HK enjoys 8.1% rise in GDP

Territory's first surplus in five years is almost double its annual growth rate

Thursday • March 17, 2005

HONG KONG — Hong Kong has posted its first budget surplus in five years as the economy bounced back strongly last year with growth of 8.1 per cent, Financial Secretary Henry Tang said yesterday.

Announcing the 2005-06 budget, Mr Tang unveiled no major surprises as Hong Kong comes to grips with its first leadership transition following Chief Executive Tung Chee-hwa's resignation last week halfway through his second term.

"I will do my best to ... maintain public confidence in the economic development and social stability of Hong Kong," Mr Tang said.

The 8.1-per-cent expansion in 2004 was the highest in four years and above the average annual growth rate of 4.8 per cent of the past 20 years.

Mr Tang forecast a budget surplus of HK$12 billion ($19.5 billion) in the year to March 31 2005, equivalent to 0.9 per cent of Gross Domestic Product (GDP) and the first since 1999-2000, thanks to better-than-expected premiums from land sales.

The government had initially estimated a deficit of HK$42.6 billion and the improvement "suggests that our economy is back on an upward track following the adjustments over the past few years", said Mr Tang.

The turnaround largely reflected land sales proceeds of HK$31.3 billion, more than two-and-a-half times the original estimate and Mr Tang warned against relying too heavily on this volatile revenue stream.

After being buffeted by the Asian financial crisis, the dot-com bubble and the 2003 Sars outbreak, the financial secretary said that Hong Kong would continue to be exposed to outside factors including oil prices, currency fluctuations, China's economic growth and changes in its policies.

However, he believed that Hong Kong could balance its books by 2007-08, a year earlier than targeted.

As the economy was recovering strongly, Mr Tang did not propose new taxes nor raise existing ones although he said that he would abolish estate duty so as to attract more investors to Hong Kong.

He gave little away about the details of a much-talked-about goods and services tax, or GST, saying only that there will be further consultation on the matter.

Mr Tang called China both a major boon but also a strong competitive force for Hong Kong.

"The development of the mainland has also emerged as a strong competitive force for Hong Kong, threatening even some of our industries which had long had an edge over our competitors, such as logistics."

Copyright MediaCorp Press Ltd. All rights reserved.

Although the budget surplus came earlier than expected, the government still should broaden its revenue base to better position itself for the next economic downturn. Currently, revenues are too heavily dependent on land sales. One way to broaden the revenue base is to introduce a sales tax.

It's ironic how just as Tung Chee-hwa steps down, perhaps because of his performance record, these statistics are released. I think he didn't do a bad job, considering all the problems out of his control that he faced.

A sales tax would be the most undesirable... Hong Kong is famous for cheap products,
it will put a dent on tourism... wht's worse, a sales tax would discourage locals to spend, at least psychologically they feel like they're paying more than they used to!

Actually, a low sales tax of 3% as some officials have suggested will bring in billions of revenues. It's a very small addition to prices and they could be incorporated into all prices so the transition will seem easy.

A sales tax is a very effective and fair method to increase government revenues. While some people might think twice before spending on large items, it will have minimal effect on people buying everyday items.

A 3% surcharge will not suddenly make Hong Kong a less desirable shopping destination. If the marginal difference is so small with other cities to start, then Hong Kong will not be a shopper's paradise that it is today.

Regardless of how the government accomplishes the goal of broadening its revenue base, it's clear that the present system is inadequate to weather economic cycles. While there is still a huge surplus accumulated from previous years, that cushion can easily be wiped out at the next downturn.

I don't think HK should introduce sales tax to the territory in the coming years. After all, this is a new thing to residents in HK and whether it's a success remains unclear.

There are other ways to broaden its revenue base but sales tax isn't the only one of them. And of course, they first have to lower their governmental expenses first.

Maybe I'm optimistic; I think the current system is adequate to weather economic cycles because there's still a huge surplus remained. This showed the current simple tax system is still effective and I'm sure it can handle the next downturn.

The government should not merely count on the surplus to provide for a structural deficit, because that surplus will run out one day, and the government will be crippled with a debt problem. Yes, there are many other ways to broaden the revenue base, but tax increases at the personal and corporate level will hinder investment. After all, Hong Kong has a very simple tax system.

The Asian financial crisis showed that Hong Kong can no longer take its finances for granted. After years of deflation and adjustments both at the corporate and government level, it's evident that mere cost-cutting alone is not going to solve the problem. Hong Kong is too dependent on land sales. In fact, the deficit miraculously disappeared just as several high-profile land sales took place in recent months.

A sales tax is quite equitable to all parts of society. People who spend more pay more, and the lower income families are less affected. Other options might be to increase taxes on the rich, but that seems to counter Hong Kong's long-running low tax policy.

The government is very careful with the timing of any tax increases. Perhaps the people won't feel as big of a pinch if this is implemented after a few good years rather than at this stage just after emerging from the SARS recession.

I would tend to agree that adopting a sales tax for certain items would a great way to boast Hk's treasury, but with so many independent vendors, collecting sales tax may end up to be quite a problem.

It will also blur HK's image as a retail haven. ~

thank you Van-To that was what i'm trying to get at...

a sales tax should be a selective one... as a HK immigrant to the US, the one thing we hate the most even after 6 years living in Los Angeles is STILL the sales tax, more so for my parents who's so used to the "real price" as they call it...

it's sth very very hard to stomach, esp when HK-ers are already so disappointed with the gov't... it takes years to adjust bcoz HK ppl buy buy buy buy buy thaz like... our identity :-D in such deep consumerism culture a sales tax is devasting...

also 3% IS a big difference... if it makes a difference for HK ppl @ 5% off sale, why won't 3% matter? Just watch the news... ppl are still counting the coins after the past couple years... a couple dollars increase by MTR or the buses cause major public outcry... ALSO, we're already having a big big prirating problem coz the real things cost too much... from handbags to computer games to the EVEN SO IMPORTANT porn we get them from the back streets in Mongkok! 1. How is the gov't to collect THOSE taxes and 2. a sales tax encourages ppl to buy more from those sources

maybe it sounds kinda kiddy but i do think that would b the case, at least from the point of view of my own family.

