Sharing the wealth

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Another year, another budget. In the run up to Financial Secretary Paul Chan’s second budget address on February 28, there had been plenty of speculation, with a great deal of it about the estimated $57 billion (to November 2017) surplus Chan might have to play with. Chan appeared ready to spend, reminding us via his blog that although Article 107 of the Basic Law entrenches a principle of keeping expenditure below revenue, fiscal balance, and a budget in line with GDP growth, it also allows for flexibility. The surplus is the result of an unexpected windfall from land sales that could be splashed around in line with Chief Executive Carrie Lam’s first Policy Address, where she claimed budget surpluses would go toward the “community”.

With no rainy days on the horizon, critics have long demanded more public spending. Business-friendly PwC Hong Kong, in its pre-budget press release, approved of Lam’s policies designed to keep Hong Kong the freest economy in the world (note: debatable) and a regional financial hub, and jumping all the way onto the Guangdong-Hong Kong-Macau Bay Area and the Belt and Road bandwagons. Unsurprisingly, PwC advocated for corporate tax breaks, but Tax Partner Agnes Wong added, “At the same time, reducing people’s tax burden and making good use of reserves in order to enhance people’s quality of life are also important.”

So, what exactly is in store for Hong Kong between now and March 2019? 

The Greatest Hits

First and foremost, that surplus turned out to be a massive HK$138 billion, with reserves by the end of the fiscal year estimated at HK$1 trillion, a Housing Reserve of HK$78.8 billion, with expenditures lower than expected at approximately HK$475 billion. All that cash in the treasury means more cash in our proverbial pockets. Chan’s budget announced that salaries, personal assessment and profits taxes will be reduced by 75%, to a maximum of HK$30,000, a boon to just over two million taxpaying Hongkongers. It will also cost the government over HK$25 billion. Tax bands will be increased, with marginal rate adjustments, property rates will be waived for the next year, and child and dependent parent allowances will also be going up. Spending has also been earmarked for technology, medical, and AI development, to go along with a new technology park at Lok Ma Chau. Culture spending is also up, in the form of the new CreateSmart Initiative (CSI) for start-ups, reimagining Cyberport as a hub for emerging e-sports industry, and boosting Hong Kong’s status as a green finance centre. 

Nonetheless, critics argue that this budget perpetuates Hong Kong’s growing wealth gap. The HKFP quoted People Power’s Ray Chan as noting the tax cuts are only a benefit to those at opposite ends of the financial spectrum. Lawmaker Leung Yiu-chung argued little was included to address the ageing population and needs of the working and middle class—many of whom still cannot purchase homes. 

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What it means

Chan also warned the days of negative or ultra-low interest rates were numbered, which could have an impact on the plans for public housing supply. In the Budget Address, the secretary stated, “As regards public housing supply, for the five-year period from 2016-17 to 2020-21, estimated public housing production by the Hong Kong Housing Authority and the Hong Kong Housing Society will be about 94,500 units, including about 71,800 public rental housing units and about 22,600 subsidised sale flats.” He also asked that LegCo and district councillors consider rezoning as a partial solution to the supply crunch. The valuable commercial Site 3 in Central is still under tender consideration, and public engagement continues (through April) over “Hong Kong 2030+”, the so-called long-term sustainable development plan that will include housing solutions. But this year’s budget offered few words of encouragement for home seekers.

“The government should beware of increasing housing demand and not just solely focus on land supply. Home sales increased by 12.6% year-on-year to 61,591 in 2017. Although the completion of flats has reached 20,000 per year, this still fails to meet Hong Kong’s demand for housing,” said Joseph Tsang, Managing Director at JLL, arguing stamp duty rates and LTV ratios in the secondary market need to come down if the government hopes to alleviate the housing crisis in the immediate future. “Unlocking the potential supply of 1.2 million units in the secondary market is the most effective way of increasing housing supply and curbing the growth of property prices.”

While Knight Frank noted the new budget will have little market impact, the lack of immediate solutions indicate that the government is more interested in future land sales as a way to increase supply. It’s now the Task Force on Land Supply’s job, and with a massive supply jump unlikely the shortage of affordable housing will persist. Knight Frank’s Senior Director, Head of Valuation and Consultancy Thomas Lam doesn’t see any looming factors that would drive prices down drastically, but “the influence of the residential property market over the next 12 months on Hong Kong government policies and the political front will be most important, followed by the pace of supply and rate hikes.”

Colliers International Director of Research Daniel Shih agrees that Chan has “come up short” on the most pressing issues, calling this budget a step back from last year. “When compared to the 2017-18 budget, the future housing supply has only increased marginally—from 20,300 units to 20,800 units per year for the next five years. We were concerned that a total of 15 sites from the 2017-18 land sales programme will be rolled over to 2018-19, which indicates that the Government failed to deliver the land sites required for a total of 19,000 residential units as promised in its 2017-18 budget,” says Shih, finishing, “Adopting the ‘kick the can down the road’ approach is just not enough.”