Hong Kong 2006
Chapter 3:
The Economy
Structure and Development of the Economy
The Economy in 2006
Public Finance
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Public Finance

Structure of Government Accounts

The Government controls its finances through a series of fund accounts. The General Revenue Account is the main account for day-to-day departmental expenditure and revenue collection. There are eight other funds established by resolutions of the Legislative Council for specific purposes. They are the Capital Works Reserve Fund, Capital Investment Fund, Civil Service Pension Reserve Fund, Disaster Relief Fund, Innovation and Technology Fund, Land Fund, Loan Fund and Lotteries Fund.

The Capital Works Reserve Fund finances the public works programme, land acquisitions, capital subventions, major systems and equipment items, computerisation and the payment of redemption money in respect of land exchange entitlements. Its income is derived mainly from land premiums and appropriation from the General Revenue Account.

The Capital Investment Fund finances the Government's capital investments, such as the injection of equity into the Airport Authority, the Kowloon-Canton Railway Corporation and the MTR Corporation Limited, and capital investments in the Housing Authority and the Urban Renewal Authority. Its income is derived mainly from appropriation from the General Revenue Account and dividends.

The Civil Service Pension Reserve Fund acts as a reserve to meet payment of civil service pensions in the unlikely event that the Government cannot meet such liabilities from the General Revenue Account. Its income is derived from appropriation from the General Revenue Account and investment income.

The Disaster Relief Fund finances grants for humanitarian aid to help victims of disasters that occur outside Hong Kong. Its income is derived mainly from appropriation from the General Revenue Account.

The Innovation and Technology Fund finances projects that contribute to innovation and the upgrading of technology in the manufacturing and service industries, and those that contribute to the upgrading and development of the manufacturing and service industries in general. Its income is derived mainly from investment income.

The Land Fund was established on July 1, 1997 to enable the investments held by the former Trustees of the HKSAR Government Land Fund to be formally brought into the Government's account. Its income is derived from investment income.

The Loan Fund finances loan schemes such as housing loans and student loans. Its income is derived mainly from loan repayments and interest.

The Lotteries Fund finances welfare services through grants and loans. Its income is derived mainly from sharing the proceeds of the popular Mark Six Lottery.

Management of Public Finances

The principles underlying the Government's management of public finance are set out in the Basic Law: to keep expenditure within the limits of revenues in drawing up the budget, to strive to achieve a fiscal balance, to avoid deficits and to keep the budget commensurate with the growth rate of its gross domestic product. The Budget presented by the Financial Secretary to the legislature each year is developed against the background of a medium-range forecast to ensure that full regard is given to the longer-term trends in the economy.

Public Expenditure

Public expenditure is taken to include government expenditure from the General Revenue Account and the Government's statutory funds excluding Capital Investment Fund, plus expenditure by the government trading funds and the Housing Authority. Government grants and subventions to institutions in the private or quasi-private sectors are included, but not spending by organisations in which the Government has only an equity stake such as the MTR Corporation Limited, the Kowloon-Canton Railway Corporation and the Airport Authority. Similarly, advances and equity investments by the Capital Investment Fund as well as repayment of government bonds and notes are excluded as they do not reflect the actual consumption of resources by the Government.

The Housing Authority, operating through the Housing Department, is financially autonomous. The Government provides the Housing Authority with capital and land on concessionary terms to finance the provision of public housing rental flats to those in need.

A trading fund is an accounting entity enabling a department to provide services on a commercial or quasi-commercial basis. Unlike a vote-funded department, a department operating on a trading fund is allowed to retain revenue generated to meet its expenditure and finance future expansion.

Financial Results

The Government's consolidated account recorded a surplus of $14 billion in 2005-06. The accumulated balance at end-March 2006 stood at $310.7 billion. This forms the Government's fiscal reserves and is available to meet any calls on its contingent liabilities. It also enables the Government to cope with any short-term fluctuations in expenditure relative to revenue.

Total government revenue in 2005-06 amounted to $247.1 billion and spending to $233.1 billion. For details of revenue by source and of expenditure by component for 2005-06 and 2006-07 (Revised Estimate), see Appendix 6, Table 6.

Public expenditure in 2005-06 totalled $245 billion. There was a drop of 4.7 per cent in nominal terms or 4.1 per cent in real terms over the previous year. Some $44.3 billion, or 18.1 per cent of the public expenditure in 2005-06, was of a non-recurrent nature. Table 7 gives an analysis of expenditure by policy area group and Table 8, the growth rate of public expenditure as compared with the rate of economic growth.

