Hong Kong skyline from above

Hong Kong Fiscal February 2018

Hong Kong: Lam’s first budget reimagines Hong Kong as an innovation and technology hub, slashes taxes and returns much of FY 2017’s windfall to taxpayers

Hong Kong is in an enviable fiscal position entering FY 2018, which begins on 1 April, thanks to last fiscal year’s record-breaking surplus. Financial Secretary Paul Chan announced a very expansionary budget for FY 2018 on 28 February, delivering the first fiscal policy address since Chief Executive Carrie Lam assumed the top role last July. Last year’s unexpectedly large windfall has given the government space to cut taxes and promote a new forward-looking fiscal philosophy, which is intended to position Hong Kong as an innovation and technology hub in the region, as well as improve the social safety net for an aging population. Chan’s address was met positively by analysts, who noted the pro-cyclical spending plan would likely add approximately 0.5 percentage points to headline GDP growth this year without threatening the city’s sound fiscal stance. Considering FY 2018’s jump in spending, as well as last year’s unexpectedly robust GDP growth of 3.8%, the government now expects GDP to increase 3.0%–4.0% in 2018.

Total spending is set to increase 17.6% in FY 2018 and, along with total revenue set to fall by 1.3%, is expected to result in an HKD 46.6 billion (USD 5.9 billion) fiscal surplus. Given last fiscal year’s massive HKD 138 billion (USD 17.6 billion) estimated surplus and this year’s bright economic outlook, the government is hoping to further diversify the economy and nurture longer-term growth through new areas of investment, setting aside HKD 50.0 billion to develop the city’s innovation and technology industries. Hoping to position Hong Kong as a hub for biotechnology, artificial intelligence and financial technology (fintech), the government plans to invest HKD 20.0 billion this year in the first phase of the new Hong Kong-Shenzhen Innovation and Technology Park. On the financial services side, it will promote a three-year pilot program to encourage firms to issue bonds in Hong Kong, as well as launch a green finance program. New spending has also been allocated to improve the city’s trading and logistics infrastructure, as well as tourism infrastructure.

Recent fiscal fortunes have also given Lam’s administration the opportunity to increase recurrent expenditures. Part of her fiscal vision is to adapt social welfare programs to the needs of a changing population, and public spending as a share of GDP will increase over the medium term—from 19.3% in FY 2017 to 21.2% in FY 2018 and rising further through 2022. The government will prioritize addressing the city’s shrinking labor pool and aging population with greater health care spending. To address young people’s concerns, spending on education will increase, and students in need will receive one-off grants and fee waivers for the secondary school exam. Moreover, a new commission geared towards youth development will be set up to begin tackling other challenges, including full-time employment and home ownership.

Last year’s HKD 138 billion (USD 17.6 billion) fiscal surplus, which left the government’s forecast of a HKD 16.3 billion (USD 2.1 billion) surplus in the dust, was due in large part to an unexpected surge in stamp duty and land premium revenues stemming from massive gains in the booming asset and property markets, respectively. Against this backdrop, Chan pledged to return approximately 40.0% of the FY 2017 surplus to taxpayers. Meanwhile, given last year’s fiscal overflow, major tax relief measures are being introduced in the FY 2018 budget that will slash revenue. Most notably, salaried workers will see their taxes rebated sharply, while marginal tax rates and the number of tax brackets will be adjusted to the benefit of taxpayers. Furthermore, tax deductions are being introduced for the elderly and the disabled. On the other hand, while ratable properties will receive modest tax waivers, Chan left the red-hot property market largely out of the FY 2018 budget, choosing instead to highlight rising interest rates and the market’s risk of overheating.

Commenting on Chan’s tabling of the FY 2018 budget, Kelvin Lau, Senior Economist at Standard Chartered, noted:

“Strong momentum at the start of 2018 allowed the financial secretary to deflect calls for one-off handouts despite the government’s considerable fiscal windfalls from land sales and stamp duty; instead the focus is on boosting Hong Kong’s long-term competitiveness, especially on the technology and innovation front. That said, the FY 2018 budget […] still delivered concessions aplenty, which will help counter rising headwinds from further Fed hikes, in our view. Improving growth prospects have also led to the government upgrading its multi-year fiscal surplus projections, despite increased expenditure budgeted.”

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest