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INTRODUCTION
The Financial Secretary, Mr. John Tsang Chun-Wah, delivered his fifth, and quite possibly last, budget to the Legislative Council on 1 February 2012, which was somewhat earlier than previous years. The AFP Group provides this commentary with the aim of helping clients understand the effects the budget may have on their personal circumstances and business interests, as well as Hong Kong society in general.
Mr. Tsang stated that the aim of his budget was to provide the financial resources for the implementation of measures to relieve people’s hardship, improve the quality of life and promote social and economic development that were announced by the Chief Executive in his October policy address. He also said that he would devote resources to all major aspects of Hong Kong society, such as education, medical services, social welfare, housing, infrastructure and various livelihood policy areas, whilst at the same time promoting economic development, so that the “investments” resulting from the budget proposals can help future generations face new challenges.
It has to be said that the budget measures announced included nothing innovative or little that was new by comparison to previous years. Rather, it was much of the same and it therefore remains to be seen if the measures meet the stated aims.
Mr. Tsang observed that the overall aspiration of our society, and therefore a major task of the current administration, was to maintain Hong Kong’s steady growth and he implied that this had been achieved despite the challenges faced by the global economy since 2008, from which Hong Kong has not been exempt.
In a somewhat self-congratulatory vein Mr. Tsang noted that despite the worldwide downturn of recent years, Hong Kong had achieved cumulative growth of 19% in real terms in the last five years and that per capita GDP has risen to US$34,200 in 2011, up from US$29,900 in 2007.
Hong Kong’s unemployment rate is now 3.3%, down from a high of 5.5% in mid-2009, and total employment has increased by more than 180,000 from a low point in 2009, which reflects a return to similar levels of unemployment achieved in 2008. Income from employment for lower-income groups has increased by 12.5% over the last year, which equates to 7% in real terms after adjustments for inflation. There has also been an improvement in the livelihoods of “grass roots” in the last year as the monthly median household income rose by 11.1% to HK$20,000, from HK$18,000, a 5.1% increase in real terms.
It is considered that Hong Kong has recovered quickly from the effects of the worldwide downturn of recent years, which was attributed to our flexible economic system and overall competitiveness. Mr. Tsang trumpeted this achievement by citing that Hong Kong had been ranked by the Heritage Foundation as the world’s freest economy for 18 consecutive years, had been rated as the world’s most open market by the International Chamber of Commerce and the World Bank had rated it as the second easiest place to do business. He also referred to a 2011 report by the IMF that concluded that Hong Kong’s policies and strategies to counter financial turmoil contributed to its “vigorous rebound” and to the top triple-A credit rating from Standard & Poor’s.
Despite these self-proclaimed achievements, which have most likely been achieved by Hong Kong’s entrepreneurial business sector despite the government’s bureaucratic meddling in financial and business matters, Mr. Tsang vowed that the government would not “lower its sense of crisis” in the face of continuing turmoil in international financial markets, unresolved economic troubles and the intricate problems of fiscal deficit and debt crisis in Europe and the U.S. as they could have a more serious impact than the 2008 “financial tsunami”.
Mr. Tsang announced that to prepare for potential external economic crisis this year, his budget would propose a series of measures to counter the risk of economic slowdown. The measures would be underpinned by the strategy of “supporting enterprises to preserve employment and promoting economic development to protect people’s livelihood” in order to tide enterprises over difficult times, preserve employment and increase peoples disposable cash at hand. He considered that in addition to cushioning the economy, the measures would help reduce the pressure of inflation on people in need so that our economy would move steadily forward.
For 2011/12 Hong Kong is expected to record a budget surplus of HK$66.7 billion, compared to a forecast HK$3.9 billion. Material underestimates have been a consistent feature of recent years and cast doubts on the government’s ability to manage the economy. For 2012/13 a deficit of $3.45 billion is predicted.
Hong Kong’s 2011 exports of goods rose by 3.6% in real terms, following a significant reduction in demand midyear resulting from slowdowns in the U.S. and Europe, compared to 17.3% growth in 2010. Domestic demand remained resilient and as the employment market continued to improve and incomes increased, private consumption expenditure maintained its growth momentum in all four quarters of 2011 to show an annual growth of 8.4% in real terms.
Inflation gathered pace in 2011 with the underlying rate for the year averaging 5.3%, a significant rise from 1.7% for 2010. In last year’s budget speech Mr. Tsang made much of the threats that inflation and asset-price bubbles would pose to the economy and the measures to be introduced to counter them. For a small economy such as Hong Kong that has a currency pegged to the U.S. dollar and which is largely externally driven, it is probably futile for the government to claim that it can do anything material about such risks!
A potential asset-price bubble showed signs of materialising in the real estate market in 2011. On the back of economic recovery and extremely low interest rates (due to Hong Kong’s pegged currency) coupled with a comparatively tight supply of residential units, the property market showed significant price increases during first half of the year, which tapered off during the second half with reductions showing in some areas. Mr. Tsang considered some of the heat had been taken out of the market and attributed this to measures introduced during 2011 to (1) increase the supply of flats; (2) curb property speculation; (3) prevent expansion in mortgage lending; and (4) ensure transparency in the property market.
All in all, Mr. Tsang’s assessment was that he and the government had done a good job in managing the economy during 2011.
In relation to our economic outlook for 2012 Mr. Tsang cautioned about external shocks and was pessimistic about export growth in the second half of the year. He therefore proposed to introduce measures worth nearly HK$80 billon to prepare for difficult times ahead with the aim of supporting enterprises and people in meeting challenges and to help ease the burden of inflation. Mr. Tsang considers this will help stimulate the economy by 1.5% in 2012.
The average underlying inflation rate for 2012 is predicted to be 4% (2011: 5.3%) and the headline inflation rate is estimated at 3.5% after taking account of the one-off measures proposed.
Hong Kong’s model of taxation and economic operation will continue unchanged. No changes to tax rates were announced, although increased allowances were proposed and a summary of the changes is provided later in this summary.