Equiom's view of the 2015/16 Hong Kong budget

Thursday 26 February 2015

by Roddy Sage, Executive Chairman, Equiom Hong Kong and Head of Family Office - Asia

1. Introduction

The Financial Secretary, Mr John Tsang Chun-Wah, delivered his eighth budget to the Legislative Council on 25 February 2015, following the release of the Policy Address by the Chief Executive, Mr Leung Chun-Ying, last month.   The theme of this year’s budget is “diversification and enhancement of the economy”.

John Tsang’s budget proposals may have come as a surprise to many against a backdrop of GDP growth of 2.3% (1% → 3% forecast for 2015), a headline inflation rate of 4.4% and a volatile world economy.   Whilst he continued to favour one-off measures of relief, with the exception of child allowances, the size of the relief measures exceeded most people’s expectations.   The $34 billion set aside for these measures equates to 54% of the Government’s revised forecast surplus of $63.8 billion for the fiscal year 2014/2015. Such measures are designed to encourage spending and stimulate economic growth.

Despite John Tsang’s normally prudent budget policy and his mindfulness about the need to strive for a fiscal balance and avoid deficits (Article 107 of the Basic Law), he is predicting budget surpluses for the next five years.   It is anticipated that throughout this period, fiscal reserves will range between 20 and 23 months of Government expenditure, reaching a figure of $856.3 billion and $948.8 billion by 31 March 2016 and 2020 respectively.   It needs to be appreciated that these budget surpluses, which average over

$25 billion per year for five years, are earned by a country with a population of 7.25 million and a workforce in the region of four million.

Although Government revenues are underpinned by income from land transactions, principally land premium and Stamp Duty, which are estimated to account for over 30% of government revenues in 2014/2015, there is an acknowledgement that there is a need to broaden the tax base.   This is reinforced by the fact that only 40% of the workforce pays Salaries Tax, and 60% of Salaries Tax collected comes from the top 5% of the taxpayers.   Equally, only 10% of the registered corporations pay Profits Tax, and over

80% of the revenue comes from the top 5% of payers of Profits Tax.   Although Mr Tsang acknowledged that the proposal to introduce a Goods and Sales Tax (“GST”) did not find support in 2006, it was indirectly stated that it may be reviewed as a means of stabilising government revenues and providing a means of reducing direct taxes.   However, all the options must be researched and evaluated.   Public consensus on the introduction of a new tax is never likely to be forthcoming, hence, the Government will need to assert its authority and introduce measures that will secure a stable revenue base.

John Tsang outlined interesting new initiatives aimed at SMEs and entrepreneurs.   Many of these were directed at the cultural and creative sectors, including fashion, film and local art groups.   Equally, encouragement will be given to women to rejoin the workforce, and funds will be used to increase the quality of Hong Kong’s work force.   Assistance will also be provided to build on the excellence of Hong Kong’s four pillars: tourism, business and professional services, financial services and logistics.   These industries are encouraged to seize the opportunities created by the “One Belt One Road” initiative and the expansion into new markets.   With regard to financial services, Mr Tsang announced that the long- awaited legislation in respect of tax incentives for offshore funds, and amended legislation to permit a deduction for interest incurred by Hong Kong-based group treasury companies, will be introduced in 2015. Other notable initiatives include the support and development of a third runway at Chek Lap Kok, the promotion of the Shenzhen-Hong Kong Stock Connect, a liberalisation of trade in services between Hong Kong and Guangdong, the development of Phase 2 of Disneyland, and the construction of an additional conference centre above Exhibition Station and hotels at Hong Kong’s attraction resorts. 

We fully endorse the Government’s support of young entrepreneurs, although it must be remembered that such businesses may need more than financial and technical support if they are to succeed.   Nonetheless, unless these people are encouraged to develop their ideas and strategies in Hong Kong they will be lost to overseas jurisdictions, which would be a great loss for Hong Kong that clearly needs to retain these talents.

Many issues were left open, namely the establishment of a suitable universal pension regime, further measures for the less fortunate, bridging the gap between the wealthy and lower-income families, etc.   Although these are continually under discussion, more can be done.

Equally, John Tsang ignored the perennial calls by professional bodies and Chambers of Commerce for a two-tier tax system, the carry back of tax losses, group relief and the establishment of an independent panel to review the Inland Revenue Ordinance, etc.

Notwithstanding these issues, his budget makes for interesting reading.


