The Chamber  •  Services

2018 Budget Address Highlights

Hong Kong, 28 February 2018 – Today’s 2018-19 Budget Address saw Financial Secretary Paul Chan Mo-po lay out his vision for the years ahead under the broad themes of 1) Diversifying the economy, 2) Investing for the future, 3) Caring & sharing.

Our extended highlights extracted from the speech can be found below:

Alternatively, download the PDF.

Economic Development

- The Gross Domestic Product (GDP) per capita of Hong Kong amounts to US$46,000

- Hong Kong’s average annual economic growth rate over the past decade was 2.7%.

Seizing Opportunities

- With the unique advantage of "one country, two systems", Hong Kong has become the premier listing and fund-raising platform for Mainland enterprises and the global centre for off-shore RMB business.

Belt and Road Initiative

- Supporting the Belt and Road development and assisting Mainland enterprises in going global will open up new room for the development of our enterprises as well as financial and professional services.

Bay Area

- The Bay Area and Hong Kong can complement each other in the field of I&T industries, thereby creating an international innovation and technology hub where talent, research and development (R&D) institutes and enterprises cluster.

- With policy breakthroughs, it would offer more convenience to Hong Kong people who operate business, study, work and live in the Bay Area.

Human Capital

- The latest unemployment rate of below 3% is a 20-year low and reflects a tight labour market in Hong Kong. 

Economic Situation in 2017

- Hong Kong's economy grew by 3.8% last year, higher than the forecast in last year's Budget.

Economic Prospects for 2018 and Medium-term Outlook

- If the recovery of tourism in recent months can be sustained, Hong Kong's retail sector will also see a more vibrant performance.

- I forecast economic growth of 3-4% for Hong Kong this year.

- For 2018 as a whole, I forecast that the headline inflation rate will be 2.2% with an underlying inflation rate at 2.5%.

- The private sector will, on average, produce about 20 800 residential units annually in the coming five years, an increase of 50% over the annual average in the past five years.

Public Finances

Annual Surplus

- Estimated surplus of $138 billion in 2017-18.

- 40% of the projected annual surplus to be shared with community, and using the remaining for improving services and investing in the future.

- In 2017-18, profits tax, salaries tax, stamp duties and land premium account for about 74% of total government revenue. 

- Public expenditure will be slightly higher than 21% of our GDP.

Revised Estimates for 2017-18

- The 2017-18 revised estimate on government revenue is $612.4 billion, 20.6% or $104.7 billion higher than the original estimate.

- Government expenditure: revised estimate of $474.4 billion, 3.5% lower than the original estimate.

- Fiscal reserves are expected to reach $1,092 billion by 31 March 2018 while the Housing Reserve will reach $78.8 billion.

Budget Measures for 2018-19

Innovation and Technology (I&T)

- $50 billion set aside for:

Lok Ma Chau Loop

- $20 billion will be used on the first phase of the Hong Kong-Shenzhen Innovation and Technology Park in the Lok Ma Chau Loop.

Innovation and Technology Fund

- $10 billion injected into the Innovation and Technology Fund (ITF). 

Establishing Technology Research Clusters

- $10 billion to support the establishment of two research clusters on healthcare technologies and on artificial intelligence and robotics technologies.

Science Park

- $10 billion to the Hong Kong Science and Technology Parks Corporation (HKSTPC).  Of this, $3 billion will be used to construct research-related infrastructure and facilities. $7 billion will be used for the HKSTPC to enhance support for its tenants and incubatees, and set up a Smart Campus in the Park, etc.

Cyberport

- $200 million to Cyberport to enhance the support for start-ups and promote development of digital technology ecosystem. 

- Cyberport will launch an "easy landing" programme to attract multinational companies to set up offices and R&D units in Hong Kong. It will also roll out a new support scheme, offering financial assistance up to $200,000 for each eligible start-up to conduct market research and promotion, as well as participate in business missions, trade fairs and exhibitions, etc. outside Hong Kong. The financial assistance offered under Cyberport's incubation programme to individual start-ups will also increase by 50% to $500,000.

E-Sports

- $100 million to Cyberport to promote development of e-sports.

Encouraging Research and Development

- Enterprises will enjoy a 300% tax deduction for the first $2 million qualifying R&D expenditure, and a 200% deduction for the remainder.

Technology Voucher Programme

- Eligibility criteria to be relaxed for the Technology Voucher Programme.  All local enterprises, irrespective of size and duration of operation, may apply.

