Friday 27 February 2015

HK's first Budget after protests tries to repair city's image

Measures include one-off tax breaks and help for affected businesses
By Li Xueying, Hong Kong Correspondent, The Straits Times, 26 Feb 2015

HONG Kong is spending HK$290 million (S$51 million) to help affected businesses and polish its image following the 79-day Occupy movement, which Financial Secretary John Tsang says may have dampened "investors' confidence" in the city.

Travel agents, hotels, restaurants and transport operators will get a waiver of licence fees for six months. And to "rebuild" Hong Kong's international image, the tourism board and information services will be allocated an extra HK$106 million for promotional efforts.

The first Budget announced after the civil disobedience campaign that ended on Dec 15 was notable for its generous HK$34 billion package of one-off sweeteners - including hefty tax cuts.

But it was the bid to repair the city's image after the protests that caught the eye. "Such self-inflicted harm does not serve the city well," said Mr Tsang.

But while the measures are "psychologically useful", analysts say the jury is still out on whether investor confidence in Hong Kong has indeed been hit.

Says HSBC economist John Zhu: "The impact on the overall economy has not been that big, given that it was a very peaceful protest and people still could get to work and back."

There have also been no reports on investors or companies that have pulled out of the city as a result, adds Ernst & Young managing partner for tax (Hong Kong and Macau) Tracy Ho.

But Mr Tsang said there was an impact of "varying degrees" on the tourism, hotel, catering, retail and transport industries.

During the movement last autumn, taxi and minibus drivers and local shops complained that trade was affected. And there could be some delayed fallout, as the number of mainland visitors over last week's Chinese New Year holiday dipped for the first time since 1997.

But what is more worrying for investors in the long term, says Ms Ho, is that Hong Kong's governance is being affected by the prolonged political impasse over the city's constitutional reform. "For instance, it takes a long time for laws to be passed," she says, citing a lack of consensus over the city's long-term future.

So, while Mr Tsang was lauded yesterday for the one-off sweeteners following a bumper surplus of HK$63.8 billion for the year 2014-15, analysts argue that more could have been done to boost the city's long-term competitiveness.

For now, what is especially welcome is a one-off 75 per cent cut in personal income and corporate taxes, subject to a rebate ceiling of HK$20,000.

There are also extra allowances for the needy and those with children.

The ad hoc measures will be positive for consumption growth in the short run, says Mr Zhu, given a "fairly challenging" environment, including an anticipated rise in interest rates in the United States this year.

Hong Kong's economy last year slowed to 2.3 per cent, from 2.9 per cent in 2013. For this year, Mr Tsang forecasts growth of 1 per cent to 3 per cent.

The Financial Secretary also announced increased funding support for small and medium-sized enterprises and the creative industries, as well as a new corporate venture fund to co-invest in start-ups.

He will also inject HK$5 billion into a fund to support the IT sector.

Standard Chartered economist Kelvin Lau singled out a new measure to halve profit tax for specified treasury activities, saying it will enhance Hong Kong's edge as a regional treasury centre hub.

These are steps in the right direction, says Mr Zhu. But more is needed for the long run, he argues - "more investments in education, research and development and to boost labour productivity".

Other key measures
- Establish steering group to study how to develop Hong Kong into a financial technology hub
- HK$1 billion (S$175 million) to boost fashion, film and cultural industries
- Push for third airport runway with the aim of beginning construction next year and opening in 2023
- Explore closer economic partnership with Macau
- Promote tourism, such as by introducing food trucks
- Boost asset management industry, such as by giving private equity funds tax exemption on profits
- Subsidise designated undergraduate programmes that address shortage in areas like health care
- Introduce laws this year requiring all vessels berthing in Hong Kong to use less polluting low-sulphur diesel
- Land to build 19,000 homes, and loans to public flat owners to pay their premiums so they can sell or lease their units, raising the supply of homes
- Explore feasibility of broadening tax base, possibly with a goods and services tax
- Set up a Future Fund for long-term public savings

Budget similarities reflect common challenges
By Wong Wei Han, The Straits Times, 26 Feb 2015

HONG Kong's latest Budget is strikingly similar in some ways to the Budget handed down in Singapore on Monday, say analysts here.