2. Noteworthy Aspects 

Economic Performance in 2014

In particular, it was noted that:

  • merchandise exports grew by 1%;
  • service exports grew by 0.5% in real terms;
  • economic growth in 2014 was 2.3% lower than the average 3.9% over the past decade; and
  • the headline inflation rate was 4.4%.  Netting out the effects of the Government’s “one-off” relief measures, the inflation rate was 3.5% (which was lower than the 4% inflation rate in 2013).

Targeted Support Measures

The following short-term measures will be launched to support certain affected sectors:

  • the waiver of licence fees for 1,800 travel agents for six months;
  • the waiver of licence fees for 2,000 hotels and guesthouses for six months;
  • the waiver of licence fees for restaurants and hawkers and fees for restricted food permits for six months, benefitting 26,000 restaurants and operators; and
  • the waiver of fees for vehicle examination once for the renewal of vehicle licences for taxis, light buses, franchised and non-franchised buses, goods vehicles, trailers and special-purpose vehicles within a year.

Rebuilding Confidence

To rebuild international investors’ and tourists’ confidence in Hong Kong and uplift our international image, the following budgets will be allocated:

  • an additional $80 million for the Hong Kong Tourism Board (“HKTB”) to step up promotional efforts to rebuild international investors’ and tourists’ confidence in Hong Kong and uplift its international image; and
  • an additional  $26  million  to  the  Information  Services  Department  for  inviting overseas media organisations and opinion leaders around the world to visit Hong Kong.

Support for Small and Medium Enterprises (“SMEs”)

In support of 320,000 SMEs in Hong Kong, accounting for 98% of all local enterprises and employing 50% of the private sector, the Government will:

  • extend the application period for the special concessionary measures under the SME Financing Guarantee Scheme to 29 February 2016;
  • inject $1.5 billion into the SME Export Marketing and Development Funds;
  • increase the maximum amount of funding support for each project under the SME Development Fund from $2 million to $5 million; and
  • expand the scope of the SME Export Marketing Fund.


The following initiatives had been undertaken, retrospectively, or will be undertaken, to facilitate start-ups:

  • InvestHK launched  “StartmeupHK”  two  years  ago  to  promote  Hong  Kong’s advantage as a leading global hub for start-ups.   It has brought Hong Kong-based enterprises to the attention of many international angel and venture capital investors;
  • Hong Kong Science and Technology Parks Corporation (“HKSTPC”) will earmark $50 million to set up a corporate venture fund for co-investment, on a matching basis with private funds, in start-ups that are located in the Science Park or have participated in its incubation programmes;
  • The proposed injection of $5 billion to the Innovation and Technology Fund will help strengthen support for relevant enterprises; and
  • The Secretary for Financial Services and the Treasury will set up a steering group to study how to develop Hong Kong into a financial technology hub.

Social Enterprises

Social enterprises are gaining recognition. With business models that balance economic and other social values, they mark the maturing of our society. Each dollar of public funding contributed $4 or $7 of workfare to those disadvantaged employees, reflecting the significant benefits brought about by social enterprises.

$150 million will be earmarked to roll out a new phase of the Enhancing Self-Reliance Through Partnership Programme (ESR Programme) from 2016/17 to 2019/20 to enhance measures to benefit more types of social enterprises and encourage greater participation of the commercial sector in the development of social enterprises.

Cultural and Creative Industries

The Government will inject an additional $400 million into the CreateSmart Initiative to support different sectors of the creative industries.

Fashion Industry

Promote the collaboration between fashion design and the clothing industries.   Upon the recommendation of the Economic Development Commission, consolidate the existing resources and invest new resources totalling $500 million to launch a series of measures to promote the fashion industry in the next three years, which will include improving local fashion events and participation in overseas events, rolling out an incubation programme for up-and-coming fashion-design start-ups, providing fashion design graduates with overseas internships and study opportunities, and subsidising participation in international competitions and exhibitions.

Film Industry 

An additional injection of $200 million into the Film Development Fund (“FDF”) to enhance funding arrangements for local filmmakers and introduce a subsidy scheme for film productions with a budget not exceeding $10 million, subject to a subsidy ceiling of $2 million, to boost the volume of local film production and nurture film talents.   The production budget ceiling of the Scheme for Financing Film Production will be raised from $15 million to $25 million. The Government will relaunch the First Feature Film Initiative, with increased subsidies for production costs to identify new talents.

