Feb. 27 (Bloomberg) -- Hong Kong reported a record budget surplus and announced tax cuts and increased spending aimed at supporting the economy as a global slowdown spreads.
Financial Secretary John Tsang, in his first annual budget speech to city lawmakers, announced both one-time giveaways and permanent cuts in company, personal, alcohol and hotel taxes to redistribute the surplus, especially to poorer people.
Hong Kong is trying to contain inflation near a nine-year high, while providing jobs as global demand falters. The city's economic growth will probably slow to 4 percent to 5 percent this year, after dropping to 6.3 percent last year from a revised 7 percent in 2006, Tsang said today.
``When things turn for the worst, at least they won't burden themselves with extra long-term spending commitments,'' said Kelvin Lau, an economist at Standard Chartered Bank Plc in Hong Kong. One-time spending means that the government hasn't committed to expensive programs that it can no longer pay for in the event of fiscal problems, Lau said.
Public spending will rise to 19.2 percent of gross domestic product next financial year, from 15.9 percent this year, Tsang said.
Singapore, which reported its biggest budget surplus in at least a decade earlier this month, announced a package of cash handouts and rebates to help cushion the effect of inflation, running at the fastest in 25 years.
The island-nation held off on tax cuts for workers and companies, contrasting with Hong Kong.
Tax Cuts
Tsang proposed a few permanent tax cuts. He dropped all taxes and administrative controls on wine and beer at an annual cost of HK$560 million ($72 million).
To aid tourism, Hong Kong will drop its hotel room tax. It also cut the salaries and company profits taxes by one percentage point to 15 percent and 16.5 percent respectively, losing HK$5.36 billion in revenue per year.
``This is a 360 degree budget, the first that actually benefits everybody,'' said Agnes Chan, a partner at Ernst & Young Tax Services Ltd. in Hong Kong. ``Who won't be unhappy? The government has enough to spare.''
The government will also change depreciation rules to encourage spending on environmentally friendly facilities, and offer a tax concession on environmentally friendly vehicles.
The American Chamber of Commerce and other business groups have cited Hong Kong's air quality as a concern, and Chief Executive Donald Tsang has promised to make pollution a priority.
The government will raise the ceiling on charitable deduction to 35 percent of income from 25 percent, and has set aside HK$1.2 billion a year to pay for the extension of free schooling to 12 years from 9 years.
Deficit Forecast
Hong Kong's government is forecasting a HK$7.5 billion consolidated deficit for the 2008-09 financial year, compared with the record HK$115.6 billion surplus this year.
``Financial policies should be sustainable,'' Tsang said. ``I will continue to manage public finances prudently by keeping expenditure within the limits of revenue.''
Some of the cuts and payments are aimed at reducing the impact of inflation, to accelerate to about 3.4 percent in 2008 from 2 percent last year on rising food costs, Tsang said.
The government will waive 75 percent of salary and profit taxes of as much as HK$25,000, forego as much as HK$25,000 on annual taxes on real-estate rental income and forgive HK$5,000 each quarter of tax on residential property.
Electricity Grant
Tsang will also inject HK$1,800 into every residential electricity account in the city, to ease the impact of rising power costs on low-income households. CLP Holdings Ltd. and Hong Kong Electric Holdings Ltd. supply power to most of the city.
Standard Chartered's Lau said that while the one-time grants can be justified, they may have a negative effect.
``With all these tax concession and low interest rates, I am worried that the driver of the inflation rate will gradually shift from food to domestic sectors later on in the year,'' Lau said. Still, ``it's reasonable and justifiable given that Hong Kong people are likely to face higher cost of living.''
Tsang expressed concern that health-care costs are climbing, saying the government needs to set up a new system that would require individuals to pay more of the costs, and pledged HK$50 billion for a fund that will aid the change.
Old age pensioners and welfare recipients will receive extra one-time payments this year.
