On 1 February, Hong Kong's Financial Secretary, John Tsang Chun-wah, delivered his fifth Budget Speech to the Legislative Council. KPMG China on Thursday announced the publish of the Budget Summary, which outlines the proposed changes and comments on their implications.

KPMG welcomes the measures proposed in the latest Hong Kong budget, but urges the government to review the long standing narrow tax base structural issue to ensure it can cope with future challenges and remain competitive.

Jennifer Wong, Partner, KPMG China, says: "This is the best budget John Tsang, the Financial Secretary has delivered during his term, as he has listened to the public's views and addressed the issues related to people's livelihoods, housing and inflation concerns."

Wong also welcomes the government's plan to spend HKD80 billion (USD10.31b) to introduce various measures that will help to tackle the current economic downturn, with a focus on the housing market.

"The government has laid down plans to increase land supply in order to increase residential units, particularly small and medium sized apartments to address public needs; it will continue to push forward the development of public housing units, the New Home Ownership Scheme and My Home Purchase Plan. All these measures can benefit a cross-section of the public," Wong adds.

The government has also addressed the issue of high rental costs for the commercial property market by increasing the supply of commercial property sites. Further, it initiates to move government offices out of the central business district, which in turn will also help Hong Kong increase its competitiveness.

Wong welcomes the concessionary measures proposed for SMEs, including lifting the maximum loan guarantee ratio to 80 percent under the SME Financing Guarantee Scheme and lowering the annual guarantee fee to between 10 and 12 percent of the loan facility' interest rate, as well as the new terms in the insurance policy offered by the Hong Kong Export Credit Insurance Corporation. All these measures could help to relieve the financial burden and increase the territory's competitiveness, Wong notes.

"The other relief measures are basically within expectations, if not better," Wong says. The Government has not awarded cash handouts this year, but has increased the 75 percent tax rebate for 2011/12 to HKD12,000 from HKD6,000; personal tax allowance will also rise to HKD120,000 after remaining unchanged for four years; this in turn will benefit many people, Wong explains.

"One thing rather disappointing is the relatively small scale of the issuance of iBonds," says Wong. "The HKD10 billion scale is quite small compared with the government reserves, and may not help tackle inflation issues." 

The Financial Secretary has prepared a balanced budget with a small deficit of HKD3.4b for fiscal 2012/13. However, Wong points out the estimated HKD60b land revenue is too "aggressive" given this target could hardly be achieved in the past, and given expectations of challenging economic conditions in the year ahead. 

Wong also notes that the government did not explicitly bring forward a discussion regarding the long standing structural issues in Hong Kong's revenues, in particular to take into account a growing aging population.

"Hong Kong's financial situation is, prima facie, promising with over HKD600b revenue reserves, but taking into account the unprovided HKD530b pension for civil servants, the HKD400b-plus expenditure required for infrastructure projects and HKD70b for the SME loans programme, Hong Kong is literally suffering a net deficit," Wong warns.

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