Hong Kong hands out generous budget with billions in tax cuts and poverty relief

Hong Kong Financial Secretary Paul Chan delivers his Budget to the city's Legislative Council, on Feb 22, 2017.
Hong Kong Financial Secretary Paul Chan delivers his Budget to the city's Legislative Council, on Feb 22, 2017. PHOTO: EPA

HONG KONG (REUTERS) - Hong Kong handed out billions in tax cuts and poverty relief on Wednesday (Feb 22), to stimulate its economy that is expected to grow more strongly than expected at 2 to 3 per cent this year despite headwinds from rising global trade protectionis.

Financial Secretary Paul Chan said in his maiden annual budget address that stronger exports and jobs, rising wages and construction projects worth nearly HK$87 billion this year, had bolstered consumer confidence and domestic demand that would feed into the local economy. He warned, however, that the city's astronomical property prices continued to be an issue.

While the financial hub's economy was projected to grow faster than the 1.3 per cent expansion forecast by six economists surveyed by Reuters, Chan cautioned risks remained.

"The uncertain external environment and interest rate trend may trigger abrupt shifts in capital flows and heighten volatility in local asset prices, with repercussions on consumption and investment sentiments and on macro-economic stability," Chan told lawmakers.

Credit Rating Agency Moody's said in a research note that the budget was relatively balanced and fiscally prudent but doubted Hong Kong would meet its bullish GDP forecast.

"We do not expect a material rebound in global trade which will weigh on Hong Kong's exports, while growth in domestic demand will be somewhat dampened by higher interest rates," Moody's wrote. "We expect three to four interest rate increases by the US Federal Reserve this year which will push interest rates up in Hong Kong."

On the property market, which Chan called exuberant and "out of tune with the local economy" despite a raft of cooling measures, he said the government would "substantially" increase residential flat supply in the next few years.

Hong Kong's provisional budget surplus was a much higher than expected HK$92.8 billion (S$16.97 billion) for the 2016/17 financial year, far in excess of the HK$11 billion last year, with fiscal reserves of HK$935.7 billion.

The government said some HK$61 billion would be ploughed into elderly services, sports development, youth development and developing the high technology sector.

Chan said Hong Kong could afford to be more proactive with its spending and his measures to "share the fruits of economic development" would help stimulate domestic demand, stabilise the economy and help the job market.

The populist-leaning budget comes at a time of flux for Hong Kong amid rising political tensions and as the city in July marks the 20th anniversary of its handover from British to Chinese rule in 1997. The city will also usher in a new leader in a March 26 election involving a 1,200-member election committee stacked with Beijing loyalists.

Chan's predecessor, longstanding former financial secretary John Tsang, is one of several candidates eyeing the top job.

The package of one-off economic handouts and stimulus measures include reducing salaries tax and profits tax up to a ceiling of HK$20,000 per individual or firm, that would cost the government some HK$18.3 billion, as well as extra social welfare handouts for the elderly and disabled.

Total expenditure would increase to more than HK$490 billion in 2017-18 from HK$380 billion in 2012-13, Chan said.

Sectors such as tourism and catering that have struggled from a slump in visitors from China would receive help such as from waiving of licence fees for travel agents, guesthouses and restaurants, and pumping more money into tourism promotion.

Visitor arrivals fell nearly 5 per cent last year, leading to the worst retail sales slump in nearly two decades. Even the once vibrant financial sector has been plagued with layoffs and dwindling stock market turnover.