Wednesday, February 27th, 2008
Hong Kong Makes Huge Tax Cuts, Increases Spending on Infrastructure Intangibles
By Mike Caggeso
Associate Editor
Sitting on an estimated $15 billion budget surplus, Hong Kong’s financial chief, John Tsang, said he would slash taxes, eliminate duties on beer and wine, increase spending on health services and introduce measures to bridge the income gap and reduce air pollution, AFP reported.
Income taxes will be cut from 16% to 15% in 2008-09 and the corporate tax rate will be cut from 17.5% to 16.5%. Beer and wine tariffs will be abolished immediately, as wine consumption in Asia has ballooned in recent years.
Hong Kong will also lower the tax on hotel rooms from 16.5% to 15%, which should boost tourism prospects as the cut means a loss of $688 million in revenue per year if tourism levels remain steady.
Public spending will rise to 19.2% of GDP for the next financial budget year, up from 15.9% this year.
The bold move has two goals. First, it allows the government to rest on the economic hammock, so to speak - using its excess cash to beef up infrastructure intangibles.
Second, it puts more money in the hands of citizens that are facing rising inflation, which is expected to increase to 3.4% this year compared to 2% last year.
"This is a 360 degree budget, the first that actually benefits everybody," Agnes Chan, a partner at Ernst & Young Tax Services Ltd. in Hong Kong, told Bloomberg.
But the holiday can’t last forever. That $15 billion surplus can disappear quickly when a government spends more and taxes less.
In fact, the government is forecasting a $963 million consolidated deficit for the 2008-09 financial year. Meanwhile, Tsang estimates the city’s economic growth will probably slow to 4% to 5% this year, down from 6.3% last year.
"Financial policies should be sustainable," Tsang said, quoted by Bloomberg. "I will continue to manage public finances prudently by keeping expenditure within the limits of revenue."
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