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Sharing
Revenue: Sharing Wealth with the People
73. Over recent months, I have heard suggestions that, as our economy recovers and the Government's financial position improves, we should increase expenditure or substantially reduce taxes, for example, by restoring the salaries tax bands and rates to their 2002-03 levels. However, other views hold that there is no need for the moment to introduce major tax relief. The Government should instead take this opportunity to save up for a rainy day.
74. I have pointed out that Hong Kong will continue to be confronted with various challenges. In the face of these, as a government that manages public finances prudently and keeps expenditure within the limits of revenues, we should not rush into deciding on substantial tax reductions. For example, the proposal to restore salaries tax rates to their 2002-03 levels would reduce government revenue by $7 billion a year, if implemented, and cause nearly 100 000 taxpayers to fall out of the tax net. I consider that such a proposal would affect the stability of our public finances, and would shrink our narrow tax base still further. As I have mentioned earlier, I also believe that citizens should fulfil their civic responsibility by paying some tax.
75. Being a government of the people, we need to appreciate our community's needs and be responsive to their aspirations with due regard to our fiscal position. Where practicable, we will indeed share wealth with the people. As our economy continues to improve, therefore, I am proposing to implement some modest tax concessions in the coming year to reduce the burden on taxpayers, particularly middle-class families, in accordance with the principle of affordability, but without wishing to narrow our tax base. I have decided against a one-off tax rebate as this would only be of short-term benefit.
Salaries Tax
76. I propose to lower the marginal rates of the second, third and top tax bands by one percentage point from the existing levels of 8, 14 and 20 per cent to 7, 13 and 19 per cent respectively. This proposal will reduce the tax payable by nearly a million people, i.e. three quarters of taxpayers, and cost the Government about $1.5 billion a year.
77. Purchasing a property is an important lifetime decision. To many people, particularly the middle class, mortgage payments are major items of family expenditure. Currently, each taxpayer is eligible for a seven-year salaries tax deduction for home loan interest of up to $100,000 a year. However, the recent increases in mortgage rates have added to their burden. Therefore, I propose to extend the limit for the deduction by a further three years to a total of ten years, subject to the maximum annual deduction of $100,000. This measure will cost the Government some $1.2 billion in 2006-07. We will introduce legislation to give effect to the two foregoing proposals as soon as possible into this Council.
Other Revenue Items
Profits Tax
78. A good number of local chambers of commerce and professional bodies have suggested revisions to the current profits tax arrangements for corporate losses. Of these proposals, the most significant ones are for the introduction of group loss relief and loss carry-back arrangements.
79. We have studied these two proposals in some detail. With the development of today's financial tools, group loss relief can easily be abused as a means to evade tax, and such activities would be very difficult to combat. I estimate that the suggested exemption, if implemented, would cost billions of dollars a year in lost tax. While taxpayers who suffer losses in their businesses may be helped to a certain extent to tide over difficult times by loss carry-back arrangements, this would place enormous pressure on tax revenue during periods of economic downturn. The Government would not only suffer a loss in tax revenue, but also have to refund tax collected in preceding years. Compared with other places, Hong Kong's tax rate is already very low. Businesses are already allowed to offset their losses indefinitely against the profits of future years. Our tax regime remains very attractive to investors. I do not therefore propose to introduce any group loss relief or loss carry-back arrangements.
Rates
80. Rateable values are derived from the amount of rent that a property can be expected to command in the open market. They are thus subject to fluctuation in line with market conditions. In the latest revaluation exercise, rateable values increased on average by about 9.2 per cent. Although on the rise after falling for several years in the wake of the Asian financial crisis, rateable values are still nearly 30 per cent below their peak. I will keep the rates charge in 2006-07 unchanged at 5 per cent. So, while nearly 80 per cent of ratepayers will see an increase in their rates bill, this will only be about $37 a month on average.