Revenue Sources

Hong Kong's tax system is simple and relatively inexpensive to administer. Tax rates are low and the Government accords a high priority to curbing tax evasion and minimising opportunities for tax avoidance. The major sources of revenue are profits tax (28 per cent) and salaries tax (15 per cent). Other significant sources include revenue from land premiums (12 per cent), stamp duties (7 per cent), properties and investments (6 per cent), utilities, fees and charges for services provided by the Government (6 per cent), rates (6 per cent), bets and sweeps tax (5 per cent), and duties on dutiable commodities (3 per cent). These major sources of revenue are presented at Appendix 6, Chart 1.

The Inland Revenue Department collects about 58 per cent of total revenue, including profits tax, salaries tax, property tax, stamp duties, bets and sweeps tax, estate duty, and hotel accommodation tax. Profits, salaries and property taxes including tax under personal assessment, which together accounted for about 45 per cent of total revenue in 2005-06, are levied under the Inland Revenue Ordinance. Persons liable to these taxes may be assessed on three separate and distinct sources of income: business profits, salaries and income from property.

Profits tax is charged only on net profits arising in or derived from Hong Kong, from a trade, profession or business carried on in Hong Kong. In 2005-06, profits of unincorporated businesses were taxed at 16 per cent and profits of corporations at 17.5 per cent.

Profits tax is paid initially on the basis of profits made in the year preceding the year of assessment and is subsequently adjusted according to profits actually made in the assessment year. Generally, all expenses incurred in the production of assessable profits are deductible. There is no withholding tax on dividends paid by corporations. Interest income, other than that received by financial institutions, and dividends received from corporations are exempt from profits tax. In 2005-06, the Government received about $69.8 billion in profits tax (about 28 per cent of total revenue).

Salaries tax is charged on emoluments arising in, or derived from, Hong Kong. The basis of assessment and method of payment (including provisional payments) are similar to the system for profits tax. Tax payable in 2005-06 was calculated on a sliding scale that progressed from 2 per cent, 8 per cent and 14 per cent on the first, second and third segments of net income (that is, income less deduction and allowances) of $30,000 each, respectively, and then to 20 per cent on the remaining net income. No one, however, needed to pay more than the standard rate of 16 per cent of his or her total income. The earnings of husbands and wives are reported and assessed separately. However, where either spouse has allowances that exceed his or her income, or when separate assessments would result in an increase in salaries tax payable by the couple, they may elect to be assessed jointly. Salaries tax contributed some $37.5 billion (about 15 per cent of total revenue) in 2005-06. Owing to the generous personal allowances under the Hong Kong tax law, only 37 per cent of the workforce had to pay salaries tax for the year of assessment 2004-05.

Owners of land or buildings in Hong Kong were charged property tax in 2005-06 at the standard rate of 16 per cent of the actual rent received, less an allowance of 20 per cent for repairs and maintenance. There is a system of provisional payment of tax similar to that for profits tax and salaries tax. Property owned by a corporation carrying on a business in Hong Kong is exempt from property tax, but profits derived from ownership are chargeable to profits tax. Property tax contributed some $1.3 billion (about 0.5 per cent of total revenue) in 2005-06.

The Stamp Duty Ordinance imposes fixed and ad valorem duties on different classes of documents relating to assignments of immovable property, leases and share transfers. The revenue from stamp duties was some 17.9 billion, about 7 per cent of total revenue, in 2005-06.

A duty is imposed on bets on horse racing administered by the Hong Kong Jockey Club, proceeds of Mark Six lotteries, and gross profits of the Hong Kong Jockey Club's football betting operation. These are the only legal forms of betting in Hong Kong. The rate of duty on betting proceeds from horse racing was 12 per cent on standard bets and 20 per cent on exotic bets in 2005-06. The duty on football betting, which was introduced on August 1, 2003, is charged at a rate of 50 per cent of gross profits. The yield from betting duty in 2005-06 totalled some $11.9 billion, or about 5 per cent of total revenue.

Prior to its abolition on February 11, 2006, estate duty was imposed on estates valued at over $7.5 million, at levels ranging from 5 per cent to a maximum of 15 per cent. Estates of persons who died during the period between July 15, 2005 and February 10, 2006 will be charged a nominal duty of $100, if the value exceeds $7.5 million.

In 2005-06, a hotel accommodation tax of 3 per cent was imposed on expenditure on accommodation by guests in hotels and guesthouses.

Under the Dutiable Commodities Ordinance, duties are levied on only four types of commodities — hydrocarbon oil, liquor, methyl alcohol and tobacco, irrespective of whether they are manufactured locally or imported. The Customs and Excise Department is responsible for collecting these duties. In 2005-06, the department collected duties of $6.4 billion, or about 3 per cent of total revenue.

The Rating and Valuation Department is responsible for the billing and collection of rates, which are levied on landed properties at a specified percentage of their rateable values. In 2006-07, the rates percentage charge was 5 per cent.

