HONG KONG – Maybe it’s time the Hong Kong government should consider undertaking a comprehensive tax reform package, because a sustainable tax regime can shore up public finances to address the city’s long-term fiscal needs.
Economists argue, the narrow tax base of Hong Kong’s low and simple tax regime exhibit a tendency for the government to be more conservative in drafting the budget because it has to rely on the direct tax receipt items like salaries and profits tax and land premium income, which is volatile, depending on the general state of the economic cycle in Hong Kong.
Because of this volatility, the government usually cannot make accurate prediction of its surpluses and deficits which hinders its capacity to rationalize long-term economic planning.
The recently announced Budget 2022-23 further backs this assertation.
On Feb 23, the administration revised the estimate that a budget surplus of HK$18.9 billion will be recorded for the financial year 2021-22, compared to the original forecast of a staggering deficit of HK$101.6 billion made in February last year. By end-March, fiscal reserves are expected to be HK$946.7 billion, equivalent to 16 months of government expenditure.
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Financial Secretary Paul Chan Mo-po attributed the huge discrepancy to the higher-than-expected government revenue contributed by higher land premium and profits tax, while lower-than-expected operating expenditure exerts less pressure on government expenditure.
The finance chief estimated the government will record a budget deficit of HK$56.3 billion for the 2022-23 financial year, equivalent to 1.9 percent of the city’s gross domestic product, due to the expenses for one-off relief measures and anti-pandemic measures.
But based on the long “track record” of making the wrong the estimates, who can guarantee that the government will not miss the forecast again?
In its mission concluding statement in January, the International Monetary Fund said the Hong Kong SAR should consider a comprehensive tax reform to broaden the tax base to address long-term fiscal needs, build buffers and secure greater equity, while maintaining fairness and international competitiveness. Possible options would be introducing a value-added tax, raising excise taxes, and levying taxes on capital gains and dividends.
We notice that the government has attempted to reform some aspects of the tax regime to make it more sustainable. It unveiled proposals in February to introduce a progressive rating system for domestic properties to reflect the "affordable users pay" principle. The proposal will make luxurious flat owners to pay more for rates while the majority of homeowners will remain unaffected. It is expected that about 42,000 domestic properties are to be affected, while government revenue would see an increase of about HK$760 million each year.
Those are the first step by the government to increase government revenues through broadening the tax base. The government definitively needs to do more in expanding the narrow tax base beyond revamping the rating system for domestic properties.
So far, the Hong Kong government has committed over HK$460 billion to launch counter-cyclical measures as well as funding under the Anti-epidemic Fund. As per government forecast, the city’s economy will grow by average three percent per annum in real terms from 2023 to 2026.
The administration may need to fork out more financial resources to boost the economy beleaguered by the lingering pandemic and growing geopolitical risks. On the other hand, long-term economic growth is predicted to grow at modest rates. Therefore, it is imperative for Hong Kong to build a sustainable tax regime to weather these economic uncertainties.
The government should also look from a long-term view how to address structural problems in housing, health care and aging, says French-based bank Natixis. Hong Kong’s enviable fiscal surplus may be a story of the past, but the good thing is that Hong Kong has still room to broaden its tax base.
Oswald Chan is a veteran business journalist and joined China Daily as a senior business news reporter in 2010. He covers various issues pertinent to the development of Hong Kong economy. He can be reached at oswald@chinadailyhk.com .