Art and Culture

A $300 million Art Development and Matching Grants Pilot Scheme will be launched, wherein the amount of private donations to eligible local arts groups will be matched by grants.

Overcoming Limitations

With a view to overcoming the limitations that hamper economic growth, the following initiatives were considered:

Human Resources

  • In 2014, $130 million was allocated to support the manpower development of the retail industry.  Over the past five years, the Government allocated $320 million to the Construction Industry Council (CIC) to train local workers through the provision of training allowances and on-site experience.   For 2015, another $100 million will be added for the CIC to train more workers to meet the acute manpower demand of the industry;
  • $100 million will be allocated to launch a three-year pilot scheme for insurance and asset- and wealth-management services. The Government will collaborate with the industry to organise activities and provide internship opportunities and also enhance the content of continuing professional development programmes and provide financial support to encourage practitioners to enroll in these programmes;
  • Starting in the 2015/16 academic year, the Government will set up a scheme costing $960 million to subsidise, on a pilot basis, 1,000 students per cohort to pursue designated self-financing undergraduate programmes, to meet Hong Kong’s manpower needs.  There will be 13 programmes for the first cohort covering health care, architecture and engineering, testing and certification, the creative industry, logistics and tourism & hospitality;
  • For 2015/16, at a cost of $21 million, the short-term internship places provided by the Government departments will be increased to 3,000 (an increase of 30% over the last financial year), so that more young people will have a deeper understanding of different areas of work in government;
  • The Government will allocate an additional $205 million in the next three years to support more young people to participate in Mainland exchange and internship programmes.

Sustainable Development

  • By making an ex-gratia payment of $11.4 billion, the Government will phase out 82,000 Euro III or earlier diesel commercial vehicles by the end of 2019. 22,000 vehicles have so far been phased out. The $80 million programme to support the replacement of catalytic converters and oxygen sensors of liquefied petroleum gas of 18,000 taxis and light buses was completed last year, accounting for 80% of the eligible vehicles;
  • The Government will extend until the end of March 2018 the 50% reduced port facilities and light dues charge incentive scheme to ocean-going vessels (“OGVs”) that use low sulphur fuel or diesel while at berth in Hong Kong.  This will mean that $240 million revenue is foregone;
  • The Government will allocate an additional $150 million to extend for another five years the 2008 Cleaner Production Partnership Programme, which helps Hong Kong-owned factories in both Hong Kong and Guangdong to reduce emissions and conserve energy.

Land Resources

The Government will continue to optimise land utilisation and increase land supply through a combination of measures to make room for economic, social and personal development.

Residential Land

  • At the end of 2014, the Government promulgated the new Long-Term Housing Strategy, setting a target for public housing supply at 290,000 units for the coming decade.  The Housing Reserve set up last December is to provide financial resources to meet the 10-year public housing supply target.   The initial injection is the investment returns generated in 2014, which amounted to $27.5 billion;
  • A total of 20 residential sites were put up for sale by the Government in 2014/15, capable of providing 6,300 private residential units.  The 2015/16 Land Sale Programme will include 29 residential sites capable of providing 16,000 units;
  • HKMC will consider launching a new Premium Loan Guarantee Scheme to help owners of subsidised sale flats to pay the premium to Hong Kong Housing Authority (“HKHA”) or Hong Kong Housing Society (“HKHS”).

Commercial Land

  • In 2014/15, the Government put up for sale five sites for commercial/industrial use and one for hotel development.  The Land Sale Programme for 2015/16 will include four sites for commercial/business use and one for hotel development;
  • The Government will increase the supply of commercial floor area through other channels, including the relocation of several Government offices away from core business districts.

Ageing Population

To improve healthcare and elderly services, the following initiatives have been considered:

Encouraging Employment

  • $130 million will be allocated to strengthen child care services and provide support for women to achieve a work-family balance. For 2015, the coverage of the on-the-job training allowance under the Employment Programme for the Middle-aged will be extended to encourage the employment of older persons to take up part-time jobs; and
  • $220 million  will  be  earmarked  to  extend  for  two  years  the  Integrated Employment Assistance Programme for Self-reliance to encourage employable able-bodied CSSA recipients to secure employment and achieve self-reliance.


