Hong Kong could be as heavily indebted as Greece - facing a structural deficit of HK$1.54 trillion by 2041 - if the city's spending grows at the current pace and nothing is done to mitigate the impact of an ageing population, the government's fiscal advisers warned yesterday.
The deficit, accounting for almost 22 per cent of the nominal gross domestic product (not adjusted for inflation), would be even higher than the 10 per cent disclosed by Greek officials when they came clean about the true state of their country's public finances in 2010.
By that time, the advisers said, Hong Kong would have had to borrow HK$10.96 trillion to cover the sustained deficits experienced from 2021 onwards - about 15 times the existing reserves of some HK$750 billion.
The projections, released by the government-appointed working group on long-term fiscal planning, do not take into account the impact of the chief executive's target announced last year to build 200,000 public rental flats in the next decade and 5,000 subsidised flats a year.
The aggressive public housing programme would speed up the emergence of a structural deficit and depletion of fiscal reserves by three years, the group warned.
After the release of the report, Financial Secretary John Tsang Chun-wah said the city's finances were still sound but caution was needed.
"I do not think that the working group is pessimistic on the future of Hong Kong," he said.
"Our public finances are still in good shape in the short to medium term, but it does not mean our economy and fiscal position will remain healthy forever."
Tsang appointed economic analysts, academics and officials from his treasury unit in March last year to study the impact of the ageing population on public finances, which are subject to land revenue fluctuations and rely increasingly on direct taxes on salary and profits.
In 13 of 16 projected scenarios, based on various GDP growth rates and spending rates in education, health care and welfare that account for some 60 per cent of the government's recurrent expenditure, structural deficits will emerge in 10 years.
But having rung the alarm, the working group avoided controversial ideas including higher rates and introduction of a goods and services tax. Instead, they suggested the government adopt a "multi-pronged" approach.
This included containing public expenses at 20 per cent of GDP and screening policies costing more than HK$100 million a year to see if they could be sustained without threatening the government's solvency.
The report also suggested raising fees for public services, banning the use of one-off land revenues to finance recurrent expenses and setting up a future fund - combining the existing land fund of some HK$220 billion with one-third of future budget surpluses - to save and invest for future emergencies.
"We didn't rule out new taxes. The public will be more receptive to new taxes only when we better control our spending," said working group chairwoman Elizabeth Tse Man-yee.
Terence Chong Tai-leung, professor of economics at the Chinese University, said the government needed indirect taxes, like a gambling tax, to widen the scope of revenue.