British retailers incorporate their VAT (17.5%) into their prices already, so the consumer doesn't see an additional charge on top of what they pay. That may be a viable option to 'hide' the sales tax effect.

Collection is actually quite easy. Retailers keep receipts. They have to report their taxes at the end of the year, so they can just multiply their revenues by the sales tax and pay the appropriate the amount. If they are reporting less than what they actually got, then it's tax evasion, and the tax authorities will get them anyway. However, small businesses such as street hawkers will not have records to show to the government. In that case, all small businesses with revenues less than some $X are exempt from sales tax. In the end, consumers looking for bargain items won't need to pay sales tax.

The current proposal of 3% is much less than most sales taxes in the rest of the industrialized world. Britain charges 17.5%. Canada charges 7% federally + provincial taxes (Vancouver and Toronto residents pay about 15%). Many American states also have sales taxes as well.

I doubt anyone will want to pay more taxes. However, are there other options to broaden the government revenue base? It's a big problem. An economic recovery should not detract moves to ensure the next financial crisis won't hit the government hard.

I dont think showing examples from other industrialized world collecting sales tax is appropriate. Our economy is heavily depending on the retail and service these days. Many tourists from Mainland enjoy shopping down here with a cheaper pricetag and higher quality customer service. Afterall, 92% of the retailers are against the introduction of sales tax. Also, what if they found 3% isn't enough to broaden the tax base? Should there be an increase? Would that hit the economy or even create the next financial crisis?

Hong Kong cannot afford to lose that image, "shopping paradise", for that 3% sales tax.

Actually, most industrialized economies are services-based, and collectibility issues oftentimes arise because of the recording of revenue receipts. Foreign visitors are able to get tax refunds for spending over a threshold of money. Obviously any retailer will be against a sales tax because they will most likely have to share a burden of it. However, will local consumers stop spending as a result? Not really. The effects will be minor, because there are some goods people must buy, such as food.

I have never seen a sales tax triggering a financial crisis. Are there examples?

Will a 3% surcharge all of a sudden make Hong Kong not price-competitive. If the margin is so small compared to other cities, why is Hong Kong a shopping paradise from the start? Obviously the margin is much larger than that. Otherwise there won't be so many people coming to Hong Kong every year to shop. Keep in mind that a HK$60 shirt will only incur a $1.8 sales tax. That's very minor.

amazing growth story for HK this year and last...

:D

Will a 3% surcharge all of a sudden make Hong Kong not price-competitive. If the margin is so small compared to other cities, why is Hong Kong a shopping paradise from the start? Obviously the margin is much larger than that. Otherwise there won't be so many people coming to Hong Kong every year to shop. Keep in mind that a HK$60 shirt will only incur a $1.8 sales tax. That's very minor.

Erm, an esprit shirt (same design) in HK costs about as much as in Singapore leh.

Price may not be the main decision for buying most of the time unless it is a standard item available almost everywhere in the world. Differentiating attributes like quality and design/excellence of the merchandise/service at affordable prices probably is. The whole buying experience is a package. If the target group buys the package, I suppose a sales tax of 3% does not matter to the tourists.

I am not an expert on such tax matters and knows zilch about HK fiscal policies. But, on a scenario where sales tax is collected only on luxury goods or via companies whose turnover is more than say HK$5 million annually AND the government provides adequate assistance for its poor on basic necessities like healthcare, housing and education, I believe it should not affect the poor much. In addition, the government should reduce personal income taxes to alleviate the impact of sales tax on salaried workers.

This 8.1% growth in the other hand reveals that the central government should be choosing who is going to be chief executive. Because this 8.1% growth is just stretching out the hand and ask grandpa for money. CEPA, mainland tourists...we can see that. Is HK really getting better? I don't think so...

HK now has to wave his hand towards Beijing for help. Therefore how come central government cannot change the chief executive when they want to? The whole economy is already changed by the mainland! The HK government has no power, especially the former Tung government.

British retailers incorporate their VAT (17.5%) into their prices already, so the consumer doesn't see an additional charge on top of what they pay. That may be a viable option to 'hide' the sales tax effect.

Yes, I think the British system would be quite effective too. A reasonable 1-2% would be an excellent place to start, & HK retailers should continue to round their consumer price denominations to whole number configurations in order to deter attention from this tax ~

One major reason why a sales tax is on the table is because the government wants to keep personal income taxes low and simple, since it is a major advantage that multinationals like. However, implementing a broad-based sales tax, although more fair because those who spend more pay more and the lower classes won't be hit as badly, is very controversial. Hence, timing is key. Since retailers are enjoying a major boom in business right now from tourism, perhaps adding a 3% surcharge won't hit them as much. For tourists purchasing a few items here and there, they might not qualify to get a refund if there is a certain threshold to meet (ie. spend $1000 and claim a refund at the airport on the way home).

Regardless of what measures the government suggests in broadening its revenue base (sales tax is just one way of many), the point is something needs to be done now. The rating agencies have criticized the dependence on land sales and if they move Hong Kong's sovereign rating lower, it will have significant implications on Hong Kong companies raising funds for expansion. That is more likely to trigger a financial crisis than merely implementing a sales tax.