Hong Kong Budget 2016-2017

Hong Kong Community College

Group Project: The Budget

Introduction

Hong Kong Budget 2016-2017, the John Tsang ninth financial plan has become a hot issue in Hong Kong. Some people appreciate it, but some argue against its effectiveness. In this assignment, we will investigate the effects the Budget brings from six parts, including tax policies, innovation, public finances, internship and exchange, social welfare and finding new markets.

Tax policies

According to the 2016 Budget, the GDP growth is 2.4% in 2015, and the GDP in 2016 forecasted by the Government in real terms is one to two percent, which is lower than the 2015’s growth. Moreover, the value of total exports of goods and the number of visitor arrivals in Hong Kong are recorded a continuous decline since mid-2015, and the government notices that this fall is likely to be more serious in 2016. In addition, 2015 is the fourth consecutive year that the economic growth was lower than the average of past ten years, which is an obvious and important warning for the Hong Kong government.

The formula of GDP is Y= G + I + C +NX. Unfortunately, both the decrease in the exports of goods and the number of visitors will lower the factor NX. By keeping factors G, I, C remain constant, the expected decrease in GDP in 2016 seems to be true.

Let assume the government spending in 2016 is similar to that in 2015. Therefore, increasing the investment and consumption will be the key factors in boosting the GDP. Based on the Budget, investment and consumption were the key driving force of economic growth last year, and they will turn more cautious in 2016, so the government should pay extra attention, and utilize them to foster the economic growth.

It can be noticed that the government has recognized the significance in increasing the consumption and investment. Consequently, it releases a series of relief measures to stimulate both C and I. For examples, increase the basic allowance and single parent allowance, reduce the salaries tax and tax under personal assessment by 75%, increase married tax allowance etc. These increases in personal tax reduction and allowance can

help to stimulus the investment and consumption. [pic 1]                  (Figure 1)

Refer to the figure 1, increase the personal tax reduction and allowance will encourage the citizen to save more, which shifts the supply of loanable funds to the right from S1 to S2. As a result, the equilibrium interest rate will fall, and the lower interest rate will stimulate investment. Here the equilibrium interest rate falls from r1 to r2, and the equilibrium quantity of loanable funds saved and invested rises from Q1 to Q2. As a result, the factor I can be risen.

On the other hand, the increase in disposable salary due to the tax reduction will increase the factor C if the citizen uses it for consumption rather than saving to boost investment. Even though it can help to improve the GDP, simply rely on tax reduction is not effective enough. To sum up, the tax reduction and allowance can help to relieve the citizen’s financial difficulties, especially the middle class, and this policy can also benefit the economic growth and increase the GDP, so tax reduction and allowance can be considered as good measures in Budget.

Innovation

Financial technology (Fintech) has been aroused the global attention in recent years. Not only Hong Kong government starts to investigate on this topic, but some multinational corporations also do. Since Fintech can bring the novel experience for consumers in managing finance and improve the operational efficiency of financial institutions by using the mobile technologies and internet etc.

As for the latest Budget, financial secretary of Hong Kong, John Tsang proposes to set up a steering group to find ways to develop Hong Kong into a financial technology hub and will set the Cyberport aside a dedicated space of 3,000 square meters in its co-working space as Smart-Space while rolling out a designated program to provide support to 150 Fintech star-ups. Also, the HKMA and SFC and the office of the commissioner of Insurance will set up Fintech dedicated platforms to liaise with the industry. Although many policies and groups are formulated, the Budget does not set up a fund for Fintech development.

On the other hand, Hong Kong is probably the most appropriate city for Fintech development. As all we know, Hong Kong is becoming one of the top three financial services locations in the world which has a long history as a banking and finance hub. Since it has affluent and increasingly well-educated population and tradition of entrepreneurship provide a secure foundation for Fintech development. As it has clear regulator rules, people are probably more easily to start-up a company in Hong Kong.

Furthermore, Hong Kong economy is free barrier and Hong Kong has a world class transparent system; therefore, free flow of information can substantially benefit the financial sector. In contrast, New York and London has implemented relatively high tax compared to Hong Kong. As a result it can take advantages from the tax system and the grater infrastructure.

From the perspective of macroeconomics, the Fintech attract foreigners to invest in Hong Kong since it offers free barrier and ease of flow of information. Therefore, the net capital outflow tends to be negative as many foreigners are investing in Hong Kong. Besides, as for the AS-AD model, since it is a kind of technology that facilitates the financial transaction, thus the long run aggregate supply shifts from LRAS1 to LRAS2 and the price level decreases from P1 to P2. Then the advanced technology also increases the productivity, thus the short run aggregate supply shifts to the right from SRAS1 to SRAS2 while the quantity of output rises from Y1 to Y2.

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