Hong Kong's fiscal deficit could balloon to HK$80 billion this year, boosted by the Government's inability to control costs and falling income from profits and salaries tax, according to Deloitte Touche Tohmatsu. The Government has estimated a deficit of HK$60 billion due to low returns from the foreign exchange fund, the postponement of the second batch of Mass Transit Railway Corp shares and delayed land sales. In the nine months to December, the SAR's deficit reached HK$60.8 billion. However, a large share of government income is received in the latter part of the fiscal year. 'Revenue from profits tax will also drop HK$14 billion . . . that's why we expect a high level of deficit this year,' said Deloitte tax partner Joseph Wong Wai-leung. 'Because of the adverse economic conditions, we expect revenue from salaries tax to decrease HK$13 billion as people apply for salaries-tax exemptions.' Mr Wong predicted Financial Secretary Antony Leung Kam-chung would announce cuts in stamp duty on shares and property in his maiden budget on March 6. Stamp duty on shares would be reduced from 0.2 per cent to 0.175 per cent, Mr Wong said. He predicted the upper range of stamp duty on properties valued between HK$1 million and HK$6 million would be cut from 3 per cent to 2.5 per cent, while properties worth more than HK$6 million would have stamp duty cut from 3.75 per cent to 3 per cent. The fiscal reserve would be cut to HK$350 billion this financial year, he said. A HK$30 billion deficit next year would shrink the reserve to HK$320 billion. Yvonne Law Shing Mo-han, Deloitte senior tax partner, said Hong Kong needed to even out the balance between direct and indirect taxes, which were now split 60/40. 'The Government should review the scope and application of existing indirect taxes before introducing new taxes . . . there are almost 100 different indirect taxes which can be reviewed in Hong Kong,' Ms Law said. The Government had to cut expenditure from the current historic high of almost 24 per cent of gross domestic product to below 20 per cent, she said. Small government was the foundation of Hong Kong's low and simple tax system. The Government should consider new sources of non-tax revenue, such as privatisation and issuing bonds. 'Although there will be an increasing interest expenditure, issuing bonds can sustain infrastructure projects during recession, maintain sufficient reserves to sustain the [currency] peg and provide investment opportunities to the public,' Ms Law said. 'We believe that a smaller government and a broadened tax base, combined with reviewing existing indirect taxes and new sources of non-tax revenues, would enable Hong Kong to successfully lower its fiscal deficit.' Ms Law also advocated short-term stimulus measures, such as extending the property rebate for another quarter. The Government could provide a 10 per cent rebate of this year's salaries tax, profits tax and property tax in the form of a coupon which taxpayers could redeem from retailers in a move to boost domestic consumption. Deloitte tax principal Calvin Lam Wai-ming said the Government should provide tax incentives for regional headquarters and financial institutions such as tax exemptions or reduced rates for service income from overseas subsidiaries and initial share floats.