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HK economy surges, no new taxes in budget

HONG KONG: Hong Kong's economic recovery is roaring, outstripping the most bullish market forecasts, and permitting Financial Secretary Donald Tsang to refrain from new taxation in the 2000/2001 budget he presented on Wednesday.

Noting that even he was surprised by the fast pace of the recovery, Tsang said gross domestic product (GDP) rose 2.9 percent in 1999 and was expected to rise 5.0 percent in 2000.

The 1999 number far exceeded even the most bullish market expectations and follows a 5.1 percent contraction in 1998, when Hong Kong was in the grip of a regional financial crisis.

A Reuters poll of 10 economists had forecast 2.2 percent growth in 1999 and 4.9 percent growth in 2000.

Tsang also cut sharply his estimate for the 1999/2000 budget deficit, to HK$1.6 billion (US$206 million) from HK$36.5 billion, and forecast a HK$6.2 billion deficit for the 2000/01 financial year which begins on April 1.

"The real story is the dramatic turnaround in Hong Kong's fortunes, especially the deficit to a mere HK$1.6 billion," said Marshall Byers, chief operating officer at Ernst & Young.

"By the time the numbers are finished, Tsang will be in a surplus again. this remarkable economy has proven extremely resilient in the face of extreme adversity."

The impressive figures propelled Hong Kong stocks in the afternoon, with sentiment further cheered when Tsang announced there would be no tax hikes this year. He also cut stamp duty on stock transactions to 0.225 percent from 0.25 percent.

The blue-chip Hang Seng Index finished at a record close of 17,951.43 points, up 86.07 points or 0.48 percent.

TAX REVIEW COMMITTEE

Before Tsang's budget delivery, the territory was rife with rumours that the government would take serious measures this year to combat a structural revenue problem, such as introducing a broad-based sales tax or hiking corporate profits tax.

But following much opposition from legislators and the business community, Tsang apparently settled for just setting up a committee to study new types of broad-based taxes, including a consumption tax.

Hong Kong Chief Executive Tung Chee-Hwa told reporters the government decided not to raise taxes or introduce new taxes "to provide a firmer foundation for sustainable economic growth in the coming months and years."

But the flip side, is that Tsang has forecast running five consecutive budget deficits from 1998/99 to 2002/03.

"The more worrying point is we're going to have a deficit for five years in a row, starting from 1998/99 to 2002/03. Although the amount may not be big, this is enough for us to think whether or not we should have structural changes," said Yvonne Law, partner-in-charge of HK & China taxes at Deloitte Touche Tohmatsu.

RETURN TO LAISSE-FAIRE GOVT

Private economists generally approved of the budget, saying sitting tight and letting economic recovery take hold was probably best course of action for the government this year.

"During the conomic downturn there is a role for the government to give some boost to the economy, to help the poor," said SG economist Franklin Poon.

"But when the economy has started to recover, the government should step back and let the market run the economy. I think overall it's quite boring, but I think at the initial stage of recovery, probably it is an appropriate budget," he said.

The Hong Kong government has provided some HK$50 billion in revenue concessions in its past two budgets to boost the economy, and last year lured the Walt Disney Co to build a theme park in Hong Kong.-Reuters