Hong Kong's Budget includes a generous package for social relief and measures to spur enterprise development, in a bid to address demographic and economic challenges, which Singapore also faces.

The two economies - long seen as regional rivals - both face land shortages and ageing populations, and both are mounting economic restructuring efforts.

In his Budget speech yesterday, Hong Kong Financial Secretary John Tsang announced HK$34 billion (S$6 billion) worth of social relief measures such as tax rebates and extra allowances for social security, care of the elderly and childcare.

UOB economist Francis Tan sees the two Budgets as quite similar in terms of what they try to tackle. "This is unsurprising as the two cities have very similar demographic challenges.

"Both cities have an ageing workforce, with 15 per cent of Hong Kong's population aged 65 years and above compared to Singapore's 8.5 per cent", while under-15s formed only 11.3 per cent of Hong Kong's population and 13.4 per cent here, he said.

Infrastructural development is also a priority. Mr Tsang said the expansion of the Hong Kong International Airport, including a third runway, will begin next year. Singapore has set aside $3 billion for Changi Airport's fifth terminal.

PwC Hong Kong tax partner K. K. So said: "Hong Kong's financial secretary has attempted to address the limitations imposed by the mismatch of manpower, scarce land resources and the ageing population. But there're also measures to foster industry diversification and support for start-ups."

Singapore's Budget included announcements such as the Silver Support Scheme and SkillsFuture to enhance workforce capabilities.

In a similar measure, Hong Kong will also fork out HK$960 million to subsidise students in 13 undergraduate programmes covering sectors such as tourism.

Mr Tan hopes Singapore will adopt Hong Kong's new inflation-linked retail bonds. An issuance of up to HK$10 billion of these bonds to residents with a three-year maturity was announced by Mr Tsang yesterday.

"I hope to see it happen soon because inflation-linked bonds can better secure the ageing population's purchasing power in the long term."

Low taxes may be a luxury for Hong Kong, Singapore
By William Pesek, Published The Straits Times, 27 Feb 2015

BEFORE now, no one would have described the leaders of Hong Kong or Singapore as Asian Robin Hoods.

Both cities have earned well-deserved international reputations for high efficiency and low taxes, with income taxes topping out at 15 per cent in Hong Kong and 20 per cent in Singapore. Their decades of sustained prosperity would seem proof of the virtues of trickle-down economics.

That dogma may finally be shifting, though. Clearly worried about rising inequality, Singapore's Government this week announced the first increase in the top income tax rate in decades, raising levies on the richest 5 per cent of citizens.

Even Hong Kong's fabled billionaires are concerned about the widening gap between the haves and have-nots, which helped drive last autumn's Umbrella Revolution. Mr Li Ka-shing, Asia's richest man, has said he's losing sleep over it. Henderson's Mr Lee Shau Kee is donating land to non-profit organisations to build old-age homes and youth hostels.

Yet, in its own Budget this week, Hong Kong resisted lifting taxes on the wealthy, instead tossing a few sweeteners at the poor and elderly, and trimming personal taxes slightly. Apparently, Hong Kong Chief Executive Leung Chun Ying believes the city can still afford to coddle its tycoons. That's an increasingly questionable assumption.

Earlier this month, the Group of 20 for the first time signalled joint concern about mounting inequality across the world economy. As French economist Thomas Piketty argues in his bestselling Capital In The Twenty-First Century, returns on money have outpaced gross domestic product over the past 30 to 40 years.

The Organisation for Economic Cooperation and Development says that the rich-poor gap in most of its member countries has reached its most egregious levels in three decades. The top 10 per cent now pockets 9.5 times more than the poorest 10 per cent, up from seven times in the 1980s. Things look to get even worse. Oxfam predicts that the richest 1 per cent will control most of the world's wealth by next year.

Growth in Asia has lifted hundreds of millions of people out of poverty, but at a cost.

According to the Asian Development Bank (ADB), four-fifths of Asians - nearly three billion people - live in nations where inequality has been rising for 20 years now. That's deadened the benefits of even rapid growth, meaning Asia's output tends to be more about quantity than quality.

The rise of China in particular has been both a boon and a curse.

