PwC expects Hong Kong to report a massive surplus of HK$168 billion (US$21.5 billion) when it unveils its proposed 2018/19 budget on February 28. The amount is more than ten times the original forecast of HK$16.3 billion made around this time last year.
The accounting firm’s projection is higher than the estimate of EY, another Big Four accounting firm, which earlier said that Hong Kong will book a surplus of HK$160 billion.
According to PwC, Hong Kong’s fiscal revenues will reach HK$621.2 billion by the end of fiscal year to March 2018, on higher than expected income from land sales, profits tax and stamp duty. Expenditures, on the other hand, are forecast at HK$453.2 billion, 8% lower than the budgeted HK$491.4 billion.
PwC expects the fiscal reserves to stand at HK$1,121.8 billion by the end of March 2018 – equivalent to 30 months of total government expenditure. The forecast is 18% larger than the HK$962 billion the government expected.
‘Miserly’ fiscal policy
“PwC predicts total revenues from profits tax and salaries tax will reach HK$219.8 billion – HK$14.1 billion more than the Government’s previous forecast,” says PwC Hong Kong Tax Partner Jeremy Choi. “The total revenue from stamp duty is expected to amount to HK$84.1 billion, nearly 60% higher than the Government's previous forecast of HK$53 billion.”
Choi projects revenue from land sales to top HK$166.3 billion, 60% higher than the government forecast last year. The underspending of the budgeted expenditures, he adds, “shows that the HKSAR Government has managed to maintain the principle of fiscal prudence and is committing resources only where justified.”
Hong Kong has a history of consistently over-achieving on revenues, giving ammunition to critics who charge that the government deliberately under-forecasts to avoid large increases on social welfare spending. In a blog post last year, a former head of the Monetary Authority, Joseph Yam, called Hong Kong’s “miserly” fiscal policy as “too prudent, not aggressive enough and not keeping up with the times.”
Yam is a key adviser to new Chief Executive Carrie Lam, who has spoken about a “new fiscal philosophy,” whose objective is to “wisely use our accumulated surpluses for the community.” Previous administrations had been attacked for sitting on huge cash piles in anticipation of rainy days that never came.
PwC notes that Lam has announced a number of measures since she took office seven months ago that aim to foster innovation-based entrepreneurship and let Hong Kong actively participate in the development of the Guangdong-Hong Kong-Macau Bay Area and China’s Belt and Road Initiative.
“We believe the policies being pursued by the HKSAR Government will move the territory in the right direction,” says Agnes Wong, PwC Hong Kong Tax Partner. “At the same time, reducing people’s tax burden and making good use of reserves in order to enhance people’s quality of life are also important.”
PwC suggests that the Government establishes regular communications between Hong Kong and the Mainland to discuss the possibility of reducing tax rates for corporates and individuals who carry on business or frequently travel to work in the Bay Area. Moreover, it should lobby for a waiver on social contributions in the Mainland for Hong Kong residents who have already contributed to the MPF scheme in Hong Kong.
“On top of the super-tax deduction proposed in the Chief Executive’s Policy Address [last year] for encouraging the private sector to invest more in R&D, we suggest that the Government provides clearer guidance when defining R&D activities and expenditures,” adds Choi. “It should also provide refundable credits for R&D investments for start-up business and reduced profits tax rate for intellectual property hubs set up in Hong Kong.”
In addition, PwC recommends widening salaries tax brackets from HK$45,000 to HK$50,000 and further increasing the deduction cap for individual self-education expenses to HK$160,000. To alleviate the financial burden on the middle class, PwC proposes increasing deductions for child allowance from HK$100,000 to HK$120,000 and extending the mortgage interest deduction period up to a maximum of 25 years, while raising the maximum interest deductible to HK$150,000 per annum.