Although the approval of the Secretary of State for the Colonies is still required before decisions are made on certain major matters including currency and banking, the Colony in other respects has complete autonomy in financial affairs and the ultimate financial authority is the Legislative Council.
Hong Kong is financially self-supporting, apart from the cost of its external defence to which it makes a substantial contribution. From 1958 to 1964 the sum was £1½ million a year, but in 1964 an additional £6 million was made available over the years up till 1970 as a contribution towards the cost of Army and Air Force building programmes. A new Defence Costs Arrangement became effective in 1967–8 which superseded the previous measures. Under this arrangement, for the next four years, the contribution to recurrent defence expenditure has been increased to £3,925,000 a year, with a sum of £600,000 made available during the four-year period of the arrangement, for a services' capital works programme. At the same time, the maintenance function of HBM Ministry of Public Buildings and Works in Hong Kong in respect of certain service property has been taken over by the Public Works Department of the Hong Kong Government.
Apart from the Housing Authority, which has a certain measure of autonomy, there are no financially independent subordinate bodies similar to the local government authorities in the United Kingdom and other Commonwealth territories. The revenue and expenditure figures therefore represent all the public income and all the public expenditure of the Colony other than 'below the line' operations of various funds.
A small deficit was returned in the first financial year after the war. Since then, with the exception of 1959–60 and 1965–6, when there were deficits of some $45 million and $137 million respectively, substantial surpluses have been accumulated. Comparative figures for the past four years are shown in Appendix IX. The accumulation of these surpluses in the varying economic conditions which the Colony has had to face since the war is a considerable achievement, particularly since it has taken place after charging annually against current revenue all capital expenditure other than a comparatively small amount financed by borrowing. In 1966–7 capital expenditure totalled nearly $625 million.
The principal reason for these results, which appear so favourable, is that exceptionally rapid increases in population have generated internal economic activity which has raised the yield from taxation and other sources of revenue without appreciable increases in the rates. Annual revenue expanded from $292 million in 1950–1 to $1,818 million in 1966–7. The rate of increase was affected by variations in such factors as the economic situation and inflows of capital, but the upward trend was continuous. In expenditure there was inevitably a time-lag before government could develop the public and social services necessary for the increased population. However, as these services were developed at a gradually accelerated rate, the margin between recurrent expenditure and recurrent revenue tended to narrow. For example, in 1952–3 recurrent expenditure absorbed only 50 per cent of the recurrent revenue, but by 1959–60 the figure had risen to 82 per cent. Consequently, in that year the surplus of revenue over expenditure could no longer finance all the capital expenditure and an overall deficit of $45 million occurred. Subsequent budgets anticipated further and substantial deficits, but statistics now available suggest that the economic strength and resilience of the Colony was underestimated, at any rate temporarily, for it was not until 1965–6 that another deficit was recorded.
The intervening years saw an upsurge in recurrent revenue, arising mainly from the very active trading conditions prevailing in the Colony, with the result that while recurrent expenditure continued at approximately the levels expected, it absorbed a smaller-than-anticipated proportion of the recurrent revenue. By 1963–4 the proportion was down to 65 per cent, but by 1966–7 it had increased to 68.4 per cent. At the same time capital expenditure, though rising substantially, was lower than originally forecast while capital revenue, due mainly to heavy receipts from land sales, recorded marked increases. The year 1964–5 produced a surplus of $78 million, but ended on a somewhat restrained note. While the export trade remained buoyant the property market turned dull and this, to a degree, affected other sectors. The deficit of 1965–6 reflected this temporary set back and was due partially to special measures arising from it but mainly to a large reduction in land sales revenue. Although the 1966–7 budget anticipated a deficit of $94 million, a surplus of $12 million was achieved in spite of the payment of $43 million in respect of arrears of pay arising from the implementation of the Report of the 1965 Salaries Commission.
The budget for 1967–8, although estimating for a $37 million deficit, abolished the Broadcasting Receiving Licence fees, reduced stamp duty on conveyance of property, and the maximum rate of estate duty from 40 per cent to 25 per cent. These concessions are estimated to cost the revenue a total of $11.25 million a year at the present time. The deficit, of course, indicates that revenue will not be able to finance all the capital expenditure arising from government's heavy programme of non-recurrent public works, mainly for more schools, medical facilities, housing, water supplies, roads and land development schemes.
Revenue and expenditure for the two previous years, together with the estimates for this financial year are detailed and compared in Appendices VI and VII. In 1966–7, revenue at $1,818 million was $33 million more than the original estimate. The head showing the largest excess was internal revenue with $33 million over the estimate. There were shortfalls on three recurrent heads (duties, fees of court and water revenue) but all other recurrent heads produced surpluses. Again, as in the previous year, the biggest shortfall was in capital receipts from land sales which were below the estimate by some $19 million. Expenditure for the financial year 1966–7 was $1,806 million against the estimate of $1,878 million showing a shortfall of $72 million. Of the $545 million voted, $449 million was actually spent on civil engineering, water and building projects under public works non-recurrent heads of expenditure.