While the mainland provides a huge market for Singapore and Hong Kong entrepreneurs to tap, the powerful competitive forces its 1.3 billion people have unleashed are dragging down Asian wages. At the same time, rich Chinese are buying up property in Hong Kong and Singapore, pushing prices out of the orbits of average families (although in Singapore at least, measures to pop the luxury property bubble are having some effect).

The answer, economists agree, is for governments to strive to raise productivity, curtail corruption, invest in education and establish secure safety nets. In a report last year, the ADB recommended four steps to reduce inequality: implementing more efficient fiscal policies that invest in education and support poor families; developing new industries; supporting small and mid-sized enterprises; and looking for innovative solutions to spread growth benefits.

Singapore's Budget tries to address all these points. But it also acknowledges that the Government needs to collect more revenues if it's going to build welfare systems to support the most vulnerable households.

By contrast, Hong Kong's government still seems focused on growth as a panacea; its Budget offers additional relief to the tourism industry and other businesses affected by the pro-democracy protests. The measures do little to address the fundamental problem - an economic structure that's impeding the ability of lower- income households to move upwards.

What Singapore's Government at least seems to recognise is that urgent action is needed - bold investments in affordable housing, social safety nets and job training that perhaps only a tax on top earners can finance in short order.

The city is already ranked 26th out of 136 economies for income inequality; standing pat will only continue to hollow out the middle class. As in Hong Kong, what used to be a competitive advantage - a generous tax regime that attracted businesses and talent from around the world - may simply be unaffordable.

The Umbrella Revolution showed that fears about social unrest are not idle. Along with attractive business environments, Singaporeans and Hong Kongers long prided themselves on something else: pragmatism. It's time to exercise some.


Fine art of taxation, a la S'pore and HK
But other factors matter to investors, talent too: Experts
By By Li Xueying, Hong Kong Correspondent, The Straits Times, 28 Feb 2015

THE art of taxation, declared King Louis XIV's Minister of Finances Jean-Baptiste Colbert, is in "so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing".

The Budgets of Singapore and Hong Kong - released two days apart this week - have thrown into relief their two governments' now contrasting approaches to this finely calibrated political art.

Both cities, regional rivals in courting investments and talents, have long been known for their attractively low tax regimes, even as they face similar pressures to spend more on social needs, given an ageing population and a widening rich-poor gap.

This year, Singapore threw a surprise curveball. It hiked the top marginal tax rate on high-income earners from 20 per cent to 22 per cent - a historic reversal of a long-time trend of reductions.

Any such move has been firmly ruled out by Hong Kong, with Financial Secretary John Tsang saying the city already enjoys a highly progressive tax rate. Instead, he suggested, Hong Kong should look at reviving the idea of a broad-based goods and services tax (GST). The city has no such tax.

So will Singapore's tax hike this week change the calculus for investors and talent in both cities?

While Singapore Deputy Prime Minister Tharman Shanmugaratnam has said it "should not significantly dent Singapore's competitiveness", he also warned it would be "naive to think that we can keep raising tax rates without affecting our competitiveness", noting that many Singaporeans are working overseas, including in Hong Kong.

For now though, there is little sign that people are looking to move as a result. While tax rates are important, they are not the main deciding factor in where people choose to live, say analysts.

Accounting firm Ernst and Young's tax partner (Hong Kong and Macau), Ms Tracy Ho, tells The Straits Times the feedback from its clients in Singapore is that "there is some impact, but not significant enough to change their mobility plans".

Adds Deloitte's tax partner (China), Mr Davy Yun: "Tax ranks as the third or fourth most important factor; the top would still be the companies' market, such as whether it is China or South-east Asia or India. "

But despite this, and even as Hong Kong keeps a close eye on what Singapore does, it is unlikely the city will go down the same path any time soon to feather its nest.

Some labour interests such as the Federation of Trade Unions have called for the richest to be taxed more instead of implementing the GST. But the louder hissing is from Hong Kong's powerful business and professional interests, which argue that keeping direct taxes low - and depressing them further if possible - remains a sacred cow.

Says Mr Yun: "It is a symbol. In Hong Kong, we have a clear philosophy. Tax increases will affect people's confidence in government policies."

Another reason is that unlike in Singapore, GST has not yet been deployed as a tool to increase revenue. Arguing that this is a better option, Ms Ho says it diversifies sources and will help Hong Kong "avoid being hit too hard during rainy days". To help cushion the impact on the low-income earners, she suggests exempting certain necessities and giving subsidies. "This will create a lot of administrative work, but that will be more fair and the idea will then be more accepted by the general public."

