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HK posts mild budget surplus amid calls for fiscal prudence

Hong Kong unveiled a modest package of measures for its working class in its budget on Wednesday, as it tries to ease pressure on its finances while appeasing voters increasingly concerned about the city’s growing income gap.

In a speech focused on maintaining Hong Kong’s competitiveness, Financial Secretary John Tsang said its economy grew 2.9 percent last year compared with 1.5 percent in 2012, and was expected to expand 3 to 4 percent this year.

The budget contained some tax cuts for the working class but a bumper "giveaway" package didn’t materialise this time.

"In terms of the relief measures, this is within our expectation. We consider these relief measures can help relieve the rising living cost of the middle class as well as the grassroots," said Jennifer Wong, a tax partner at KPMG China. "This is a forward-looking budget."

Tsang did budget around HK$20 billion in one-off relief measures including tax concessions, rent subsidies for public housing tenants and welfare handouts. But that was below the previous year’s HK$33 billion in one-off assistance.

The city’s lower- and middle-income families struggle with rising costs from home prices that have more than doubled since 2008, and the spillover effects of a strengthening yuan.

As a global financial centre and gateway for investment into mainland China, Hong Kong is among the most vulnerable developed economies to any sudden bouts of capital outflows. Since its currency is pegged to the US dollar, it is also more exposed to tapering in US monetary stimulus and expected interest rate rises.

A Reuters poll of analysts had estimated the economy would grow 3.5 percent this year.

Tsang said the government would not loosen a raft of property cooling measures that have begun to show signs of moderating the once red-hot market.

Government finances are highly volatile because of a narrow tax base -- only a third of wage earners pay income tax and it is heavily reliant on revenues from selling land to developers, limiting its ability to clamp down on the sector.

"These (measures) serve to forestall an increased risk of a property bubble that would hamper our macro-economic and financial stability," Tsang said.

A targetted 470,000 residential flats would be built in the coming 10 years and 71,000 private units are also expected to come onto the market within four years to help supply.

The government recorded a provisional surplus of HK$12 billion (US$1.6 billion) for the 2013/14 fiscal year, in line with expectations, but far less than HK$64.8 billion last year, prompting Tsang to remind of the need to preserve Hong Kong’s revenue base, though without raising taxes.

"We have to ensure that our expenditure growth keeps pace with economic and revenue growth. We should also strive to forge a consensus in the community on preparing for Hong Kong’s fiscal challenge in the short, medium and long term," he said.

The government previously said it was expecting a mild deficit of HK$4.9 billion.

Hong Kong is a special region of China with its own distinct financial system but its fortunes are increasingly tied to the mainland, where growth is slowing. Efforts by the Chinese government to boost Shanghai as a financial centre also pose a drag on the city, which has the largest pie of the lucrative offshore yuan business and wants to retain it.

With respect to Hong Kong’s role as China’s largest offshore yuan hub, with total yuan deposits of more than 1 trillion yuan (US$163.2 billion), Tsang said it would work with China to deepen reforms and diversify and strengthen its yuan products in Hong Kong, though without giving specifics.

Hong Kong is one of the world’s richest cities, flush with billionaires and gleaming skyscrapers and fiscal reserves of over HK$745.9 billion. Nevertheless, it struggled in past decades to contain a yawning wealth gap that has seen around 1.3 million of its 7 million population pushed below the poverty line, according to a government-commissioned report.

Last month, Hong Kong’s leader Leung Chun-ying announced a multi-billion dollar raft of poverty alleviation measures including a low-income working family allowance, which while lauded as long overdue also raised concerns the city’s reserves might be run down by the new recurrent expenditure.

"The community’s rising aspirations in an evolving environment will inevitably put increasing pressure on public finances," said Tsang.

He said recurrent expenditure on welfare in 2014/15 would hit HK$56.9 billion, a nearly 10 percent jump from last year.