  •  For 2015/16, the Government will allocate $49 billion to the Hospital Authority (“HA”), up by nearly 50% from over five years ago;
  • To deal with the expected long-term demand for healthcare services, several hospital projects will be carried out, at an estimated cost of $81 billion, to provide a total of 2,800 additional beds;
  • Funds will  be  injected  into  the  high-risk  pool  under  the  Voluntary  Health Insurance Scheme to provide a tax concession for subscribers to regulated insurance products; and
  • A fund for the HA will be set up to make use of investment returns for public- private partnership initiatives to alleviate pressure on the public healthcare system due to manpower shortages and the surge in demand.

 Retirement Protection

  • The Commission on Poverty will consult the public again on retirement protection. A “pay-as-you-go” retirement protection system does not appear to be sustainable. $50 billion will be set aside to provide for better retirement protection for the elderly in need.

Public Finances

Despite expected surpluses in the coming years, Hong Kong needs to take early and positive action to contain expenditure, preserve the revenue base and save up in a timely manner to avoid structural deficits.

More specifically:

Containing Expenditure

More efficient use of resources must be achieved through re-engineering and re- prioritising.   The “0-1-1” envelope savings programme was launched last year to reduce operating expenditure by a total of 2% over the next three financial years.

Preserving the Revenue Base

The various Government departments reviewed over a thousand fees and charges in accordance with the “cost-recovery” and “user pays” principles.   Next, the Government will review livelihood-related fees and charges.   Since the community did not support the introduction of a Goods and Services Tax, the Government may once again explore the feasibility of broadening the tax base to stabilise Government Revenue and create room for direct tax concessions.

Saving Up in a Timely Manner

The Finance Secretary agrees with the suggestion of the Working Group to establish a Future Fund, comprising an endowment of $220 billion from the Land Fund, which is part of the fiscal reserves and a proportion of future budget surpluses. The Future Fund will serve as long-term savings and will be placed in long-term investments for higher returns.

Revised Estimates for 2014/15

The estimated government revenue for 2014/15 will be $470.7 billion, 9.4% or $40.6 billion higher than the original estimate.   The increased revenue is the result of:

  • Stamp Duty revenue: $29.7 billion higher than the original estimate, representing an increase of over 60%.  Of this revenue, over 75% comes from “double Stamp Duty”, which was not budgeted;
  • Profits Tax:  $18.5 billion, or 15.8% higher than originally estimated; and
  • Revenues from Salaries Tax and land premium: $5.1 billion and $3.2 billion higher than their respective original estimates.

The revised government expenditure is estimated at $397.2 billion, 3.4% or $14 billion lower than the original estimate.

As such, a surplus of $63.8 billion has been forecasted, and fiscal reserves are expected to reach $819.5 billion by 31 March 2015. 

Relief Measures

Mr Tsang announced the introduction of a HK$ 34 billion package of the following “one-off” relief measures in 2014/15, compared to HK$ 20 billion in 2013/14:

  • A reduction in Salaries Tax and tax under personal assessment for 2014/15 by 75%, subject to a ceiling of HK$20,000; 
  • A reduction in Profits Tax for 2014/15 by 75%, subject to a ceiling of HK$20,000; 
  • The waiver of rates for the first two quarters of 2015/16, subject to a ceiling of HK$2,500 per quarter for each ratable property;
  • The payment of one month’s rent on behalf of public housing tenants (excluding tenants who are required to pay additional rent to the HKHA and non-elderly tenants of the HKHS Group B estates); and
  • The provision of an extra allowance to recipients of Comprehensive Social Security Assistance (“CSSA”), Old Age Allowance, Old Age Living Allowance and Disability Allowance, equal to two months of the respective allowances.

With a view to helping parents, but without complicating the tax regime, the basic and additional child allowances will be increased from HK$70,000 to HK$100,000 from 2015/16 onwards.

It was also noted that consideration will be given to the provision of tax relief for subscribers of qualifying insurance products.

Revenue-raising Measures

For 2014/15, the Government did not mention the introduction of any concrete revenue- raising measures, as the surplus was actually higher than expected.   However, to avoid deficits in a ten-year period, it was noted that the tax base should be broadened.   As such, the introduction of GST may be reconsidered.


3. The Four Pillar Industries

The Government’s dependence on the financial services industry, the trading and logistics industry, tourism and business and professional services, which together account for about 60% of Hong Kong’s GDP and provide over 50% of the jobs available in Hong Kong, is self-evident.

