales and stamp duty.
Revenue from land sales is $50.8 billion, 76% higher than the original estimate.
Stamp duty revenue for the whole year would be $8 billion, 16% higher than estimated.
As for government expenditure, a revised estimate of $466.7 billion, 4.1 % or $20.2 billion lower than the original estimate.
For 2016-17, forecasted surplus: $92.8 billion.
Fiscal reserves are expected to reach $935.7 billion by 31 March 2017.
(a) reducing salaries tax and tax under personal assessment for 2016-17 by 75%, subject to a ceiling of $20,000, which will be reflected in the final tax payable for 2016-17. This proposal will benefit 1.84 million taxpayers and reduce government revenue by $16.4 billion;
(b) reducing profits tax for 2016-17 by 75%, subject to a ceiling of $20,000, which will be reflected in the final tax payable for 2016-17. This proposal will benefit 132 000 taxpayers and reduce government revenue by $1.9 billion;
(c) waiving rates for four quarters of 2017-18, subject to a ceiling of $1,000 per quarter for each rateable property. This proposal will benefit 3.21 million properties and reduce government revenue by $10.9 billion; and
(d) providing an extra allowance to social security recipients, equal to one month of the standard rate Comprehensive Social Security Assistance payments, Old Age Allowance (OAA), OALA or Disability Allowance.
Five recurrent tax measures starting from 2017-18:
(a) widening the marginal bands for salaries tax from the current $40,000 to $45,000. This measure will reduce the tax burden of 1.3 million taxpayers and reduce tax revenue by $1.5 billion a year;
(b) raising the disabled dependant allowance from the current $66,000 to $75,000. This measure will benefit 35 000 taxpayers and reduce tax revenue by $50 million a year;
(c) raising the dependent brother/sister allowance from the current $33,000 to $37,500. This measure will benefit 23 800 taxpayers and reduce tax revenue by $13 million a year;
(d) extending the entitlement period for the tax reduction for home loan interest from 15 years of assessment to 20 while maintaining the current deduction ceiling of $100,000 a year. This proposal will reduce tax revenue by $430 million a year; and
(e) raising the deduction ceiling for self-education expenses from the current $80,000 to $100,000. This measure will benefit 3 500 taxpayers and reduce tax revenue by $8 million a year.
$300 million earmarked to allow property owners to participate in the "Smart Tender" Building Rehabilitation Facilitating Services Scheme run by the Urban Renewal Authority (URA) at a concessionary rate. It is estimated that owners of about 4 500 buildings will benefit from this initiative in the next five years.
Three support measures for local SMEs:
(a) extending the application period for the Dedicated Fund on Branding, Upgrading and Domestic Sales for five years to June 2022 to assist Hong Kong enterprises in furthering their business development in the Mainland;
(b) extending the application period for the special concessionary measures under the SME Financing Guarantee Scheme to 28 February 2018 to help enterprises tide over their liquidity needs; and
(c) proposing to strengthen the underwriting capacity of the Hong Kong Export Credit Insurance Corporation (ECIC) by raising the cap on the contingent liability of ECIC under contracts of insurance from $40 billion to $55 billion.
900+ SMEs already registered their intention to participate in the Technology Voucher Programme.
Tax deduction for the purchase of regulated health insurance products, details of which are being examined by the Government.
Use of $61 billion surplus:
(a) $30 billion earmarked to strengthen elderly services and rehabilitation services for persons with disabilities.
(b) $20 billion earmarked for sports development as announced in the Policy Address.
(c) $10 billion reserved for supporting I&T development in Hong Kong; and
(d) $1 billion deployed for youth development, including the provision of $700 million for the Education Bureau to strengthen its efforts in promoting vocational and professional education and training (VPET).
HKSAR Government discussing with the Central Government on further expansion and enhancement of The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA).
Looking ahead, government will continue its efforts to negotiate Investment Promotion and Protection Agreements (IPPA) with Iran and Russia.
The establishment of a Trade Single Window is high on the Government's agenda. It will provide a one-stop electronic platform for the lodging of trade documents, promote cross-border customs co-operation and expedite trade declaration and customs clearance.
In the next five years, Invest Hong Kong will strengthen its promotional activities overseas and in the Mainland, focusing on the development of Hong Kong into a maritime services hub in the region, as well as a platform connecting the Mainland with the maritime industry in other parts of the world.
