As we approach the unveiling of the 2025-26 Budget by Financial Secretary Paul Chan, Hong Kong's deficit is projected to reach nearly HK$100 billion for the 2024-25 financial year, a figure that is on par with the HK$100.2 billion recorded in 2023-24.
With reserves dwindling after three consecutive years of deficits, the urgent need to contain expenditure and explore new revenue streams has become increasingly pressing. It may take several years for the Government to achieve a surplus, making it essential to identify key areas for expenditure and investment within these financial constraints.
Addressing the Fiscal Deficit
Despite a decline in fiscal reserves, Hong Kong retains significant borrowing capacity, with a government debt-to-GDP ratio around 10%, lower than that of many advanced economies. This provides room to expand the issuance of government-backed bonds, which can raise funds and enhance the growth of a diverse financial services sector. However, proceeds from these bonds should be directed towards long-term investments rather than recurring expenses.
To tackle the fiscal deficit, the Government could consider increasing tax revenue without burdening local businesses. One viable option is to impose a tax on digital activities performed by non-resident digital service providers, who currently operate in Hong Kong without tax obligations. This approach would create a fairer tax environment for local digital suppliers and strengthen Hong Kong‘s economic resilience.
It‘s crucial for the Government to not only enhance revenue but also manage expenditure effectively to balance the fiscal deficit. A thorough examination of government spending is necessary, prioritizing efficiency and reviewing civil servant establishments. Additionally, the “$2 Scheme,“ which offers elderly people aged 60 or above a discounted transport fare of $2 per trip, warrants reassessment in light of the rapidly aging population.
Becoming More Business-friendly
Hong Kong has been renowned for its tax friendly environment, consistently ranking among the lowest globally. However, the upcoming implementation of Pillar Two of BEPS 2.0 in 2025 could impact our tax competitiveness. It is crucial to prioritize the maintenance and enhancement of Hong Kong’s position as a premier business-friendly destination.
With the number of regional headquarters set up in Hong Kong has yet to return to pre-pandemic levels, there is a pressing need to incentivize the headquarters economy, thereby attracting additional capital, cutting-edge technologies and top talents. One strategy is to involve empowering front-end agencies to disburse incentives for potential investors. These agents serve as a single window for investors to acquire information and access suitable investment incentives, enhancing visibility and certainty throughout the investment planning process.
In terms of public goods provision, a broader adoption of public-private partnerships, involving both financial and non-financial participation from the private sector, could significantly boost efficiency. The Government could proactively engage with businesses at an early stage to capitalize on the private sector’s expertise in project design and delivery for optimal project financing.
Preparing for an Ageing Society
Hong Kong’s population is expected to reach 8.19 million by mid-2046, with 36% aged 65 or older, according to the Census and Statistics Department. The proportion of elderly individuals will rise from 22.7% in 2023 to 36% in 2046, while the labour force participation rate is projected to decrease from 55.2% to 51.6%. This demographic shift will create an “inverted pyramid“ structure, intensifying the pressures of aging.
As a vital component of Hong Kong’s retirement protection framework, the Mandatory Provident Fund (MPF) System has been in operation for over two decades. It is imperative to reassess the system to better meet the basic retirement needs of the working population, ensuring individuals have adequate savings for a fulfilling post-work life.
Doris Fung, dfung@chamber.org.hk