Identifier
Created
Classification
Origin
06HONGKONG733
2006-02-22 10:16:00
CONFIDENTIAL
Consulate Hong Kong
Cable title:
"GOOD TIMES" BUDGET PROPOSED
how-toVZCZCXRO4802 PP RUEHCN DE RUEHHK #0733/01 0531016 ZNY CCCCC ZZH P 221016Z FEB 06 FM AMCONSUL HONG KONG TO RUEHC/SECSTATE WASHDC PRIORITY 5041 INFO RUEHOO/CHINA POSTS COLLECTIVE RUCPDOC/DEPT OF COMMERCE WASHDC RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 000733
SIPDIS
SIPDIS
STATE FOR EAP/CM AND EB
MANILA PASS AMBASSADOR PAUL SPELTZ
TREASURY FOR DAS DLOEVINGER AND OASIA-GKOPEKE
USDOC FOR 4420
E.O. 12958: DECL: 02/22/2031
TAGS: PGOV ECON EFIN HK CH
SUBJECT: "GOOD TIMES" BUDGET PROPOSED
REF: HONG KONG 687
Classified By: EP Section Chief Simon Schuchat; Reasons: 1.4 (b/d)
SUMMARY/COMMENT
---------------
C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 000733
SIPDIS
SIPDIS
STATE FOR EAP/CM AND EB
MANILA PASS AMBASSADOR PAUL SPELTZ
TREASURY FOR DAS DLOEVINGER AND OASIA-GKOPEKE
USDOC FOR 4420
E.O. 12958: DECL: 02/22/2031
TAGS: PGOV ECON EFIN HK CH
SUBJECT: "GOOD TIMES" BUDGET PROPOSED
REF: HONG KONG 687
Classified By: EP Section Chief Simon Schuchat; Reasons: 1.4 (b/d)
SUMMARY/COMMENT
--------------
1. (C) A dearth of newsy initiatives in Financial Secretary
Henry Tang's February 22 budget speech reflects continued
cyclical good times. There appears to be broad agreement
here that there are no big new problems requiring short-term
changes to economic policy or a significant redirection of
government resources. Tang, however, will likely find
himself criticized for the speech on two counts. First, his
offer of only very limited tax concessions will disappoint
the one-third of salaried workers who pay income taxes to
begin with and would like to see some relief from mortgage
payments that have risen rapidly with local interest rates.
Second, Tang's laying out of tangible steps towards a
consumption tax will be politically unpopular with just about
everyone -- except the very few who have contemplated the
HKG's existing volatile revenue structure and consider a
consumption tax a necessary step towards addressing it. END
SUMMARY/COMMENT
A TINY TAX CUT
--------------
2. (C) Financial Secretary Henry Tang's February 22 budget
speech -- a "second reading" to the legislature of the
Appropriations Bill for 2006 -- revealed a small revenue
surplus for the 2005-06 budget period, the second in a row,
thanks to recently strong economic performance -- 8.6 percent
GDP growth in 2004 (revised upward today) and 7.3 percent in
2005 (released today). Anticipation of the surplus had
fueled hopes from the middle and upper classes for an income
tax cut; these taxpayers find themselves increasingly
squeezed by higher payments linked to their adjustable-rate
mortgages. Tang, however, offered only token cuts,
suggesting a shaving of one percent off the marginal rate for
the upper three tax brackets. He also proposed extending the
deduction period for interest on mortgages from seven to ten
years.
3. (SBU) Tang did not comment on lowering or rationalizing
the duties on alcoholic beverages. Several diplomatic
missions in Hong Kong, including our own, have over the years
pressed for a revision of the duties, especially for wine
(presently 80 percent).
CONCRETE STEPS TOWARDS A CONSUMPTION TAX
--------------
4. (C) Tang said the HKG would announce details in mid-2006
of a plan for a consumption tax (Goods and Services Tax, or
GST),and that this will be followed by public consultations.
He did not specify whether the proposed GST would be revenue
neutral. Tang did state an intention to offer GST tax
refunds to visitors and to provide relief to lower-income
residents. Deputy Finance Secretary Martin Glass told a
Consular Corps briefing that the GST would be low, simple,
and broad-based. Glass acknowledged that this initiative
would be hard to sell to the public, which is already showing
signs of a "knee-jerk reaction." He pointed out that only
one-third of Hong Kong's work force presently pays income
taxes. A GST, by contrast, affects everyone, and is
naturally unpopular. While today's move towards a
consumption tax was tangible, JP Morgan Greater China
Economist Daniel Hui pointed out that the underlying
mechanics involved suggest that such a levy will not be
implemented before 2010.
5. (U) A consumption tax, however, is important in the longer
term for Hong Kong as a way to stabilize government revenue
flows, in the view of Government Economist K.C. Kwok, who
also chaired the Consular Corps briefing. We note that HKG
revenue sources are highly volatile according to economic
conditions. The tax base remains narrow, with income taxes
and various fees accounting for most government revenue, and
yields from these sources move up and down with economic
performance and property value swings. Further, around 20
percent of fiscal intake over time has come from highly
volatile non-tax sources such as land sales and interest
rate-sensitive returns on accumulated surpluses. Because of
Hong Kong's USD-pegged exchange rate and lack of any capital
controls, the HKG must be careful not to slip into projected
HONG KONG 00000733 002 OF 003
chronic deficits that would draw on the accumulated reserves
necessary for maintaining the currency link.
FISCAL GOALS REACHED AHEAD OF TIME
--------------
6. (U) Kwok pointed out that the HKG has as of this year
reached several fiscal targets three years earlier than
planned. Government expenditure stands below the HKD 200
billion mark (USD 26 billion). The HKG's consolidated as
well as operating budgets are both now in balance, for the
first time in eight years. Government expenditure amounts to
less than 20 percent of GDP.
NEW INITIATIVES
--------------
7. (C) Tang spoke at length about Hong Kong enhancing its
value-adding capabilities and developing in a manner that is
"win-win" with the mainland's own economic trajectory. He
described a city whose economic future depends on bolstering
employee skills and expanding physical infrastructure, both
of which are necessary to support Hong Kong's role as a
regional business platform. Tang touched on numerous
elements of "soft infrastructure" such as investor
protections, the beneficial free trade agreement with China,
and a committee presently looking into the potential utility
of a competition law. He noted challenges such as labor
market skills mis-match, avian influenza, environmental
degradation, and the need to attract overseas talent. All
that said, Tang made few proposals of note for new
expenditures or even low-cost pilot initiatives, merely
offering tweaks in line with existing trends. Some of the
more noteworthy proposals, all of which are either small in
scale or build on existing initiatives, include:
o TALENT PROGRAM: A new program to attract mainland and
overseas talent; DepSec Glass said in the briefing that the
aim is to attract accomplished workers with impressive
qualifications, and that a pre-existing job offer would not
be required to obtain the right to stay in Hong Kong and look
for work for up to one year.
o INFRASTRUCTURE: A stated commitment to physical
infrastructure, with an eye towards creating 14,000 jobs in
the weak construction sector. Plans are to earmark HKD 29
billion (USD 3.7 billion) per year. Specific projects still
to be determined.
o AID TO DISADVANTAGED: An increase of HKD 100 million per
year (USD 13 million) to strengthen rehabilitation services,
family support, and child development.
o EMPLOYMENT: HKD 230 million (USD 30 million) over five
years to assist the unemployed and help them achieve
self-reliance.
o "GREEN" TAXES: Intention to promote the "polluter pays"
principle through tax policy, including programs to encourage
the recovery of tires, reduce the use of plastic bags, and
promote electric vehicles.
WHERE THE MONEY COMES FROM
--------------
8. (U) The figures below were provided to the Consular Corps,
detailing anticipated 2006-07 revenue of HKD 257.3 billion
(USD 33 billion).
UNIT = PERCENTAGES
CATEGORY 2006-07
Profits Tax 27.5
Land Premium 11.9
Salaries Tax 16.1
Rates (Property Related) 6.0
Stamp Duties 5.8
Utilities/Fees/Charges 5.7
Properties/Investments 6.2
Betting Duty 4.6
Land Fund 3.1
Duties 2.6
Other Operating 3.9
Other Capital 6.6
HONG KONG 00000733 003 OF 003
WHERE THE MONEY GOES
--------------
9. (U) The figures below are percentages of budget
allocations based on original estimates for 2005-06 and
2006-07, provided to the Consular Corps. The recurrent
government expenditure in 2005-06 was HKD 247.8 billion (USD
31.7 billion) and for 2006-07 was HKD 245.6 billion (USD 31.4
billion).