Financial Services Industry

Pilot Bond Grant Scheme

- Propose to launch a three-year Pilot Bond Grant Scheme to attract local, Mainland and overseas enterprises to issue bonds in Hong Kong.

Green Bond and Green Finance

- Propose to launch a green bond issuance programme with a borrowing ceiling of $100 billion.

Faster Payment System and Virtual Banks

- The HKMA is prepared to launch a Faster Payment System offering 24-hour real-time payment function.  This will allow banks and Stored Value Facility service providers to provide real-time, round-the-clock, cross-institution payment and fund transfer service to their business and personal customers.

Trading and Logistics Industry

- In addition to signing the Closer Economic Partnership Arrangements (CEPA) with the Mainland and Macao, we have forged four FTAs and 20 Investment Promotion and Protection Agreements with other economies.

- Airport Authority Hong Kong (AA) made available a site of around 5.3 hectares at the South Cargo Precinct of the Airport Island to develop a modern air cargo logistics centre.

- $5 billion set aside for the project for possible redevelopment of the Air Mail Centre at the HKIA.

Tourism

- $396 million to the tourism industry in the new financial year, of which $226 million will be provided to the Hong Kong Tourism Board (HKTB).

- $310 million in the next few years to support the Ocean Park in developing education and tourism projects.

Business and Professional Services

- New Economic and Trade Office to be set up in Thailand.

Support for Small and Medium Enterprises

- Help for SMEs and starups include:

(a)          injecting $1.5 billion into the Dedicated Fund on Branding, Upgrading and Domestic Sales (BUD Fund);

(b)          injecting $1 billion into the SME Export Marketing and Development Funds;

(d)         increasing the cumulative funding ceiling for enterprises under the SME Export Marketing Fund from $200,000 to $400,000, and removing the existing condition on the use of the last $50,000 of grants;

(e)          extending the application period for the special concessionary measures under the SME Financing Guarantee Scheme to 28 February 2019; and

(f)           in the five financial years from 2018-19, providing a total of $250 million additional funding to HKTDC for assisting local enterprises in seizing opportunities arising from the Belt and Road Initiative and the Bay Area development, promoting the development of e-commerce, and enhancing Hong Kong's role as a premier international convention, exhibition and sourcing centre.

Creative Industries

- $1 billion injected into the CreateSmart Initiative.

Manpower Training

Education

- Increase recurrent expenditure on education by $5 billion, of which $3.6 billion has been approved by the LegCo.

- Regularise the Pilot Scheme on Promoting Interflows between Sister Schools in Hong Kong and the Mainland, under which participating schools will receive a grant of $150,000 per annum.

Enhancing Liveability

Land Resources

- Identified 210+ sites with housing development potential in the short to medium term. To provide more than 310 000 flats, of which about 70 per cent will be for public housing.

- For the actual supply of housing units, the estimated public housing production for the next five years is about 100 000 units. The private sector will, on average, complete about 20 800 residential units annually in the next five years.

- Including the 15 sites rolled over from 2017-18, the 2018-19 Land Sale Programme comprises a total of 27 residential sites capable of providing about 15 200 residential units.

- In the short to medium term, 380 000 residential flats in total provided.

Industrial/Commercial Land

- Estimated total floor area of 1.1 million square meters expected to be made available through government land sales in coming years.

Healthcare

- Expenditure on public healthcare services will increase by 13.3% to $71.2 billion in 2018-19.

Hospital Authority

- An additional recurrent funding of nearly $6 billion will be allocated to the Hospital Authority (HA) in 2018-19.

- To tackle the recent influenza surge, the HA has deployed $500 million for implementing relief measures to alleviate the work pressure on frontline healthcare personnel.

Public Healthcare Facilities

- The second 10-year hospital plan It is expected to deliver 3 000 to 4 000 additional hospital beds, provide additional facilities and quota for consultation with $300 billion as an initial provision.

Arts and Culture

- The Xiqu Centre of the West Kowloon Cultural District will be completed this year.

- $20 billion set aside for the improvement and development of cultural facilities.

- $500 million injected into the Art Development Matching Grants Pilot Scheme.

Sports

- $1 billion into the sports portion of the Arts and Sport Development Fund to support sports organisations in the training of athletes and hosting competitions.

- Another $5 billion injected into the Elite Athletes Development Fund.

