Letter from... Hong Kong

After languishing in the economic doldrums brought on by the Asian financial crisis, Hong Kong has finally found a reason to celebrate.

It was an upbeat Financial Secretary, Henry Tang, who delivered his annual Budget speech on 16 March, announcing that the economy had grown by 8.1% - the highest rate in four years and well above the 20-year average of 4.8%. 'This suggests that our economy is back on an upward track following the adjustments over the past few years,' said Tang.

The good news continued: exports had surged by 15%; property values were on the rebound; and unemployment was down to a three-year low. In the lucrative tourism sector, visitor arrivals were at an all-time high of nearly 22m. Triumphantly for the Government, deflation that had persisted for nearly six years finally came to an end. This was due largely to better than expected revenues, particularly from property transactions. But Tang, announcing a fiscal surplus of US$1.5bn - instead of the predicted deficit - said the Government had successfully reined in its operating costs for the first time in 50 years. This was quicker than anyone expected, and 'clearly demonstrates that we have the determination and capability to contain our spending,' he said.

Land premiums alone rose two-and-a-half fold, almost back to the heady days of the mid-1990s. This increasingly important sector now accounts for nearly 12% of total government revenue, and is expected to rise to over 14% in 2009/2010. However, among those questioning a reliance on this potentially unstable source of revenue is Rod Houng-Lee, head of tax at PricewaterhouseCoopers, who points to a 'back to the future' scenario.

'If you look behind the numbers, [Government] is almost going back to the old business model by relying on a significant part of its income from land sales,' Houng-Lee said. 'By their own predictions this may reach 14% by 2010, which would mean it's back to an all-time high. In turn, this potentially means you can forget about a Goods and Services Tax (GST).'

A GST for Hong Kong has been mooted for years. The Government formalised the debate in the 2003/2004 Budget, and this year moved it forward to the consultation stage. Using an 'if it ain't broke, don't fix it' rationale, opponents argue that a GST is too complicated for a jurisdiction such as Hong Kong, whose economic reputation is built on its low and simple tax regime. Some were predicting a GST would be introduced in this year's Budget, but Financial Minister Tang remained circumspect, stating only that the Government remains 'open-minded' to the idea. The political implications of imposing a new and unpopular tax at a time when the territory's top job, that of chief executive, is up for grabs may not have been lost on him.

Indeed, there was tax relief for some. The proposed abolition of estate duty was welcomed by Yvonne Law, national chief knowledge officer and senior tax partner of Deloitte Touche Tohmatsu (Deloitte), as a positive move for operators of SMEs (small and medium sized enterprises), and one that makes Hong Kong more competitive as an asset management centre in Asia. 'This is earlier than expected, and is in the right direction towards maintaining Hong Kong's position as a regional financial centre,' said Law.

While the next 12 months would be critical in gauging the pace of Hong Kong's rebounding prosperity, Law says it appears to be 'right on track', barring any disastrous external influences. 'If expenditure can be restricted the way the Government plans, despite possible inflation, then we should be doing well,' she said.

Already, 2005 has proved a good year for Hong Kong. It was voted the world's freest economy for the 11th consecutive year (by The Heritage Foundation), and ranked by the World Bank as the fourth easiest place to do business. This 'good news' Budget, combined with Hong Kong's tax advantages, sound legal infrastructure and its position as the gateway to China should further elevate Hong Kong's competitiveness as the place to do business in Asia.

Peta Tomlinson is a freelance journalist who writes for the South China Morning Post and the Hong Kong Trade Development Council.