UNIT = PERCENTAGES
CATEGORY 2005 2006
Education 23.6 23.0
Social Welfare 14.5 14.8
Health 13.0 13.2
Security 10.6 11.0
Infrastructure 10.9 9.9
Economic 4.7 4.8
Environment and Food 4.3 4.7
Community/External Affairs 8.3 8.4
Housing 0.1 0.1
Support (Operational) 14.9 15.1
Sakaue
SIPDIS
SIPDIS
STATE FOR EAP/CM AND EB
MANILA PASS AMBASSADOR PAUL SPELTZ
TREASURY FOR DAS DLOEVINGER AND OASIA-GKOPEKE
USDOC FOR 4420
E.O. 12958: DECL: 02/22/2031
TAGS: PGOV ECON EFIN HK CH
SUBJECT: "GOOD TIMES" BUDGET PROPOSED
REF: HONG KONG 687
Classified By: EP Section Chief Simon Schuchat; Reasons: 1.4 (b/d)
SUMMARY/COMMENT
--------------
1. (C) A dearth of newsy initiatives in Financial Secretary
Henry Tang's February 22 budget speech reflects continued
cyclical good times. There appears to be broad agreement
here that there are no big new problems requiring short-term
changes to economic policy or a significant redirection of
government resources. Tang, however, will likely find
himself criticized for the speech on two counts. First, his
offer of only very limited tax concessions will disappoint
the one-third of salaried workers who pay income taxes to
begin with and would like to see some relief from mortgage
payments that have risen rapidly with local interest rates.
Second, Tang's laying out of tangible steps towards a
consumption tax will be politically unpopular with just about
everyone -- except the very few who have contemplated the
HKG's existing volatile revenue structure and consider a
consumption tax a necessary step towards addressing it. END
SUMMARY/COMMENT
A TINY TAX CUT
--------------
2. (C) Financial Secretary Henry Tang's February 22 budget
speech -- a "second reading" to the legislature of the
Appropriations Bill for 2006 -- revealed a small revenue
surplus for the 2005-06 budget period, the second in a row,
thanks to recently strong economic performance -- 8.6 percent
GDP growth in 2004 (revised upward today) and 7.3 percent in
2005 (released today). Anticipation of the surplus had
fueled hopes from the middle and upper classes for an income
tax cut; these taxpayers find themselves increasingly
squeezed by higher payments linked to their adjustable-rate
mortgages. Tang, however, offered only token cuts,
suggesting a shaving of one percent off the marginal rate for
the upper three tax brackets. He also proposed extending the
deduction period for interest on mortgages from seven to ten
years.
3. (SBU) Tang did not comment on lowering or rationalizing
the duties on alcoholic beverages. Several diplomatic
missions in Hong Kong, including our own, have over the years
pressed for a revision of the duties, especially for wine
(presently 80 percent).
CONCRETE STEPS TOWARDS A CONSUMPTION TAX
--------------
4. (C) Tang said the HKG would announce details in mid-2006
of a plan for a consumption tax (Goods and Services Tax, or
GST),and that this will be followed by public consultations.
He did not specify whether the proposed GST would be revenue
neutral. Tang did state an intention to offer GST tax
refunds to visitors and to provide relief to lower-income
residents. Deputy Finance Secretary Martin Glass told a
Consular Corps briefing that the GST would be low, simple,
and broad-based. Glass acknowledged that this initiative
would be hard to sell to the public, which is already showing
signs of a "knee-jerk reaction." He pointed out that only
one-third of Hong Kong's work force presently pays income
taxes. A GST, by contrast, affects everyone, and is
naturally unpopular. While today's move towards a
consumption tax was tangible, JP Morgan Greater China
Economist Daniel Hui pointed out that the underlying
mechanics involved suggest that such a levy will not be
implemented before 2010.