Environment

- Another $800 million this year to further promote the installation of renewable energy facilities at government buildings, venues and community facilities.

- The current first registration tax (FRT) concessions for electric vehicles will cease on 31 March 2018.  Government has decided to continue to waive in full the FRT for electric commercial vehicles, electric motor cycles and electric motor tricycles until 31 March 2021.

- Apart from continuing with the current FRT concession of up to $97,500, we will also launch a "one-for-one replacement" scheme from today to allow eligible private car owners who buy a new electric private car and scrap an eligible private car they own to enjoy a higher FRT concession of up to $250,000.  The above concessions will remain in force until 31 March 2021.

Caring and Sharing

Rehabilitation Services

- Additional annual provision of $660 million to improve the rehabilitation services through various measures.

Ethnic Minorities

- $500 million to strengthen support for ethnic minorities.

Abolishing the Arrangement for "Offsetting" Severance Payment or Long Service Payment against MPF Contributions

- To effect the abolition of the MPF "offsetting" arrangement, the Government is striving to put forth as soon as possible a proposal which is more acceptable to both employers and employees and will consult major stakeholders.  The Government has clearly indicated its willingness to increase its financial commitment, and I will set aside $15 billion for these measures.

Reducing Tax Burdens on Individuals

- Working towards the implementation of the two-tiered profits tax rates system. Measures for 2018-19:

(a)          Widening the tax bands for salaries tax from the current $45,000 to $50,000, increasing the number of tax bands from four to five, and adjusting the marginal tax rates to 2%, 6%, 10%, 14% and 17%. 

(b)          Increasing the basic and additional child allowances from the current $100,000 to $120,000.  This will benefit 335 000 taxpayers and reduce tax revenue by $1.31 billion a year;

- Propose to offer greater flexibility to taxpayers by allowing husbands and wives option to decide whether to elect for personal income assessment individually.

Other Concessionary Measures

- Reduce salaries tax and tax under personal assessment for 2017-18 by 75%, subject to a ceiling of $30,000.  The reduction will be reflected in the final tax payable for 2017-18.  This will benefit 1.88 million taxpayers and reduce tax revenue by $22.6 billion;

- Reducing profits tax for 2017-18 by 75%, subject to a ceiling of $30,000.  The reduction will be reflected in the final tax payable for 2017-18.  This will benefit 142 000 taxpayers and reduce tax revenue by $2.9 billion;

- Waiving rates for four quarters of 2018-19, subject to a ceiling of $2,500 per quarter for each rateable property. 

Estimates for 2018-19

- Major policy initiatives announced by the Chief Executive involve an operating expenditure of $40 billion and capital expenditure of $23.5 billion.

- Total government revenue for 2018-19 is estimated to be $604.5 billion, of which earnings and profits tax is estimated at $218.4 billion.

- The revenue from land premium is estimated to be $121 billion, while that from stamp duties is estimated to be $100 billion.

- The overall expenditure of the Government for 2018-19 is estimated to be $557.9 billion, an increase of 17.6% compared with the revised estimate for 2017-18.

- Operating expenditure for 2018-19 is estimated to be $441.5 billion, a year-on-year increase of 18.4%.

- Recurrent expenditure, which accounts for over 90 per cent of operating expenditure, will reach $406.5 billion, a year-on-year increase of 11.8%.

- In 2018-19, the estimated recurrent expenditure on education, social welfare and healthcare accounts for about 60% of government recurrent expenditure, exceeding $230 billion in total.

- In 2018-19, the civil service establishment is expected to expand by 6 700 posts to 188 451. Highest per cent year-on-year increase since reunification.

- I forecast a surplus of $46.6 billion in the Consolidated Account in the coming year. Fiscal reserves are estimated to be $1,138.6 billion by the end of March 2019, equivalent to 40.3% of GDP.

Medium Range Forecast

Average growth rate is forecast to be 3% per annum in real terms from 2019-2022, slightly higher than the trend growth rate of 2.7% over the past decade; and the underlying inflation rate is expected to average 2.5% per annum.

Over the medium term from 2019-20 to 2022-23, growth of recurrent government expenditure is estimated to range between 6.1% and 9.7% per annum.

Fiscal reserves are estimated at $1,222.6 billion by the end of March 2023, representing 35.6% of GDP or equivalent to 21 months of government expenditure.

Taking all these into account, the Government will have an overall surplus in the next five years.