The Hong Kong government will have a budget surplus of around HK$36 billion at the end of the 2006-07 financial year, PricewaterhouseCoopers (PWC), a renowned accounting firm, predicted yesterday.

At the same time, the fiscal reserves level will hit HK$346.7 billion, equivalent to 17 months of government spending.

PWC, however, did not expect that the government would cut tax allowances drastically other than some minor changes in the tax bands and marginal tax rates.

Addressing a pre-budget media session yesterday, PWC tax partner Tim Lui estimated a handsome HK$36.5 billion surplus, which compared so favorably with the mere HK$5.5 billion as pencilled by the government.

"Thanks to the fine economic situation, the exceptionally good performances of several major revenue items such as the Exchange Fund investment and stamp duty income provide an additional windfall of over HK$20 billion," he said. "But with another bumper year in sight, Financial Secretary Henry Tang is under tremendous pressure to return wealth to the people when he announces the next budget on February 28."

Fellow tax partner Guy Ellis did not think Tang would cut the tax allowances. For if he did that, he would no less than pull the people out of the tax net and that would be inconsistent with the government's intention to broaden the tax base.

In their view, Tang might keep the basic personal allowance for salaries tax intact at HK$100,000 (it was HK$108,000 at 2002-03) and the standard tax rate at 16 percent. But he might increase the marginal tax band to every HK$32,500 as the middle of the road between the current every HK$30,000 and HK$35,000 as in 2002-03 and lower the two upper tiers of the four marginal tax rates to 13 percent and 19 percent to 12 percent and 17 percent respectively.

"The above tax concessions may cause the government something like HK$3 billion. And if the government wants to exempt taxpayers from a quarter's rate payment, it would incur another HK$4 billion," Lui said.

"But tax concessions in the form of rebates will benefit the citizens immediately because people do not have to wait for about nine months when they receive the tax bills. It is all up to Mr Tang to decide but we think the government can well afford a concession package between HK$5 billion and 8 billion," he said.

Liberal Party chairman James Tien agreed that the government is in a very good financial position and should return wealth to the people.

Noting that the salaries tax rate was last raised in 2002-03, he proposed tax rebate for the middle class, who had shared the difficult SARS period with the government by accepting higher taxes.