S & P Threatens Hong Kong With Credit Rating Downgrade

by Mary Swire, Tax-News.com, Hong Kong

17 April 2002

After downgrading Japan's rating to AA minus from AA with a negative outlook, S & P said that Hong Kong also faces a downgrade of its credit rating unless the Government can find ways to increase taxation income to plug the budget deficit. The international credit rating agency said the Government had to do more to address the deficit problem in the next few years.

However, S&P associate director Chew Ping said the agency had no immediate plan to cut the SAR's current rating, of AA minus with a stable outlook, as the government has strong reserves to support the budget deficit. For the year to March 31, the budget deficit was HK$65.6 billion, and it is expected to be HK$45.66 billion this year. A balanced budget is expected only in 2006-2007.

"The SAR Government has already taken some steps to address the [deficit] problem, but it needs to do more to make sure it has enough revenue to plug the gap," Mr Chew said.

The government responded to S & P's strictures by saying that Financial Secretary Antony Leung Kam-chung is aiming to reduce public expenditure's share of gross domestic product by 3%; but Mr Chew said no details had been published on how this would be achieved.

Increases in taxation have been ruled out in the short term as damaging for the economy as it seeks to recover after the downturn, but Mr Chew said this was still the right time to study a possible goods and services tax. "A goods and services tax has been introduced in many countries and it has proven to be able to widen the tax base," Mr Chew said, adding that this appeared to be what was needed in Hong Kong, where only one in three of the working population was paying salary tax.

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