ENG-2018 — Page 88

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The Economy

Financial Results

For 2017-18, the government recorded a surplus of $148.9 billion, with revenue of $619.8 billion and expenditure of $470.9 billion. Fiscal reserves at the end of March 2018 stood at $1,102.9 billion, equivalent to 28 months of government expenditure. Highlights of government revenue and expenditure for 2017-18 and 2018-19 (Revised Estimate) are found in table 6 of Appendix 6.

Public expenditure comprises government expenditure and expenditure by the Housing Authority and Trading Funds. In 2017-18, public expenditure increased 2.6 per cent against the previous year to $507.6 billion, of which $379.8 billion, or 74.8 per cent, was of a recurrent nature. Table 7 gives an analysis of public expenditure by policy area group and table 8, the growth rate of public expenditure as compared with the rate of economic growth.

Future Fund

The Future Fund seeks to secure higher returns for Hong Kong's fiscal reserves through placement in longer-term investments. It has an endowment of $224.5 billion. This is part of fiscal measures to cope with foreseeable long-term fiscal challenges arising from an ageing population and slower economic growth.

The Future Fund is being placed with the Exchange Fund for an initial period of 10 years from 1 January 2016 to 31 December 2025. Investment returns arising from the Future Fund during the placement shall be retained by the Exchange Fund for reinvestment. Interest on the placement shall be paid to the government upon completion of the placement period or on a date as directed by the Financial Secretary.

Revenue Sources

Hong Kong's tax system is simple. Tax rates and the cost of administration are low. To protect tax revenue, the government takes vigorous measures to combat tax evasion and prevent tax avoidance. The major sources of revenue include land premium (27 per cent), profits tax (22 per cent), stamp duties (15 per cent) and salaries tax (10 per cent). All major sources of revenue are presented in chart 1 of Appendix 6.

The Inland Revenue Department collects about 53 per cent of total government revenue, including profits tax, salaries tax, property tax, stamp duties and betting and sweeps tax. Profits, salaries and property taxes, including tax under personal assessment, are levied under the Inland Revenue Ordinance and together accounted for about 34 per cent of total government revenue in 2017-18.

Profits tax is charged only on profits arising in, or derived from, Hong Kong from a trade, profession or business carried on within the territory. In 2017-18, profits of unincorporated businesses were taxed at 15 per cent and profits of corporations at 16.5 per cent. Profits tax is charged provisionally on the basis of profits made in the year preceding the year of assessment and is later adjusted according to the actual profits made in the assessment year. Generally, all expenses incurred in the production of assessable profits are deductible. There is no withholding tax on dividends paid by corporations. Interest income from deposits placed with banks or deposit-taking companies, other than that received by financial institutions, and

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