Commentary on the 2005 Budget

The economy

The Financial Secretary (FS), Mr. Henry Tang, delivered his 2005 Budget Speech on 16 March 2005. The figures that he announced showed an economy well on the way to recovery with GDP growth of 8.1% in 2004, projected growth of 4.5%-5.5% in 2005 and a trend growth rate over the period 2006-2009 of 4% in real terms. Unemployment had also dropped from a peak of 8-10% in mid-2003 to 6.4% in early 2005 and the number of bankruptcies had reduced from 22,000 in 2003 to around 12,000 in 2004. After nearly six years of deflation, the second half of 2004 saw a small increase (of 0.5%) in the Composite Consumer Price Index. Visitor arrivals in 2004 reached an all-time high of 21.81 million.

Public finances

Mr. Tang forecast a surplus of HK$12 billion in the overall government Consolidated Account, the first surplus since 1999-2000 and a far cry from the HK$42.6 billion deficit projected one year earlier in the 2004 Budget Speech. The additional revenue came chiefly from land premiums, which brought in HK$31.3 billion instead of the anticipated HK$12 billion. Revenues from profits tax, salaries tax and stamp duty were also significantly up.

In fact, the final figures for 2004/05, which were published recently in the year-end accounts, turned out to be a fairly healthy HK$21.3 billion surplus. The government has been at pains to point out that, apart from the unexpectedly high level of land premiums, the better than expected figures include over HK$25 billion in bond and note issuance, which will have to be repaid. However, these monies were also taken into account in the original projected deficit figure of $42.6 billion.

The FS announced that operating expenditure for 2004/05 would be $2 billion lower than for 2003/04 which, discounting special accounting arrangements with the former municipal councils, represented the first decrease for over 50 years. Ongoing fiscal balance in the Consolidated Account was expected to be achieved one year early, in 2007/08, while balance in the Operating Account should be achieved on schedule in 2008/09. The FS was confident of achieving the three fiscal targets set in the 2004 Budget on time or ahead of time, if the economy continued to pick up. These targets were:

• Reduce operating expenditure to HK$200 billion by 2008/09;
• strive to restore fiscal balance in the Operating and Consolidated Accounts by 2008/09; and
• bring public expenditure down to 20% of GDP or below, in line with the principle of "Big market, Small Government".

Tax changes

Against the above background the FS made few tax changes. The main announcements were as follows:

• No changes to the rates of salaries and profits tax.
• Introduce two new personal allowances:
  • HK15,000 per year for taxpayers maintaining dependent parents/grandparents aged between 55-59; and
  • an additional HK15,000 per year for taxpayers who reside with their dependent parents/grandparents aged between 55-59.
• Increase the child allowance for the first to ninth child from HK$30,000 to HK$40,000 per year.
• Estate duty to be abolished. Legislation has now been introduced in the Legislative Council ("LegCo"), although its passage has been delayed until after the LegCo summer recess for technical reasons.
• No change to the duty on alcoholic beverages. This followed public consultation exercise prior to the budget.
• A public consultation to be conducted on introducing a goods and services tax.
• On possible "green" taxes: a public consultation to be conducted on a product responsibility scheme for waste tyres, and the feasibility of levying a tax or charging fees on plastic bags to be considered.