Hong Kong's Budget: Addressing Deficit and Slower Growth

Hong Kong's fiscal deficit and slower economic growth have prompted the government to take decisive action in the upcoming 2025-26 Budget. Financial Secretary Paul Chan Mo-po faces the challenge of reversing and plugging the growing deficit while ensuring long-term growth. The city's financial reserves are projected to drop to HK$639.8 billion, the lowest in Hong Kong's history, and a consolidated budget deficit of HK$94.8 billion is expected for 2025.

PwC Hong Kong has proposed several recommendations to guide the government's budget planning. The firm suggests a comprehensive review of public expenditure to contain costs while balancing the impact on the public. Additionally, PwC recommends leveraging Hong Kong's location in the Greater Bay Area (GBA) to maintain its role as a key connector between mainland China and the world. Fostering innovation and retaining talent are also crucial to support future growth.

To address the fiscal deficit, the government should consider increasing revenue through taxation. Implementing a two-tiered standard rates regime for salaries tax and tax under personal assessment, as proposed in the 2024 Budget, can provide additional revenue without significantly impacting people's livelihood. Raising excise taxes, introducing a VAT, and taxes on capital gains and dividends, as suggested by the IMF executive board, can also help raise government revenue.

Stabilizing the property market is another critical aspect of Hong Kong's economic recovery. Removing demand-side management measures for residential properties, such as Buyer's Stamp Duty (BSD), New Residential Stamp Duty (NRSD), and Special Stamp Duty (SSD), can help stabilize the property market and encourage investment. Providing additional support for first-time homebuyers and increasing housing supply can also boost the property market and stimulate economic growth.

Promoting innovation and technology is essential for Hong Kong's long-term prosperity. Fostering innovation and retaining talent by leveraging Hong Kong's location in the GBA and attracting international talent can help stimulate economic growth. Offering tax incentives for commodity trading businesses to reinforce Hong Kong's status as an international shipping hub and relaxing intellectual property-related tax rules to support innovation, especially in the GBA, can also contribute to Hong Kong's economic recovery.

Boosting tourism is another key strategy for Hong Kong's economic growth. Attracting more tourists to Hong Kong by leveraging its multiple-entry visa policy and extending it to more cities in the Greater Bay Area can help revive the retail and hospitality sectors. Introducing perks for travel agencies and new marketing campaigns can also boost tourism and make Hong Kong more appealing to visitors.

Optimizing public expenditure is crucial for Hong Kong's fiscal health. Conducting a comprehensive review of public expenditure to contain costs while balancing the impact on the public and scrutinizing public spending can help the government address the fiscal deficit. Increasing funding for areas that can stimulate innovation and employment, such as technology, green industries, and tourism, can also contribute to Hong Kong's economic recovery.

By implementing these strategies, Hong Kong can balance its budget while maintaining economic growth, addressing the current fiscal deficit and slower economic growth projections. The government must explore avenues that offer a mix of fiscal prudence and targeted investment to reduce dependency on reserves and strengthen Hong Kong's fiscal health in the years ahead.