Looking at various possibilities to better connect Hong Kong and places in the Pearl River Delta (PRD) region upon the commissioning of the HZMB. Government will also consider the provision of cross-boundary helicopter service between Hong Kong and PRD cities to further enhance cross-boundary transportation services.
To facilitate transit passengers travelling between the Hong Kong International Airport (HKIA) and the PRD region via the HZMB in the future, the Airport Authority Hong Kong (AA) has suggested providing two-way land-to-air shuttle bus service to take these passengers direct to the Restricted Area of the HKIA for outbound flights.
the Government plans to introduce a bill into the Legislative Council (LegCo) in 2017 to amend the Inland Revenue Ordinance to offer tax concessions for aircraft financing companies.
Hong Kong's financial services industry maintained a robust performance, contributing 18% of our GDP and employing over 250 000 people.
Today, around 70 % of the world's Renminbi (RMB) payment transactions are processed via Hong Kong. With the wider use of RMB in the international arena, we will continue to explore with the Mainland authorities ways to open up more channels for two-way cross-border RMB fund flows.
To facilitate Hong Kong's development into a full-fledged fund service centre, government proposes to extend the profits tax exemption to onshore privately-offered open-ended fund companies.
The launch of the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect are of ground-breaking significance to mutual capital market access between Hong Kong and the Mainland.
The Government is studying with the relevant Mainland authorities ways to further facilitate the participation of investors of both places in the bond market, with a view to improving the connectivity between market infrastructures.
Exploring the development of eMPF, a centralised electronic platform, to enhance the administrative efficiency of the MPF Scheme, thereby providing room for fee reduction.
In a move to boost tourism operators:
(a) waive the licence fees for 1 800 travel agents for one year;
(b) waive the licence fees for over 2 000 hotels and guesthouses for one year; and
(c) waive the licence fees for restaurants and hawkers and fees for restricted food permits for one year, benefiting 27 000 restaurants and operators.
An additional sum of $243 million in 2017-18 for tourism initiatives:
(a) supporting light shows, home-grown mega events and continuation of efforts to attract more small-and-medium-sized MICE events to Hong Kong;
(b) promoting further the diversification of tourism products with a view to encourage the development of a greater variety of tourism products to attract more visitors to Hong Kong;
(c) stepping up our efforts to attract more high-spending visitors by implementing a scheme targeting transit passengers and overnight visitors in Hong Kong through the HKTB.
(d) enhancing Hong Kong's appeal as a tourist destination. Through the HKTB, government will continue its publicity in the Mainland to promote Hong Kong's tourism and strengthen our efforts to publicise in overseas markets the mega events to be held in Hong Kong this year; and
(e) providing funding support for the training of members of the tourism industry through the Travel Industry Council of Hong Kong to enhance service quality of the industry as well as waive local traders' participation fees for overseas promotional fairs.
Commencing preliminary work to establish Economic and Trade Offices in India, Mexico, Russia, South Africa and the United Arab Emirates.
Continuing to work with the Central Government and the Asian Infrastructure Investment Bank (AIIB) for Hong Kong’s participation in the AIIB as a non-sovereign territory.
Various measures, amounting to a total of $18 billion, have been launched to promote I&T development.
On hardware, government has provided $8.2 billion for the Hong Kong Science and Technology Parks Corporation (HKSTPC) to build an Advanced Manufacturing Centre and a Data Technology Hub in Tseung Kwan O Industrial Estate.
Setup of new committee on I&T development and re-industrialisation to co-ordinate the I&T development and re-industrialisation of Hong Kong.
Setting up a $2 billion Innovation and Technology Venture Fund (ITVF). The ITVF will co-invest in local I&T start-ups with venture capital funds.
Launch of a $500 million Innovation and Technology Fund for Better Living to finance I&T projects that improve people's daily lives and benefit the elderly or the underprivileged.
The electronic and mobile payment ecosystem in Hong Kong is maturing: 13 Stored Value Facility (SVF) licences granted by the HKMA last year and the commencement of the Payment Systems and Stored Value Facilities Ordinance last November.
To further enhance the payment infrastructure, the HKMA is developing a new Faster Payment System (FPS).
Looking ahead, distributed ledger technology (DLT), including Blockchain, and cyber security will be two major development clusters in Fintech.
