Explainer | Budget 2025: is raising taxes the answer to Hong Kong’s ‘structural deficit’?

Hong Kong’s ballooning deficit has prompted authorities to pledge spending cuts and other measures in the coming budget to bring down expenditures and help balance the books. The city’s deficit has reached record levels in recent years, ranking highly among developed economies. The budgetary shortfall for the 2024-25 financial year is expected to reach nearly HK$100 billion (US$12.8 billion), more than twice of the HK$48 billion previously projected. As finance chief Paul Chan Mo-po prepares for his budget speech on February 26, the Post breaks down whether Hong Kong is facing a “structural deficit” and whether taxing top earners can help get the city out of the red. 1. What is a structural deficit? A structural deficit is defined as a persistent shortfall in a government’s budget, regardless of how well the economy is performing. It is caused by an underlying imbalance between a government’s revenue and expenditure. The result is often based on investments in areas such as social welfare, other public services and infrastructure development. Another relevant concept is a “cyclical deficit”, which occurs when the economy is not performing well and disappears once it recovers. 2. Why is the Hong Kong government making losses? Hong Kong has recorded budget deficits almost every fiscal year since 2019-20. Even with the end of the Covid-19 pandemic in early 2023, Hong Kong’s deficit for 2023-24 still exceeded HK$100 billion after taking HK$71 million of bond issuances into account. The deficit for 2024-25 was initially estimated at HK$48 billion but is expected to reach nearly HK$100 billion, largely owing to disappointing land sales revenue. Hong Kong’s financial reserves dropped from a high of HK$1.17 trillion in 2018-19 to HK$734 billion in 2023-24. Its reserve is projected to fall to HK$686 billion by the end of 2024-25, the lowest level since 2012-13. Authorities have attributed the repeated deficits to slower-than-expected economic growth and pandemic spending, in addition to reduced land premiums and stamp duties. Revenue from land premiums and stamp duties has dropped sharply in recent years, with only HK$19 billion and HK$49 billion being collected in 2023-24, respectively. In 2022-23, the government collected HK$69 billion from each revenue source, a huge dip from HK$143 billion and HK$99 billion gathered in 2021-22, respectively. Expenditure, meanwhile, has increased by more than 35 per cent when comparing 2018-19 and 2023-24. 3. So is Hong Kong facing a structural deficit? Some analysts have said Hong Kong is grappling with a structural deficit, a position that the government has never taken. Liu Yang, an associate professor of finance at the University of Hong Kong, said the deficit was 80 per cent structural, noting this gave the government significant control over its fluctuations. The academic attributed the volatility to long-term projects covering livelihood, healthcare, pensions and housing, while suggesting the deficit could be reduced by scaling back some of the initiatives. Another source of the volatility was the focus on income from land, which accounted for one-fifth of government revenue but contributed to 60 per cent of its financial risk given the income source was subject to the real estate market’s performance, he said. Gary Ng Cheuk-yan, a senior economist at Natixis, agreed that the nature of the deficit problem was structural given long-standing geopolitical tensions had affected investors’ confidence in the city. “Some might argue that the land revenue will come back when the interest rate goes down in the future, but this is just part of the story. We have to be aware that overall economic growth has slowed down,” he said. “At the same time, expenses continue to increase for infrastructure projects, the long-term economic benefits of which are still uncertain.” But finance chief Chan has dismissed the concerns of a structural deficit, attributing drops in profits tax and land revenue to cyclical factors such as property market adjustments and high interest rates. The minister has argued that revenue will recover after the economic downturn, with the government aiming to balance the books within two to three years – primarily by cutting expenses. 4. Should Hong Kong raise taxes on top earners? The government is reportedly considering raising taxes on top earners for the second consecutive year, as part of efforts to address the deficit, potentially increasing the 16 per cent rate for those earning more than HK$5 million and lowering the income threshold. Last year, the government started taxing incomes up to HK$5 million at 15 per cent and above that at 16 per cent, affecting 12,000 people, or 0.6 per cent of taxpayers, managing to raise HK$910 million annually. But the city’s tax rate for top earners remains significantly lower than places such as Singapore, which stands at 24 per cent, and the United Kingdom’s 45 per cent rate. Agnes Chan Sui-kuen, chairman of the Hong Kong General Chamber of Commerce, said it was not the right time to raise such a tax as the city was still recovering from the pandemic. She warned the move could hurt the city’s global talent search. The Business and Professionals Alliance, a political party, also criticised the proposal as damaging to Hong Kong’s simple tax system, something it described as key to attracting businesses and investments. Professor Terence Chong Tai-leung, executive director of the Chinese University of Hong Kong’s Lau Chor Tak Institute of Global Economics and Finance, suggested capping the top earners’ tax rate at 16.5 per cent, matching the profit tax level to prevent employees from paying more than their employers. Chong also suggested imposing a time limit on any increase to mitigate the long-term impact on the business environment, adding that cutting expenses would leave more room to manoeuvre. Economist Ng, meanwhile, said the salaries tax on the top earners could be raised progressively as long as it remained lower than Singapore’s, adding that “raising the property tax on luxury homes is another source of revenue”.

Explainer | Budget 2025: is raising taxes the answer to Hong Kong’s ‘structural deficit’?

The Post breaks down whether Hong Kong is facing a structural deficit and whether taxing top earners can help get the city back on track

1. What is a structural deficit?