The Budget Inisght 2016Financial Secretary John Tsang should be used to criticism given that on February 24th he handed down his ninth budget for the SAR. With a focus on care for the elderly, SMEs and the tourism sector, the most remarkable aspect of Tsang’s address was the noticeable lack of the “One Belt, One Road” references that CY Leung inserted into his Policy Address over 40 times. That may be a hint Tsang is gearing up for a run at the Chief Executive job in 2017, but in the meantime he has books to balance. Reaction was swift, and uniform: it’s more of the same — kind of the like the PA.

Tax Nuts & Bolts

Tsang’s 2016/17 budget was viewed as being intensely business-friendly with not nearly enough attention paid to living standards and wage discrepancies that are often crippling to average Hongkongers. The HKFP reported Labour Party’s Lee Cheuk-yan as stating, “We think the most pressing problem in Hong Kong today is the inequality of wages… but [the budget] is giving a lot to businesses and very little to citizens.” Labour legislator Fernando Cheung claimed public spending was biased towards business over the city’s disadvantaged.

This year’s budget clocks in $380 billion on estimated revenues of $500 billion for total reserves at the end of March 2017 in the neighbourhood of $870 billion. Among the policies set for this year are tax cuts for salaries, personal assessment and profits taxes (75 percent to a maximum of $20,000), waiving of business registration fees (one of several support measures) and a drop in quarterly property rates from $2,500 to $1,000. Tsang and the government argue the breaks for SMEs are crucial in a wobbly global economy, as they employ half the Territory’s workforce. Single parent allowances are up (to $132,000) as are dependent parent allowances (to $46,000 for those aged over 60, $23,000f for those up to 59). And to keep the Hong Kong dollar stable and maintain competitiveness, Tsang has 10-year, $200 billion Hospital Authority reserve to go along with public housing reserves totalling $74 billion.

Spending on the creative industries is also climbing. The start-up focused CreateSmart Initiative is getting $400 million, last year’s Implementation of Fashion Initiative will be aggressively expanded with government and HKTDC support for young designers, and for athletics and arts grant matching. The Film Development Fund is getting $20 million added to its budget this year, as Tsang commented that, “Locally-produced Cantonese films, a key component of the local culture, have all along been well-received by audiences in the Mainland and Southeast Asia.” Spoken like a man in search of the top office.

The Property Factor

Of course, property and land sales — as a major revenue generator — are always key to a Hong Kong budget. Land revenues this year are predicted to be $67 billion, almost 14 percent of all revenue.

“The Hong Kong Housing Authority (HKHA) requires substantial resources to implement the ten-year public housing construction programme,” stated Tsang before laying out the reserve situation and the coming drop in investment balance. “When Government and HKHA have reached consensus on the necessary government financial support arrangements, we shall seek approval from the Finance Committee for funding to be drawn from the Housing Reserve to support the long-term public housing development.”

The 2016-17 Land Sale Programme, officially announced by Secretary for Development Paul Chan the next day, comprises 29 residential sites, including 14 new sites with a potential for 19,000 units. Alongside railway property development, Urban Renewal Authority projects and private development Tsang predicted 29,000 units in the coming fiscal year. Commercially, plans for the year comprise eight sites (plus three hotel sites) able to accommodate 540,000 square metres (six million square feet) of floor area (and 21,000 hotel rooms). Some of that will come via the sale of the Trade and Industry Development Tower in Mong Kok, the relocation of three government offices to Wan Chai, reprovisioning in Kwun Tong and Kowloon Bay, conversion of the Murray Road car park for commercial use and redevelopment of Queensway Plaza

Denis Ma, Head of Research at JLL had positive words for a continued flow of commercial space, but noted it would only work with complementing infrastructure. “Increasing land supply of commercial sites, should lower rental costs provided that it is steadily and consistently released onto the market, which in turn will make Hong Kong more competitive,” he said. “But the government also needs to continue to invest and develop transportation links in new office markets, such as Kowloon East.” The Murray Road car park site would be appealing to professional and financial services firms, and will “attract strong interest from the city’s developer community given that it is the first commercial development site in Central offered directly by the government since the current site of CITIC Tower back in 1995.” On the residential front and more sites at Kai Tak, Ma theorised that the impact on home prices won’t be quantifiable for four or five years. “An influx of new supply does not always translate to declining prices if there is sufficient demand. In recent years, we’ve seen residential property prices in Tseung Kwan O continuing to rise against a wave of new supply,” he said.

Knight Frank, however, noted that the budget fails to provide any immediate stimulus for the property market. The salaries and profits tax reductions will provide roughly just 1 percent savings if that reduction is funnelled into a $3 million mortgage. With respect to supply, “Increasing housing supply will help alleviate the residential supply shortage, so the government should be able to meet its housing targets from 2016 to 2019,” said David Ji, director, head of research and consultancy, Greater China. “However it will be difficult for them to meet their longer term targets due to challenges in land rezoning from ‘green belts’ and ‘government, institute and community’ use to residential use.” In addition, Ji was disappointed there was no mention of any movement of existing cooling measures.

Tsang finished by addressing Hong Kong’s recent “suffocating” socio-political atmosphere and “tiresome confrontations,” claiming that was the biggest economic hurdle the city was facing. “Calm and rational discussions no longer have a place in this Council. There is not even room for dialogue in our society.” Spoken like a CE.