Government will sponsor or organise a series of celebration events to showcase Hong Kong's creative industries, staging events in HK, five mainland and three overseas cities.
Between 2012-13 and 2017-18, recurrent expenditure on education has recorded a cumulative growth of nearly 30% to $78.6 billion, accounting for 21% of government recurrent expenditure, with an average annual growth of about 5.4%.
Increasing land and housing supply is one of the priorities of the Government.
The projected supply from the first-hand private residential property market in next 3-4 years: approximately 94 000 units.
The private sector will, on average, produce about 20 300 private residential units each year in the next five years, representing an increase of about 70% over the yearly average in the past five years.
Public housing: for the five-year period from 2016-17 to 2020-21, estimated production about 94 500 units, including about 71 800 public rental housing units and about 22 600 subsidised sale flats.
The 2017-18 Land Sale Programme comprises a total of 28 residential sites, including 20 new sites, capable of providing about 19 000 residential units. Estimated that the potential land supply for private housing in 2017-18 will have a capacity to produce about 32 000 units.
From 2012-13 to 2016-17, a total of 23 sites for commercial/industrial use have been sold/will be put up for sale, capable of providing about 1.02 million square metres of floor area, representing an increase of about 1.8 times compared with the previous five years.
The Land Sale Programme for the coming financial year includes three commercial/business sites and one hotel site.
The Development Bureau and the Planning Department are conducting public engagement for "Hong Kong 2030+: Towards a Planning Vision and Strategy Transcending 2030" ("Hong Kong 2030+"), which has put forward a number of policy directives and recommendations.
Major new policy initiatives announced in the Policy Address involve an operating expenditure of $25 billion and capital expenditure of $61 billion.
Estimated total government revenue for 2017-18 = $507.7 billion, of which earnings and profits tax is estimated at $208.9 billion. Land revenue is estimated to be $101 billion.
Estimated overall expenditure of the Government for 2017-18 = $491.4 billion.
Estimated operating expenditure for 2017-18 = $384.2 billion
Recurrent expenditure, which accounts for over 90% of operating expenditure, will reach $371 billion, reflecting a year-on-year increase of 7.4% or $25.6 billion.
2017-18, estimated recurrent expenditure on education = $78.6 billion
In 2017-18, recurrent expenditure on healthcare is estimated to be $61.9 billion, representing an increase of $3.2 billion by year and accounting for 17 % of government recurrent expenditure.
Capital expenditure is forecast to be $107.2 billion for 2017-18, including $86.8 billion for capital works.
A number of major infrastructure projects are at their construction peaks such as the Guangzhou-Shenzhen-Hong Kong Express Rail Link (Hong Kong Section), the Shatin to Central Link, the Central-Wan Chai Bypass and the Island Eastern Corridor Link, the HZMB local projects (i.e. the Hong Kong Boundary Crossing Facilities and Hong Kong Link Road) and the Tuen Mun-Chek Lap Kok Link, etc.
Projects under planning: Siu Ho Wan Depot site, the Tung Chung new town extension, plans for new development areas at Kwu Tung North, Fanling North, Hung Shui Kiu and Yuen Long South, etc.
Ten-year hospital development plan of $200 billion to build a major acute general hospital in the Kai Tak Development Area.
$20 billion has been allocated for developing sports and recreation facilities. The Government will seek funding approval of about $31.9 billion from the Finance Committee for the construction of the Kai Tak Sports Park.
Forecasted surplus: $16.3 billion in the Consolidated Account in the coming year. Estimated fiscal reserves: $952 billion by the end of March 2018, representing 37% of GDP.
Medium Range Forecast
For the medium term, average growth rate forecast = 3% per annum in real terms from 2018 to 2021, broadly comparable to the trend growth of 2.9 % over the past decade; and the underlying inflation rate is expected to average 2.5% per annum.
2018-19 to 2021-22, growth of recurrent government expenditure estimated to range between 5.3% and 9.8% per annum, consistently higher than the average annual nominal economic growth of 4.5% over the same period.
There will be a small deficit in the Consolidated Account in 2020-21 and 2021-22. Fiscal reserves are estimated at $942.9 billion by end-March 2022.
“Over the past decades, Hong Kong encountered numerous difficulties and challenges that caused confusion and anxiety among our people. Yet, time and again, we were able to weather the storm and see the sunshine on the other side.”