Sale and Securitisation of Government Assets
81. The Government will observe the principle of "Big Market, Small Government" in continuing to identify suitable assets for sale or securitisation. This programme serves both to increase government revenue and to offer more investment options to the public, spurring on the development of our financial markets.
Medium Range Forecast and Fiscal Reserves
Medium Range Forecast
82. If our economy grows as forecast and we can implement our expenditure and revenue proposals, the medium range forecast for 2006-07 to 2010-11 will be as follows:
2006-07 2007-08 2008-09 2009-10 2010-11
($ billion)($ billion)($ billion)($ billion)($ billion)
Operating 209.6 215.8 227.3 239.7 253.6
revenue
Operating 209.0 214.2 219.6 225.1 230.7
expenditure
Operating 0.6 1.6 7.7 14.6 22.9
surplus
Capital 47.7 52.9 62.3 52.1 55.6
revenue
Capital 40.1 44.2 44.1 44.1 45.9
spending
(including
payments
from the
Capital
Investment
Fund)
Repayment 2.6 - 2.7 3.5 -
of
government
bonds and
notes
Capital 5.0 8.7 15.5 4.5 9.7
financing
surplus
Consolidated 5.6 10.3 23.2 19.1 32.6
surplus
- as a 0.4% 0.7% 1.4% 1.1% 1.8%
percentage
of GDP
Fiscal 306.4 316.7 339.9 359.0 391.6
reserves
- as a 15 15 15 16 17
number
of months
of government
expenditure
Public 264.9 277.1 282.0 287.4 295.0
expenditure
- as a 18.2% 18.0% 17.3% 16.6% 16.1%
percentage
of GDP
83. I forecast a surplus of $0.6 billion in the Operating Account for 2006-07, and this will build up to $22.9 billion in 2010-11. In respect of the Consolidated Account, I estimate that a surplus of $5.6 billion will occur in 2006-07, and this will build up to $32.6 billion in 2010-11.
84. The projected surplus in both accounts over the next five years is to a great extent based on our forecast of economic growth. Taking such growth into account, we will increase operating expenditure moderately over the next few years to enhance the quality of government services and cater for inflation. However, Hong Kong faces many challenges. Having regard to prevailing circumstances in the next five years, we will review our expenditure guidelines annually to ensure that we continue to manage our public finances prudently and keep expenditure within revenue limits.
Fiscal Reserves
85. We expect that by 31 March this year, our fiscal reserves will stand at $300.8 billion, equivalent to 16 months of government expenditure. For the next five years, the fiscal reserves will be maintained at a level between $300 billion and $390 billion, the equivalent of 15 to 17 months of government expenditure.
Concluding Remarks
86. Our most valuable asset is the very special community we have in Hong Kong:
* we observe the rule of law and love freedom of speech;
* we are resilient and hard-working;
* we respect open markets and fair competition, and value economic development;
* we regard challenges and setbacks as the springboard for further success;
* we are versatile and enterprising, and seize opportunities well; and
* we probably have the fastest pace of living in the world, but we also pause to help the needy.
87. I recall saying in my Budget Speech two years ago that our economy was in the early dawn of recovery. With Hong Kong people's special characteristics and Hong Kong's competitive advantage in having the Mainland as our hinterland and our international outlook, the economy has continued its steady recovery over the past two years. It is now springtime in Hong Kong and, like the early morning sun, our economy has risen above the horizon. However, prosperity does not come easily, and we must treasure what we have achieved and not rest on our laurels. We must continue to develop ourselves and play to our strengths.
88. Madam President, in the eight years following Hong Kong's reunification with our motherland, we have faced and overcome many challenges because we were able to remain strong, to unite and work together. I firmly believe that our people support us in practising free market principles and prudently managing public finances. I firmly believe that our community is committed to taking advantage of our hard-earned economic recovery and building on our strengths. I firmly believe that, for as long as we continue to be united and work together, we shall be able to make the most of the present opportunities and we shall be the brightest pearl of our nation.
Ends/Wednesday, February 22, 2006
Issued at HKT 12:10
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