At March 31, 1967, net available public assets were $848 million, of which $138 million was earmarked in a Revenue Equalization Fund as a reserve against future deficits on current account. According to normal government practice, the statement of assets and liabilities excludes the public debt of the Colony from the liabilities. The debt at March 31, 1967 was $75.5 million or the equivalent of approximately $19 per head of population. Indebtedness decreased by $3.3 million during the year. owing mainly to the repayment of $3.2 million of the United Kingdom's interest-free loan of £3 million ($48,000,000) for the development of Kai Tak Airport. This loan is repayable in 15 annual instalments; the first repayment was made on October 1, 1961. The Rehabilitation Loan, which was raised in 1947–8 to cover part of the cost of post-war reconstruction, is repayable in 1973–8; there is provision for a sinking fund which stood at $28.1 million on March 31, 1967.
In addition to the Assets and Liabilities referred to, there exists the Development Loan Fund and a Lotteries Fund for special purposes (see Appendix XIII). The Development Loan Fund, of $579 million, is used to finance social and economic development projects of a self-liquidating nature. The greater part has been used for low-cost housing schemes. At March 31, 1967 outstanding commitments from funds allocated exceeded liquid assets of $33 million by $179 million. The Lotteries Fund, established in 1965, is for the support and development of social welfare services in the Colony. The fund started with a transfer from general revenue of $7.4 million and an additional $5.2 million was credited during the period June 30, 1965 to March 31, 1967, by which date grants and loans amounting to $8.69 million had been approved. Details of Public Debt and Colonial Development and Welfare schemes and grants are shown in Appendices X and XI.
The audit of all public accounts and of certain Special Funds is carried out by the Director of Audit under the general supervision of the Director General of the Overseas Audit Service. Annual reports on the accounts by the Director of Audit and the Director General are presented to the Legislature and transmitted to the Secretary of State.
There is no general tariff and only five groups of imported commodities—alcoholic liquors, tobacco, hydrocarbon oils, table waters and methyl alcohol—are subject to import duty. Excise duties are levied on the same products manufactured locally. All firms engaged in the import, export, manufacture, or sale of dutiable commodities must be licensed.
The rates of duty are, in general, low. A preferential rate of duty for liquor of Commonwealth origin is at present levied at between 66 per cent and 89 per cent of the rate for non-Commonwealth liquor; locally-produced beer enjoys a further preferential margin over Commonwealth beer. Duty on all types of liquor ranges from $1.60 per gallon, on locally brewed beer, to $73 a gallon for liquors and spirits of non-Commonwealth origin.
The scale of duties on imported tobacco ranges from $2.50 a pound for Chinese prepared tobacco to $11.25 a pound on non-Commonwealth cigars. Preferential rates are granted for unmanufactured tobacco of Commonwealth origin and to cigars, cigarettes and pipe tobacco of Commonwealth origin or manufacture.
The duties on motor spirits and other light or heavy oils now stand at $1.80 and 10 cents a gallon respectively. The general rate of duty on diesel oils for road vehicles is $1.30 per gallon, although public omnibus operators and marine and industrial users pay reduced rates. The rates of duty on table waters and methyl alcohol are 48 cents and $7.50 per gallon respectively.
Rates are levied on the basis of the annual letting value of land or a building held or occupied as a distinct or separate tenancy. The valuation list covers the rating areas of Hong Kong Island, Kowloon, New Kowloon and part of the New Territories. In Hong Kong Island, Kowloon and New Kowloon, rates are charged, with a few exceptions, at 17 per cent per annum of rateable value. In those parts of the New Territories which are statutorily subject to rates, the charge is 11 per cent. The valuation list is prepared by the Commissioner of Rating and Valuation and is frequently revised to bring it up to date. Revenue from rates has more than doubled over the last six years. The estimate for 1967–8 is $278 million.
There are few exemptions. Premises used for educational, charitable and welfare purposes are rated, but most of the bodies running these establishments receive back the amount of rates paid in the form of either direct subventions or contributions toward rates.
Income was first subjected to direct taxation in Hong Kong in 1940 as a temporary war-time measure and no attempt was made to collect tax after the liberation of the Colony, although the ordinance was not repealed until 1947. However, a new source of revenue was by then essential and it was decided to impose a direct tax on earnings and profits as a permanent measure. Under the Inland Revenue Ordinance 1950, tax is charged only on income or profits arising in or derived from the Colony. No tax is charged on income or profits arising outside the Colony whether remitted here or not. The ordinance aims at simplicity and charges tax generally at source and at a flat rate rather than in the hands of the eventual recipient on a sliding scale. Thus there is no need to ascertain the total income of each individual.
