Warning of another big deficit shows need for broader tax base in Hong Kong

The headline number came as a bit of a shock. Financial Secretary Paul Chan Mo-po has warned the full-year deficit could double the previous estimate to more than HK$100 billion. While it is not the highest, it is still a big financial hole. The largest shortfall of HK$232.5 billion was recorded in 2020, at the height of the pandemic, followed by HK$139.8 billion from the last financial year.

That may be cold comfort for some. To tackle the problem, Hong Kong needs to grow revenue and/or cut spending. From Chan’s latest comments, there is much work in progress. Hopefully, he will have a solid game plan when it is time for the next government budget. A high deficit is to be expected, as sluggish land sales and a reduction in both stock and property stamp duties will have a negative impact.

Chan said the government was working hard to attract more outside businesses to set up shop in the city. Increased economic activities will not only enhance Hong Kong’s competitiveness, but also income from profits tax for the government. That may work further down the road. For now, though, the economic environment in mainland China and the global economy are not promising. Geopolitical tensions and an ageing population will also be a persistent drag on the local economy. The government needs a comprehensive review going forward. Reduced public spending may become necessary.

The civil service headcount has remained frozen and all government departments have been instructed to cut 1 per cent of spending. As the city’s largest employer, that may be as far as the government can go for now. Reducing headcounts would be too demoralising. Furthermore, Chan has insisted it is important to keep building transport infrastructure to benefit residents and the economy. That means huge projects such as the Lantau Tomorrow Vision and the New Territories’ Northern Metropolis will not be scaled back or delayed, at least for now.

Chan has also declared there is no intention to broaden the tax base. That presumably means no sales or consumption tax. He has probably learned from the experience of former financial secretary Henry Tang Ying-yen, for whom a proposal for a goods and services tax quickly turned into political poison. But circumstances have changed and the social atmosphere is different from two decades ago. While such a simple tax is considered regressive, other places have been able to offset the negative impact with exemptions, rebates and refunds to low-income groups.

Keeping fingers crossed and hoping for the best is not a plan. While growing the economy is a must, a careful long-term review to broaden the tax base should also be part of the government’s budget planning.