Hong Kong’s success in its four pillar industries is attributed not just to the innovation and upgrading efforts but also to the economic development of the Mainland. The Central Government has put forward the initiatives of building the Silk Road Economic Belt and the 21st -Century Maritime Silk Road or “One Belt One Road”. There is a need to capitalise on today’s opportunities, keep pace with the times and get ready for challenges, taking a role in fostering China’s prosperity.

More specifically, the key initiatives announced to enhance these business sectors include:

Trading and Logistics

  • The proceeding with the development of a three-runway system (“3RS”) for the Hong Kong International Airport to meet the long-term demand for air traffic. Construction of 3RS could commence in 2016 for commissioning in 2023 so that the airport can handle an estimated annual capacity of 100 million passengers and 9 million tonnes of cargo by 2030;
  • The Transport and Housing Bureau’s completion of technical assessments for 10 hectares of a logistics site reserved at Tuen Mun West as back-up land for the logistics industry;
  • The examining of how to further streamline departments’ handling of import/export documents. The provision of a one-stop customs-clearance service through a “Single Window” will closely follow mainstream international development; and
  • The exploration of the feasibility of promoting the use of electronic letters of credit to reduce the cost of doing business in cross-border trade.


  • The expected completion of the “Iron Man Experience” at Hong Kong Disneyland Resort by 2016/17. The Government will also commence discussions on developing Phase 2 of the Hong Kong Disneyland Resort, which will include additional attractions, hotels and retail facilities;
  • The completion of the waterpark at Tai Shue Wan at Ocean Park by 2016/17, which will be followed by the development of the proposed Fisherman’s Wharf Hotel;
  • New facilities and activities at the Central harbourfront such as the Observation Wheel, carnivals, exhibitions and open-air concerts;  Exploration of the construction of a convention centre above the Exhibition Station of the Shatin to Central Link in order to attract more international business visitors; and
  • Making the sites facing the Victoria Harbour within the “hotel belt” adjacent to the Kai Tak Cruise Terminal available to the market, starting from the end of 2015.

Business and Professional Services

  • The Mainland and Hong Kong’s Closer Economic Partnership Arrangement (“CEPA”): the CEPA started in 2003 and has given tremendous business opportunities to Hong Kong’s service suppliers and professionals. Over 3,000 Certificates of Hong Kong Service Supplier have been issued, and thousands of Hong Kong residents have set up individually owned stores in the Mainland;
  • Intellectual Property Trading: to promote Hong Kong as a premier IP trading hub providing high-value-added IP services in the region, the Government will earmark $23 million for the next three years to offer IP consultation, manpower training and other services to SMEs.

Financial Services

Shanghai-Hong Kong Stock Connect

The Shanghai-Hong Kong Stock Connect has been operating smoothly since its launch in November 2014. There will be discussions to launch the ShenzhenHong Kong Stock Connect. There will also be roadshows in the Mainland to promote Hong Kong’s securities market to Mainland investors.

Offshore Renminbi Business

Hong Kong provides services for RMB transactions around the world and is the world’s largest centre for offshore RMB banking, financing and asset management. In 2014, RMB trade settlement conducted through Hong Kong banks amounted to RMB 6.3 trillion, or a 60% year-on-year increase, while RMB bond issuance amounted to RMB 200 billion, or a 70% year-on-year increase.

Asset Management

  • The waiver on Stamp Duty for the transfer of all exchange traded funds (“ETF”) took effect on 13 February 2015 after the relevant amendment ordinance was passed by the Legislative Council (“LegCo”);
  • A bill in LegCo will be tabled to allow private equity funds to enjoy Profits Tax exemption available to offshore funds;
  • A Bill to amend the Inland Revenue Ordinance to allow, under specified conditions, interest deductions under Profits Tax for corporate treasury centres, and the reduction of Profits Tax for specified treasury activities by 50%, to attract multinational and Mainland enterprises to set up corporate treasury centres in Hong Kong.

Bond Market

  • The Government successfully issued its first sukuk in 2014. The US$1 billion issuance marked the world’s first US dollar-denominated sukuk originated by a government with the highest credit rating, setting a significant pricing benchmark for the market. The Government will consider a further sukuk issuance in a bid to attract more investors; 
  • The Inflation-linked Retail Bonds (“iBond”) were introduced in 2011 and have been well received by the public. The Government will launch an iBond issue of up to $10 billion, with a maturity of three years, to target Hong Kong residents and interest will be paid to bond holders every six months at a rate linked to the inflation rates of the last half-year period.


For further information on the subject of this article, please contact a member of Equiom's Hong Kong team.