Income and profits are grouped in four categories, each of which is subject to a separate tax—Property Tax, Salaries Tax, Profits Tax and Interest Tax. A fifth and aggregate tax known as Personal Assessment is chargeable on people who so elect. In that case the individual's income, otherwise chargeable to the four separate taxes, is aggregated in a single sum which is reduced by personal allowances and tax, charged on a sliding scales, granting reduced rate reliefs. The privilege of election is not available to non-residents.
The standard rate of tax was raised to 15 per cent from April 1, 1966, having stood at 12½ per cent for the previous 15 years. Business profits, interest received from loans and the interest element of purchased annuities are charged to tax at the full standard rate. However, where the profits of a non-corporate business are below $7,000 for any year, no tax is charged and tax chargeable on such a business is restricted to one-half of the amount by which the profits exceed $7,000. Property Tax is charged on the net rateable value of any land or building in the Colony with the exception of those in the New Territories and those wholly occupied by the owner as his residence. If the rent receivable is controlled by reference to 1941 rental, the charge is at one-half the standard rate, otherwise tax is payable at the full standard rate. Salaries Tax is charged on the total income from employment reduced by allowances which are at present: for the taxpayer, $7,000; for his wife, $7,000; for each of the first two children, $2,000; for each of the third to sixth children, $1,000; and for each of the seventh to ninth, $500. This makes a maximum allowance for children of $9,500. Premia paid for life insurance are allowed to an amount not exceeding one-sixth of the amount by which the income exceeds $7,000. Tax is charged on a scale starting at 2¾ per cent on the first $5,000 of the net income and increasing at each subsequent $5,000 stage until at $45,000 the maximum rate of 30 per cent is reached. The total Salaries Tax payable by any individual is restricted to an amount not exceeding the standard rate on his gross income.
It is estimated that the revenue from Earnings and Profits Tax during the financial year 1967–8 will be $502 million.
Estate Duty generally follows the lines of the British tax of the same name. Duty is assessed only on that part of an estate which is in Hong Kong. The rates of duty range from three per cent on estates valued between $100,000 and $200,000 to 25 per cent on estates over $4 million. Yield for the year ending March 31, 1968 is estimated at $15 million.
Stamp Duty is modelled on the British pattern and fixed duties are charged on various documents. The lowest is 15 cents on bills of lading and receipts and the highest $20 on deeds. Ad valorem duty on various other documents ranges from 15 cents on $500 to $2 on $100. As from April 1, 1967, a fixed duty of $20 was substituted for the $2 per cent ad valorem duty on conveyance of land where the sale price does not exceed $20,000 and the stamp duty was reduced to $1 per cent ad valorem duty where the sale price exceeds $20,000 but does not exceed $40,000. A special duty at the rate of three per cent is payable on the first conveyance of any parcel of land after September 1948. The estimated yield from Stamp Duty during the current financial year is $50 million.
Substantial revenue accrues from Entertainment, Dance Halls, Bets and Sweeps Taxes and it is estimated they will yield $52.9 million during the current year. Entertainment Tax is charged on the price of admission to places of entertainment, the rate varies with the amount charged, but averages about 22 per cent. Certain types of entertainment given for charitable or educational purposes are taxed at a lower rate or may be exempt. Public Dance Halls Tax exacts a levy of 10 per cent on all dance hall charges. Bets and Sweeps Tax imposes 7½ per cent on totalizator receipts and 25 per cent on cash sweepstake receipts.
The Hotel Accommodation Tax, introduced in July, 1966, provides money for the organization of tourism. The rate is two per cent of the charge made for accommodation by the proprietor of any hotel containing 10 or more rooms normally available for guests. This levy is estimated to yield $2.2 million in the current year.
Every business carried on in the Colony, except one which is not carried on for the purpose of gain or one which is carried on by a charitable institution, must be registered and pay an annual registration fee of $25. Where the business is very small the Commissioner may exempt it. These fees are expected to yield approximately $3.2 million.
When Hong Kong was founded in 1841, China's currency was based on uncoined silver. The normal unit for foreign trade throughout the Far East was the Spanish or Mexican silver dollar. By a proclamation of 1842, Mexican or 'other Republican dollars' were declared to be legal tender in the Colony although government accounts were kept in sterling until 1862. There were several unsuccessful attempts to change the monetary basis from silver to gold.
A mint was set up in 1866 and produced a Hong Kong equivalent of the Mexican dollar, but the new coin was unpopular and the mint closed down two years later. (The machinery was later sold to establish the first modern mint in Japan.)
An order of the Queen in Council, dated February 2, 1895, authorized the minting in India of a British trade dollar, equivalent to the Mexican dollar. In Hong Kong this gradually replaced the Mexican dollar although the latter still remained both legal tender and the standard by which other dollars were judged. The sterling or gold value of the dollar varied with the price of silver. This gave Hong Kong a variable exchange relationship with London and the world at large, but a reasonably stable one with China.