The budget measures are not expected to ``impair the government's financial position in the medium term,'' rating company Standard & Poor's said in a release today.
Financial Secretary John Tsang, in his first annual budget speech to city lawmakers, announced both one-time giveaways and permanent cuts in company, personal, alcohol and hotel taxes to redistribute the surplus, especially to poorer people.
Hong Kong is trying to contain inflation near a nine-year high, while providing jobs as global demand falters. The city's economic growth will probably slow to 4 percent to 5 percent this year, after dropping to 6.3 percent last year from a revised 7 percent in 2006, Tsang said today.
``When things turn for the worst, at least they won't burden themselves with extra long-term spending commitments,'' said Kelvin Lau, an economist at Standard Chartered Bank Plc in Hong Kong. One-time spending means that the government hasn't committed to expensive programs that it can no longer pay for in the event of fiscal problems, Lau said.
Public spending will rise to 19.2 percent of gross domestic product next financial year, from 15.9 percent this year, Tsang said.
Singapore, which reported its biggest budget surplus in at least a decade earlier this month, announced a package of cash handouts and rebates to help cushion the effect of inflation, running at the fastest in 25 years.
The island-nation held off on tax cuts for workers and companies, contrasting with Hong Kong.
Tax Cuts
Tsang proposed a few permanent tax cuts. He dropped all taxes and administrative controls on wine and beer at an annual cost of HK$560 million ($72 million).
To aid tourism, Hong Kong will drop its hotel room tax. It also cut the salaries and company profits taxes by one percentage point to 15 percent and 16.5 percent respectively, losing HK$5.36 billion in revenue per year.
``This is a 360 degree budget, the first that actually benefits everybody,'' said Agnes Chan, a partner at Ernst & Young Tax Services Ltd. in Hong Kong. ``Who won't be unhappy? The government has enough to spare.''
The government will also change depreciation rules to encourage spending on environmentally friendly facilities, and offer a tax concession on environmentally friendly vehicles.
The American Chamber of Commerce and other business groups have cited Hong Kong's air quality as a concern, and Chief Executive Donald Tsang has promised to make pollution a priority.
The government will raise the ceiling on charitable deduction to 35 percent of income from 25 percent, and has set aside HK$1.2 billion a year to pay for the extension of free schooling to 12 years from 9 years.
Deficit Forecast
Hong Kong's government is forecasting a HK$7.5 billion consolidated deficit for the 2008-09 financial year, compared with the record HK$115.6 billion surplus this year.
``Financial policies should be sustainable,'' Tsang said. ``I will continue to manage public finances prudently by keeping expenditure within the limits of revenue.''
Some of the cuts and payments are aimed at reducing the impact of inflation, to accelerate to about 3.4 percent in 2008 from 2 percent last year on rising food costs, Tsang said.
The government will waive 75 percent of salary and profit taxes of as much as HK$25,000, forego as much as HK$25,000 on annual taxes on real-estate rental income and forgive HK$5,000 each quarter of tax on residential property.
Electricity Grant
Tsang will also inject HK$1,800 into every residential electricity account in the city, to ease the impact of rising power costs on low-income households. CLP Holdings Ltd. and Hong Kong Electric Holdings Ltd. supply power to most of the city.
Standard Chartered's Lau said that while the one-time grants can be justified, they may have a negative effect.
``With all these tax concession and low interest rates, I am worried that the driver of the inflation rate will gradually shift from food to domestic sectors later on in the year,'' Lau said. Still, ``it's reasonable and justifiable given that Hong Kong people are likely to face higher cost of living.''
Tsang expressed concern that health-care costs are climbing, saying the government needs to set up a new system that would require individuals to pay more of the costs, and pledged HK$50 billion for a fund that will aid the change.
Old age pensioners and welfare recipients will receive extra one-time payments this year.
The budget measures are not expected to ``impair the government's financial position in the medium term,'' rating company Standard & Poor's said in a release today.
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