Key comments on the 2024/5 Budget (香港2024/5預算案點評) 20240304

This suggests whatever budget measures will only add to the bigger picture favourable tail winds. In the next 6-9 months, expect high single digit rebound in home prices and volumes, but by late 2024 we think the resuming USD strength and European wars to again weaken local property demand, with possible finish by early 2025 at levels below current prices.

Extracts of budget speech below, with emphasis from your correspondent, and comments in []:

————most disappointing measures relating to HK’s tax system——————

234. …implement a two‑tiered standard rates regime for salaries tax and tax under personal assessment starting from the year of assessment 2024/25. … the first $5 million of their net income will continue to be subject to the standard rate of 15 per cent, …portion exceeding [at] 16 per cent. It is expected that about 12 000 taxpayers will be affected, accounting for 0.6 per cent of the total number of taxpayers … revenue will increase by about $910 million each year.

[for a puny little increase, why destroy HK’s simple income tax regime?]

235. …implement the progressive rating system for domestic properties, …effect from the fourth quarter of 2024‑25 onwards. …properties with rateable value over $550,000, which account for about 1.9 per cent of the relevant properties. It is estimated that the system will contribute to an increase of about $840 million in government revenue annually.

[for another puny increase, why destroy HK’s simple rates system?]

238. …global minimum tax …by the OECD to address base erosion and profit shifting. …apply the global minimum tax rate of 15 per cent on large multinational enterprise groups with an annual consolidated group revenue of at least EUR 750 million and impose the Hong Kong minimum top‑up tax starting from 2025. …bring in tax revenue of about $15 billion for the Government annually starting from 2027‑28.

[for rubbing shoulders with mostly overleveraged / wanton spending bureaucrats elsewhere this is a big loss for HK’s competitiveness (yes I know the pressures of being put on ‘grey lists’ etc – get big bro China to back us instead of bowing to profligate tyrannies elsewhere might be a better option?]

———————-other important initiatives————————–

Re-domiciliation Mechanisms

36… putting in place user‑friendly fund re-domiciliation mechanisms for Open-ended Fund Companies and Limited Partnership Funds. … will submit a legislative proposal enabling companies domiciled overseas, especially enterprises with a business focus in the Asia-Pacific region, to re-domicile in Hong Kong.

Lifting all punitive stamp duties

43. …cancel all demand-side management measures for residential properties with immediate effect, that is, no SSD, BSD or NRSD needs to be paid for any residential property transactions starting from today.

Likely lifting of LTV/DSR restrictions too

44. …now room to make further adjustments to …property lending …The HKMA will make announcements later today.

Deduction of Expenses and Allowances under Profits Tax

54. …Profits-tax payers will be granted tax deduction for expenses incurred in reinstating the condition of the leased premises to their original condition. …the time limit for claiming the allowances will be removed. This will allow the new owner to claim allowances for the property after a change of ownership …take effect from the year of assessment 2024/25. [seems applicable to new purchases rather than new tenancies for existing owners – impact limited]

Tax / rates concessions

72.

(a) rates concession for domestic properties for the first quarter of 2024/25, subject to a ceiling of $1,000 for each rateable property;

(b) rates concession for non‑domestic properties for the first quarter of 2024/25, subject to a ceiling of $1,000 for each rateable property;

(c) reduce salaries tax and tax under personal assessment for the year of assessment 2023/24 by 100 per cent, subject to a ceiling of $3,000. …This measure will benefit 2.06 million taxpayers and reduce government revenue by $5.1 billion;

(d) reduce profits tax for the year of assessment 2023/24 by 100 per cent, subject to a ceiling of $3,000. …benefit 160 000 businesses and reduce government revenue by $430 million; and

(e) allowance to eligible social security recipients, equal to one half of a month of the standard rate Comprehensive Social Security Assistance (CSSA) payments, Old Age Allowance, Old Age Living Allowance or Disability Allowance, while similar arrangements will apply to recipients of the Working Family Allowance, altogether involving an additional expenditure of about $3 billion.

Lower bribes for EVs

87. The first registration tax (FRT) concessions for electric vehicles, due to terminate at the end of March, will be extended for two years. …will reduce the concessions by 40 per cent. …At the same time, e‑PCs valued at over $500,000 before tax will not be entitled to concessions [good to see govt stepping back from mad rush to net zero, but can do more – scrap all concessions!]

‘high’ tech grants everywhere – really should scale back?

[109 & 113 & 119 & 123…. $3bn to Cyberport, $6bn to universities on biotech, $10bn on New Industrialisation Acceleration Scheme (NIAS), $2bn on InnoHK research clusters, etc… blind throwing of money at problems that may not need govt intervention? ]

HK to consolidate its #1 RMB hub status

131. As the world’s largest offshore RMB business hub, Hong Kong processes about 75 per cent of global offshore RMB settlement. We also have the world’s largest offshore RMB liquidity pool, at over RMB 1 trillion.

Lower patent tax

160. …amend the Inland Revenue Ordinance …implementing the “patent box” tax incentive, which will reduce substantially the tax rate for profits derived from qualifying IP to five per cent.

Increase ship register in HK

164. In addition, Hong Kong’s ship registration regime is widely recognised internationally. Hong Kong ranks fourth in the world in terms of gross tonnage, …port state control detention rate of Hong Kong registered ships is much lower than the global average. …to offer block registration incentive to attract shipowners to register ships in Hong Kong extensively. The Government will amend the relevant regulations regarding this incentive starting this year.

Oversupply of public housing continues: 31k vs 16k private p.a. starter home collapse to continue

184. We will make available land for the production of no less than 80 000 private housing units in the coming five years.
185. On public housing supply, the Government has identified sufficient land for meeting the supply target of 308 000 public housing units over the next ten years (from 2024‑25 to 2033‑34).

No sign of fiscal restraint, big disappointment

208. Total government expenditure for 2024‑25 will increase by about 6.7 per cent to $776.9 billion, with its ratio to nominal GDP projected to increase slightly to 24.6 per cent.
209. Recurrent expenditure will increase by seven per cent to $580.2 billion. Of this, substantial resources will still be allocated to livelihood‑related policy areas including health, social welfare and education, involving a total of $343.7 billion, representing 59.3 per cent of recurrent expenditure.
210. …will be a deficit of $48.1 billion for the year, and fiscal reserves will decrease to $685.1 billion. [time to take back many crowd pleasing non-means tested giveaways – eg the Joy You scheme)
211. In 2024‑25, the Government will maintain its target of zero growth in the civil service establishment. [should cut civil service size!]

[whilst forecasting 26/27 budget surplus, we believe this is overly optimistic, including on land sale projections as well as not factoring in global geopolitics]

So there you have it, short term asset positive, but may be a good opportunity to lighten up given decoupling uncertainties in the wider macro environment…