The rateable value of a property is an estimate of its annual rent in the open market at a designated date. In order to better reflect prevailing market rents, revaluation of rateable values is conducted on an annual basis. The current Valuation List took effect on April 1, 2006, with rateable values reflecting the rental values in existence on October 1, 2005.

The Valuation List of March 31, 2006 contained about 2.25 million assessments. In 2005-06, the revenue from rates was $14.16 billion, or about 6 per cent of total revenue.

The Rating and Valuation Department is also responsible for the billing and collection of government rent, which was payable from July 1, 1997, for land leases granted on or after May 27, 1985, and on the extension of non-renewable land leases. The latter group comprises all land leases in the New Territories and New Kowloon, that part of Kowloon north of Boundary Street, which were renewed on June 28, 1997. Government rent is levied at 3 per cent of the rateable value of the lot and is adjusted in step with any subsequent changes in the rateable value. There were about 1.69 million assessments in the Government Rent Roll on March 31, 2006. Total government rent collected in 2005-06 was $4.7 billion, or about 2 per cent of total revenue.

The Government derives significant amount of revenue from other sources. Fees and charges for services provided by government departments generated about $11.1 billion, or about 5 per cent of total revenue, in 2005-06. It is government policy that fees, in general, should be set at levels sufficient to recover the full cost of providing the services. Certain essential services are, however, subsidised by the Government or provided free of charge. Government-operated public utilities generated about $3.4 billion, which accounted for about one per cent of total revenue; the most important of these, in revenue terms, is water charges.

The Government also collected $10.4 billion from investments and interest income on the fiscal reserves in 2005-06, amounting to about 4.2 per cent of the total revenue.

Lastly, some $29.5 billion, or about 11.9 per cent of total revenue in 2005-06, was generated from land transactions. All revenue from land transactions is credited to the Capital Works Reserve Fund to help finance the Public Works Programme.

Public Consultation on Tax Reform

In mid-July 2006, the Government launched a public consultation on how it should reform the tax system. In the consultation document, the Government explained in detail why it needed to broaden the tax base. In addition, the document sought to consult the public on whether the introduction of a Goods and Services Tax (GST) was an appropriate option to broaden the tax base. The Government conducted an interim review of the public consultation in December 2006. The community generally agreed that the Government should stabilise its revenue by broadening the tax base for the purpose of ensuring the health of its public finances and maintaining Hong Kong's competitiveness. Although the community could not reach a consensus on the introduction of a GST, it supported the Government in continuing discussions with the public on other options to broaden the tax base. The Government will prepare a report after the conclusion of the consultation period at the end of March 2007 and submit it for consideration by the Government of the next term.

Government Procurement and Supplies Management

Hong Kong, China is a signatory to the World Trade Organisation Agreement on Government Procurement (WTO GPA). Government procurement is undertaken in accordance with the principles of openness, transparency, fairness, public accountability, value for money and non-discrimination. Public tender procedures are widely used for general items. Restricted or single tender procedures are used where open competitive tendering would not be an effective means, such as in cases involving compatibility with existing equipment, or patented or proprietary items. For complex and critical purchases, prequalification exercises may be conducted before tendering to ensure that suppliers are financially and technically competent and reliable.

Purchases of goods and related services with values above predetermined thresholds are undertaken by the Government Logistics Department (GLD). These goods and related services are normally obtained through competitive tendering, without preference to any particular source of supply, to ensure that user departments' needs are met at the best possible price, having regard to life-time cost and reliability of supply. GLD helps user departments to get the best-value purchases. Special consideration is given to environmentally friendly products where available and appropriate.

To facilitate sourcing and market research, GLD maintains and regularly updates the Supplier Lists which comprise local and overseas suppliers for different categories of commodities and services.

Notices for public and prequalification tenders are published in the Government Gazette and local newspapers. Suppliers on the relevant Supplier Lists and, in case of procurements covered by WTO GPA, consulates and overseas trade commissions are also informed. To allow easy access by overseas suppliers, GLD also puts its tender notices and related information on the Internet. Under the Electronic Tendering System introduced in April 2000, subscribers can download tender documents and submit tender offers electronically.

In 2006, GLD awarded contracts on behalf of all user departments with a total value of $3.82 billion. Items bought from 33 different territories included:

  high value purchases of computer equipment and software, pharmaceutical products, transport services, specialised vehicles, fuel oils and telecommunication equipment;
commonly used items supplied through allocated term contracts and delivery by the term contractors on an as-and-when-required basis to avoid stocking and double handling; and
essential and emergency items purchased in bulk and held in the Government Logistics Centre of GLD. User departments can place orders for these items when required.
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