In 1845 the Oriental Bank issued the first bank notes in the Colony, and the Chartered Bank of India, Australia and China, the Chartered Mercantile Bank of India, and the Hongkong and Shanghai Banking Corporation followed suit. Although not legal tender, these notes increasingly became the customary means of payment because of the inconvenience of dealing with large amounts of silver. By 1890 they had become established by convention as practically the sole medium of exchange apart from subsidiary coinage. An ordinance of 1895 restricted the issue of banknotes to specifically authorized banks, (the Hongkong and Shanghai Banking Corporation and the Chartered Bank of India, Australia and China (now the Chartered Bank). By then the Oriental Bank had closed its doors and the Chartered Mercantile Bank of India had been recognized. In 1911 this reorganized bank (now the Mercantile Bank Limited) was added to the list of authorized note-issuing banks).
The rising price of silver from 1931 onwards forced China to abandon the silver standard in 1935. Hong Kong followed. The Currency Ordinance of that year, later renamed the Exchange Fund Ordinance, set up an exchange fund to which note-issuing banks were obliged to surrender all silver previously held by them against their note issues in exchange for certificates of indebtedness. The certificates, which are non-interest-bearing and are issued and redeemed at the discretion of the Financial Secretary, became the legal backing for the notes issued by the note-issuing banks, apart from their fiduciary issues. The silver surrendered by the banks was used to set up an exchange fund, which in practice keeps its assets in sterling and operates in a similar manner to traditional Colonial Currency Boards. The ordinance also made the banknotes legal tender.
At the same time the government undertook to issue one-dollar currency notes to replace the silver dollars in circulation. In 1960, because of the heavy expense of keeping clean notes in circulation, a dollar coin of cupro-nickel and about the same size as a British florin was re-introduced. Stocks are sufficient to replace all notes issued but, although banks have been asked to withdraw all notes received in the course of business, many still remain unredeemed although few appear to be in active circulation. The dollar notes and coins are backed by security funds which maintain their assets partly in sterling and partly in Hong Kong dollar bank accounts. The government also issues subsidiary coins of the value of 5 cents, 10 cents and 50 cents, and notes of the value of 1 cent.
The value of the Hong Kong dollar was established at approximately 1s 3d sterling in 1935 and it was maintained at that level till 1967 when sterling devalued by 14.3 per cent. The Hong Kong dollar was subsequently revalued in terms of sterling at 1s 4½d. Banks may deal with the public at a few points on either side of this rate, both to allow for a profit margin and, to a slight extent, to meet fluctuations in demand and supply.
The total currency in nominal circulation at December 31, 1967 was:
|Bank note issue||.....||$2,176,270,000|
|Government $1 note issue||.....||$14,408,487|
|Government $1 coin issue||.....||$58,760,890|
|Subsidiary coins and notes||.....||$58,217,747|
The Colony has been a part of the Sterling area since August 1941. Exchange Control is administered under powers conferred by the Defence (Finance) Regulations 1940. The system of control is based on that in force in the United Kingdom, with some modifications made necessary by the position of Hong Kong as an entrepôt.
During 1967, banking deposits did not show their customary increase, largely because of the internal disturbances in the Colony. The net decrease in total bank deposits amounted to $243 million; total deposits remained at $8,162 million at December 31, 1967. Loans and advances decreased by $36 million and at the end of the year represented 65.5 per cent of bank deposits, compared with 64 per cent at the end of 1966. Withdrawals of deposits in many cases were the result of a desire by some members of the public to hold their money in more liquid form. This resulted in an increase in the note issue at the time; the note issue at December 31, 1967, was $2,176,270,000, representing 26.7 per cent of total deposits.
Banking business in the Colony is licensed by the government and carried on subject to the provisions of the Banking Ordinance, which deals with the supervision of banks and requirements of minimum capital and reserves, liquidity ratios, and limitations on the holding of certain classes of assets. Monthly returns are made by all banks to the Commissioner of Banking, who makes regular inspections. The Banking Ordinance was amended during the year in the light of experience gained since it came into operation in 1964. The amendments mainly affect minimum capital, reserves and liquidity of banks, control over the opening of branches, and certain powers and functions, largely of a technical banking nature, of the Commissioner of Banking.
At the end of 1967 there were 71 incorporated banks in Hong Kong, compared with 72 at the end of 1966. A total of 331 banking offices existed at the end of 1967, representing an increase of 13 during the year. Fifty-one banks are authorized to deal in foreign exchange. Many have branches and correspondents throughout the world and Hong Kong offers a comprehensive banking service of the highest order. Monthly clearings during the year averaged $4,858 million. The table at Appendix XIV illustrates the expansion of banking activities over the past 12 years.