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Hong Kong to hike taxes
HONG KONG, China (Reuters) -- Hong Kong will hike corporate and personal taxes for the first time in nearly 20 years in a bid to curb its huge budget deficit. If the deficit continues to deteriorate, investors will lose confidence and pull money out of the territory, Financial Secretary Antony Leung warned on Wednesday in his annual budget address. Leung said that Hong Kong's economy is expected to grow by three percent this year, after expanding by 2.3 percent in 2002, faster than the government's projection for two percent growth. In the fourth quarter gross domestic product (GDP) rose five percent year-on-year, beating economists' estimates, as exports from the world's busiest port rebounded, thanks in large part to mainland China's booming trade. "Hong Kong's economy is on an upward trend. Economic growth in real terms picked up significantly, rising from 0.6% in 2001 to 2.3% in 2002, with the main impetus coming from robust growth in exports of goods and services," Leung said. But he added that he expects the territory's deflationary trend to continue in 2003, with consumer prices falling by 1.5 percent. Prices have been falling in Hong Kong for more than four years, reflecting persistent economic weakness. "The budget measures were in line with market expectations but the increase in salaries tax will hit consumer sentiment and could make deflation deteriorate further," said Kenny Tang, associate director at Tung Tai Securities. Government revenues have been badly hit in recent years as it has suspended sales of land to help prop up real estate prices, which are languishing about 65 percent below their 1997 peaks. Steep falls in financial markets has also prevented it from selling other major assets.
The shortfall in revenues has pushed the budget deficit to record levels, prompting fears among investors of credit rating downgrades and speculative attacks on the local dollar, which is linked to the U.S. dollar. The government said that its deficit for fiscal 2002/03, which ends in March, would reach a record HK$70.05 billion. Despite higher taxes and spending cuts it will only decline marginally to HK$69.8 billion in 2003/2004, but Leung repeated his pledge to balance the books by 2006/2007. "The external sector is the reason for the better than expected GDP, but that being the only driver with political risks in Iraq and North Korea, we are not optimistic." said Simon Wong, North Asia economist at BNP Paribas. "This budget is only the first in a series of tightening measures," he added. Leung proposed to raise Hong Kong's standard personal tax rate to 16 percent from 15 percent in two phases in 2003/04 and 2004/05. The standard tax rate is effectively the maximum rate a person pays on any income earned after deducting allowances. The government also plans to raise corporate profits tax to 17.5 percent from 16 percent from the 2003/04 fiscal year and property taxes by one percentage points to 16 percent over two years. Despite the hikes, Hong Kong will still have one of the lowest tax rates in the world and is betting it will not lose its edge over regional rivals like Singapore and Shanghai. Its simple, low-tax regime has kept many foreign investors in the territory despite high property and labor costs. The government also confirmed plans to slash welfare payments, which Leung said would save government about HK$1.71 billion a year. The government announced plans last month to cut welfare payments by 11.1 percent for the bulk of people receiving public assistance. Their numbers have grown as the economy stagnated. Payments to able-bodied recipients will be cut in June. Cuts for the old, disabled and those in poor health will be implemented in two phases, the first in October and the other in October 2004. Leung also said the government will consider implementing a goods and services tax in the long term to try to broaden its revenue base. Several members of the investment community have urged the government to begin looking at implementing such a tax to help it achieve a balanced budget. But critics say it could hurt already weak consumer demand if it is put in place while the economy is still struggling. Copyright 2003 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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