Hong Kong's Tax Base Is Too Narrow, Warn Experts
by Mary Swire, Tax-News.com, Hong Kong
28 October 2003

Economists are warning that Hong Kong cannot rely on the prospect of economic growth in order to tackle its projected $HK100 billion budget deficit, and the government must begin to broaden the tax base, including the introduction of a goods and sales tax.

Last Wednesday, the City’s Financial Secretary Henry Tang said that economic growth was being revised upwards from 2% to 3% as the post-SARS recovery begins to solidify. However, the government has also pushed back its target of balancing the books by two years to 2008/2009 whilst announcing cutbacks in spending by 11% over the next five years to tackle the deficit, which reports say could hit $HK100 billion this year.

Speaking to the Tapei Times, Standard & Poor’s director of sovereign ratings, Ping Chew labeled these measures as “modest” adding that the plan is “still short of concrete strategies to restructure the government's revenue mix to address the deficit issue. We still think that the government's revenue mix is not correct in meeting its spending. That's why you see the deficit keeps on increasing."

Ping added that Hong Kong’s narrow tax base made it vulnerable to economic shocks and argued that whilst tax hikes will be unpopular, GST was an “equitable way to implement new taxes.”

This is a view shared by David O’Rear, chief economist at the Hong Kong Chamber of Commerce who points out that 3% of the city’s work force contribute 60% of total wage taxes, whilst only 1% of businesses account for 60% of company taxes.

"That is far too narrow and obviously needs to be addressed. If they don't, then the credit agencies will obviously start to reverse their opinions on Hong Kong resulting in possible downgrades which could lead to a threat to the Hong Kong dollars peg with the US [dollar]," warned Mr O’Rear.

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