At this point, though, a GST remains as politically anathema in Hong Kong - where the government is unpopular and the society polarised - as any rise in direct taxes. The last time the idea was tabled, in 2006, it was scrapped after an uproar.

With Hong Kong thus likely to stay on the spot, the immediate picture is that Singapore will be more expensive for high-income earners.

Before, a family of four earning HK$2.3 million (S$402,000) or more will be paying higher taxes in Singapore than in Hong Kong. Now, they will be doing so as long as they earn over HK$2 million, calculates Ernst and Young.

However, for overseas investors and executives, this is often offset by Singapore's more competitive corporate tax rates that include tax breaks and incentives for certain industries and MNCs - which Hong Kong does not offer, notes Mr Yun. Singapore also has more double taxation tax treaties, with 76 signed versus Hong Kong's 32.

"In the end, it all balances out," says Ms Ho.

The experts are loath to spell out the tipping point where a society moves from a low- to high-tax system that will undercut its competitiveness. "Roughly speaking, 20 per cent and below for top personal income rate may be considered low," says Mr Yun. But he hastens to add: "We can't just look at a magic number but rather the whole environment, from schools to pollution."

In an echo of the 17th century French politician, he says: "It is not a science but an art."

Singapore v HK: Taxes

- Singapore: 42% of working population pay
- HK: 40% of working population pay
- Singapore:Top 3.6% contribute to 61% of personal income tax revenue
- HK: Top 5% contribute to 60% of revenue

- First HK$40,000 (S$7,000): 2%
- Next HK$40,000: 7%
- Next HK$40,000: 12%
- Excess of HK$120,000: 17%

- First S$20,000: 0%
- Next S$10,000: 2%
- Next S$10,000: 3.5%
- Next S$40,000: 7%
- Next S$40,000: 11.5%
- Next S$40,000: 15%
- Next S$40,000: 18%
- Next S$40,000: 19%
- Next S$40,000: 19.5%
- Next S$40,000: 20%
- Excess of S$320,000: 22%

- Singapore: 17%, but can go as low as 8.2% after exemptions and rebates
- HK: 16.5%
Both do not tax capital gains, shareholder dividends and offshore income

- S'pore: 7%; HK: none

How S'pore, HK will tackle same challenges
Policies differ, but both cities known to outperform fiscal plans, says Fitch
By Chia Yan Min, The Straits Times, 3 Mar 2015

THE Hong Kong and Singapore Budgets released last week highlight some long-term economic challenges facing both cities and how their respective governments differ in their policy response, Fitch Ratings said yesterday.

The credit ratings agency noted that robust growth in both cities has been accompanied by a perception of widening inequality, leading to social and political pressures.

Both also face long-term challenges, such as the rising income disparity, sustaining economic growth and ageing populations.

Singapore's response has been to adopt "a more explicitly redistributionist fiscal policy", the report noted. Its Budget includes a proposal to raise the top marginal tax rate to fund a social welfare programme for the elderly poor, the Silver Support Scheme.

Hong Kong, by contrast, introduced tax cuts in its Budget and set up a sovereign wealth fund to provide financial support to address the ageing population and the potential structural deficit this may cause.

"The emphasis of Singapore's growth policy seems to be on strengthening total factor productivity, partly through fiscal incentives," Fitch Ratings said.

These include measures like a wage credit scheme and corporate income tax rebates.

Hong Kong's approach is to boost infrastructure expenditure. The government's long-term fiscal plan calls for capital expenditure to rise by an average of 9.9 per cent per year until 2019.

The Fitch analysis showed that Hong Kong is spending slightly less on "identifiable social items" as a percentage of GDP than in 2000, while for Singapore, the percentage is about the same.

The fiscal positions for both cities are likely to remain strong in the medium term, added Fitch, which expects policymakers in both jurisdictions to continue to place a high priority on long-term fiscal sustainability.

"It is also notable that both governments have a tendency to budget on the conservative side and have historically outperformed their fiscal plans," the report said.

In the case of Singapore, the fiscal balance has outperformed the Budget for the past 11 consecutive years.

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