VZCZCXRO1817
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #0343/01 0561052
ZNR UUUUU ZZH
R 251052Z FEB 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6960
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 000343 
 
SIPDIS 
 
STATE FOR EAP/CM, EEB/IFD/OMA, PASS USTR FOR JEFFREY LEE, 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV HK
SUBJECT: HONG KONG'S 2009-10 BUDGET FOCUSES ON JOBS, 
FINANCIAL INNOVATION, AND CARING 
 
REF: HONG KONG 0040 
 
¶1.  Summary: Hong Kong's Financial Secretary outlined the 
Special Administrative Region's new budget on February 25. 
The Secretary reported Hong Kong's economy has been hit hard 
by the global economic crisis, officially falling into 
recession in the third quarter of 2008.  With unemployment at 
4.6 percent and rising and more than 34,000 jobs lost since 
August 2008, the government's 2009-10 budget focuses on 
creating 62,000 jobs in the next three years.  Hong Kong's 
revenue increased on the back of a good first half of 2008 
and, combined with its large fiscal reserves, gives 
policymakers plenty of room to support the economy through 
additional government spending.  In addition to creating new 
jobs, Hong Kong will seek to improve local quality of life 
through increased spending on building renovation, health, 
culture and environmental projects.  Officials also plan to 
increase Hong Kong's competitiveness as a financial services 
center by revising laws to allow for negotiation of double 
taxation agreements and by issuing Hong Kong government bonds 
to facilitate the creation of a local bond market.  End 
summary. 
 
¶2.  Hong Kong Financial Secretary John Tsang outlined Hong 
Kong's economic position and unveiled the government's 
2009-2010 budget to the Legislative Council (Legco) on 
February 25.  Like the rest of the region, Hong Kong has been 
severely affected by the economic downturn.  In December and 
January, Hong Kong trade volumes were down 20 percent from 
the year before.  Unemployment has risen to 4.6 percent in 
the three month period ending in January, with coming months 
expected to be worse still.  Hong Kong's economy shrank by 
2.5 percent in the fourth quarter of 2008 (or 3.6 percent on 
a seasonally adjusted basis) as trade and consumption both 
dropped sharply.  Hong Kong, however, is in a relatively 
strong position to respond to the economic crisis.  Banks in 
Hong Kong are generally well-capitalized and do not appear to 
be significantly exposed to toxic assets.  Government 
revenues increased in 2008 as taxes on 2007 profits are paid 
in 2008.  Additionally, recent boom years mean Hong Kong has 
sizable fiscal reserves (HKD 448.1 billion/US$ 57.8 billion) 
that it can draw on to fund additional spending. 
 
================ 
Jobs, Jobs, Jobs 
================ 
 
¶3.  Given concerns over rising unemployment, creating jobs is 
the government's top near-term priority.  Tsang promised to 
create 62,000 job and internship opportunities over the next 
three years by boosting government infrastructure spending, 
increasing job training, renovating and repairing dilapidated 
buildings, hosting international and local events (including 
the 2009 East Asian Games), enhancing the energy efficiency 
of government buildings, and creating an internet safety 
training program for youth. 
 
¶4.  In the medium term, Tsang promised to "consolidate Hong 
Kong's fundamentals" and "create a caring community" to 
improve both Hong Kong's economic prospects and the quality 
of life for residents.  Tsang also promised Hong Kong would 
do more to promote the development of economic integration 
with mainland China and the region by strengthening the 
infrastructure links between Hong Kong, Guangdong and Macau, 
and by studying ways to promote closer ties with Taiwan.  He 
noted the importance of human capital in the key sectors of 
Hong Kong's economy and vowed to increase funding to 
secondary, tertiary, and English-medium education.  Hong Kong 
will negotiate to allow Guangdong residents easier access to 
Hong Kong (and Macau), expand research and development 
opportunities by expanding the Hong Kong science park, 
coordinate with Guangdong on energy and environmental policy, 
and promote Hong Kong as "green" city by subsidizing energy 
efficiency improvements in government buildings and 
purchasing electric cars.  Finally, Tsang promised to work 
with China in the G-20 to improve the global regulatory 
framework, even as Hong Kong improves it own financial 
regulations. 
 
===================================== 
Issuing Bonds to Create a Bond Market 
===================================== 
 
¶5. In order to facilitate Hong Kong's development as a global 
financial center, the government will issue government bonds. 
 Tsang went to great lengths to clarify that the Hong Kong 
government is very capable of funding its operating expenses 
 
HONG KONG 00000343  002 OF 002 
 
 
solely through tax revenues and dipping into its fiscal 
reserves, but emphasized that issuing government bonds will 
help the development of the bond market in Hong Kong.  The 
funds raised will be deposited in an account separate from 
fiscal reserves and will not be used to finance spending, he 
said.  Additional details will be determined in consultation 
with local financial experts and the Legco. 
 
¶6.  The government will also revise its laws to allow it to 
sign agreements with foreign tax jurisdictions to avoid 
double taxation.  Hong Kong has a handful of double taxation 
agreements (DTAs) on the books already (reftel) but its 
current laws do not allow it to comply with the OECD 2004 
Exchange of Information requirements demanded by many tax 
authorities.  Following a consultation period last year, the 
Hong Kong government has decided to put forward appropriate 
amendments by mid-year to allow adoption of the more 
stringent standards. 
 
============================= 
Creating a "Caring Community" 
============================= 
 
¶7. Tsang highlighted government efforts to create a "Caring 
Community."  Through urban renewal projects, building 
maintenance, conservation, and harbor beautification 
projects, the government will contribute to "greening" Hong 
Kong.  Tsang promised additional funds for sports, culture 
and recreation, including spending HKD 53 million (US$ 6 
million) to support traditional Cantonese opera.  The 
government will increase health spending to 17 percent of GDP 
by 2012 and will increase the Hospital Authority budget by 
HKD 2.6 billion (US$ 335 million) by 2012.  Tobacco taxes 
will increase by 50 percent in order to discourage smoking. 
Programs for child care, elderly care, women's education, 
support for the disabled and victims of domestic violence are 
all set to increase. 
 
¶8.  Tsang ended his budget address by offering to extend 
one-off revenue concessions to certain segments of society. 
Property taxes, known locally as "rates," for the second and 
third quarters of 2009 will be waived, up to a limit of HKD 
1500 (US$ 195) per unit per quarter.  This will exempt 90 
percent of households and 60 percent of commercial units from 
this tax during these two quarters.  Government-owned rental 
properties will reduce rents by 20 percent, benefiting more 
than 17,000 tenants.  The salaries tax for 2008-9 income 
(paid in 2009) will be reduced by 50 percent and certain 
government fees that were suspended last year will continue 
to be suspended in 2009-10. 
 
¶9.  Total government spending will be HKD 301.6 billion (US$ 
38.91 billion) in 2009-10 and revenue is projected to be HKD 
261.7 billion (US$ 33.77 billion), leaving a deficit this 
year of HKD 39.9 billion (US$ 5.15 billion), which will be 
funded from Hong Kong's sizable fiscal reserves.  Increased 
capital spending, combined with slower economic growth, will 
force Hong Kong to continue to run down its fiscal reserves 
for the next five years.  However, given the size of Hong 
Kong's reserves, the budget deficits in coming years will 
still leave them with reserves sufficient to cover well over 
one year of government expenditures in 2014. 
DONOVAN