5. (U) A consumption tax, however, is important in the longer
term for Hong Kong as a way to stabilize government revenue
flows, in the view of Government Economist K.C. Kwok, who
also chaired the Consular Corps briefing. We note that HKG
revenue sources are highly volatile according to economic
conditions. The tax base remains narrow, with income taxes
and various fees accounting for most government revenue, and
yields from these sources move up and down with economic
performance and property value swings. Further, around 20
percent of fiscal intake over time has come from highly
volatile non-tax sources such as land sales and interest
rate-sensitive returns on accumulated surpluses. Because of
Hong Kong's USD-pegged exchange rate and lack of any capital
controls, the HKG must be careful not to slip into projected
HONG KONG 00000733 002 OF 003
chronic deficits that would draw on the accumulated reserves
necessary for maintaining the currency link.
FISCAL GOALS REACHED AHEAD OF TIME
--------------
6. (U) Kwok pointed out that the HKG has as of this year
reached several fiscal targets three years earlier than
planned. Government expenditure stands below the HKD 200
billion mark (USD 26 billion). The HKG's consolidated as
well as operating budgets are both now in balance, for the
first time in eight years. Government expenditure amounts to
less than 20 percent of GDP.
NEW INITIATIVES
--------------
7. (C) Tang spoke at length about Hong Kong enhancing its
value-adding capabilities and developing in a manner that is
"win-win" with the mainland's own economic trajectory. He
described a city whose economic future depends on bolstering
employee skills and expanding physical infrastructure, both
of which are necessary to support Hong Kong's role as a
regional business platform. Tang touched on numerous
elements of "soft infrastructure" such as investor
protections, the beneficial free trade agreement with China,
and a committee presently looking into the potential utility
of a competition law. He noted challenges such as labor
market skills mis-match, avian influenza, environmental
degradation, and the need to attract overseas talent. All
that said, Tang made few proposals of note for new
expenditures or even low-cost pilot initiatives, merely
offering tweaks in line with existing trends. Some of the
more noteworthy proposals, all of which are either small in
scale or build on existing initiatives, include:
o TALENT PROGRAM: A new program to attract mainland and
overseas talent; DepSec Glass said in the briefing that the
aim is to attract accomplished workers with impressive
qualifications, and that a pre-existing job offer would not
be required to obtain the right to stay in Hong Kong and look
for work for up to one year.
o INFRASTRUCTURE: A stated commitment to physical
infrastructure, with an eye towards creating 14,000 jobs in
the weak construction sector. Plans are to earmark HKD 29
billion (USD 3.7 billion) per year. Specific projects still
to be determined.
o AID TO DISADVANTAGED: An increase of HKD 100 million per
year (USD 13 million) to strengthen rehabilitation services,
family support, and child development.
o EMPLOYMENT: HKD 230 million (USD 30 million) over five
years to assist the unemployed and help them achieve
self-reliance.
o "GREEN" TAXES: Intention to promote the "polluter pays"
principle through tax policy, including programs to encourage
the recovery of tires, reduce the use of plastic bags, and
promote electric vehicles.
WHERE THE MONEY COMES FROM
--------------
8. (U) The figures below were provided to the Consular Corps,
detailing anticipated 2006-07 revenue of HKD 257.3 billion
(USD 33 billion).
UNIT = PERCENTAGES
CATEGORY 2006-07
Profits Tax 27.5
Land Premium 11.9
Salaries Tax 16.1
Rates (Property Related) 6.0
Stamp Duties 5.8
Utilities/Fees/Charges 5.7
Properties/Investments 6.2
Betting Duty 4.6
Land Fund 3.1
Duties 2.6
Other Operating 3.9
Other Capital 6.6
HONG KONG 00000733 003 OF 003
WHERE THE MONEY GOES
--------------
9. (U) The figures below are percentages of budget
allocations based on original estimates for 2005-06 and
2006-07, provided to the Consular Corps. The recurrent
government expenditure in 2005-06 was HKD 247.8 billion (USD
31.7 billion) and for 2006-07 was HKD 245.6 billion (USD 31.4
billion).
UNIT = PERCENTAGES
CATEGORY 2005 2006
Education 23.6 23.0
Social Welfare 14.5 14.8
Health 13.0 13.2
Security 10.6 11.0
Infrastructure 10.9 9.9
Economic 4.7 4.8
Environment and Food 4.3 4.7
Community/External Affairs 8.3 8.4
Housing 0.1 0.1
Support (Operational) 14.9 15.1
Sakaue