As widely expected, the estimated 2007/08 consolidated budget surplus reached a record of HKD115.6 billion, more than 4.5 times the government's earlier estimate of HKD25.4 billion. The surplus is the largest on record and brings the fiscal reserves to HK$484.9 billion or 30.1% of GDP or 25 months of government expenditure. The much higher-than-expected budget surplus highlights the volatility of the government revenue.

Generous Tax Concessions, But No Major Tax Reform

The 2008/09 Budget offered a generous package of HKD40 billion tax concessions, largely in line with market expectation.

Salaries tax

• An one-off rebate of 75% of the salaries tax paid, up to a maximum of HKD25,000
• Standard tax rate was cut to 15%, from 16% as Chief Executive Donald Tsang promised in his annual policy address last Oct.
• Increase in marginal rate bands and basic allowance

Corporate tax rate was cut to 16.5%, from 17.5%.

• Waiver of 75% of 2007/08 profits tax for SMEs, up to a maximum of HKD25,000.
• The cut in business rate is in line with global trend to maintain the territory's international competitiveness as a business hub. For instance, Singapore cut its corporate tax rate to 18% in Feb last year

Other initiatives

• Exemption of property rates for all the four quarters for 2008/09, capped at HKD5,000 per quarter for each rateable unit.
• Waiver of one month's public rentals
• One-off tax reduction of 75% of property tax for 2007-08, subject to a ceiling of $25,000
• Subsidy of HKD1,800 for each residential electricity account

More Cautious Economic Outlook and Rising Inflationary Pressure

• The Hong Kong economy turned in a robust growth of 6.3% yoy in real terms in 2007, in line with our earlier estimate. The Financial Secretary projected a slightly lower growth for 2008 at 4%-5% amidst a cooling global economy, slightly lower than our estimate of 5% growth.
• The government believed 2008 CPI inflation is to edge up to 4.5%, but one-off measures of four quarters property rates, one-month public rental waiver and electricity subsidy will keep the headline CPI reading low at 3.4%, broadly in line with our estimate of 3.2%.

Overall: Huge Surplus at Government's Discretion

Overall, the main theme of the 2008/09 budget is on short-term one-off concessions with little touch on broad-based tax reform or clear guidelines on government's budget policy.

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