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Hong Kong's Fiscal Policies Unsustainable, Working Group Says

by Mary Swire,, Hong Kong

05 March 2014

The Working Group on Long-Term Fiscal Planning, which was set up in June 2013 to look at the state of Hong Kong's public finances, has suggested that a future structural fiscal gap will require the Government to find additional tax revenue.

According to the Working Group's analysis, Hong Kong's overall fiscal position in the short- to medium-term remains healthy. In the longer term, however, the Government must seek to align the growth rates of its revenue and expenditure, it says.

It projects the economy will have a nominal annual growth rate of 4.4 percent until 2041, with government revenue growing at around the same annual rate (4.5 percent), reaching 19.8 percent of gross domestic product (GDP) in 2041-42. If education, social welfare and health services remain unchanged, the Working Group projects 5.3 percent annual growth in public expenditure, and therefore a structural fiscal deficit from 2029-30.

However, if funding for the three services were to increase by 3 percent annually, in line with historic trends, government expenditure would grow by an average 7.5 percent per year, and a structural fiscal deficit would surface in seven years.

The Group recommends keeping public spending at the same level as revenue, at around 20 percent of GDP, by prioritizing "with a greater regard to long-term affordability and readiness to accept offsetting savings" in policy areas.

The Working Group "holds strongly that the projections from this report should be treated as a wake-up call for the Government and the community to appreciate the scale of the structural deficit problem that could beset the Hong Kong community, given the ageing population and other known and potential financial commitments."

With regard to taxation, the Group recommends that the Government should "preserve, stabilize, and broaden the revenue base, by stepping up tax enforcement and reinforcing principles such as cost recovery, user pays, and polluter pays." Lastly, it should consider introducing new revenue items when new policies or services are implemented – for example, waste collection fees or "green" tax, the working group says.

Specifically, it says the Government should avoid an over-reliance on direct taxation, and not rule out new revenue sources. The Group notes that, "in the absence of a goods and services tax (GST), and with over 40 percent of non-tax revenue coming from land premium, the revenue streams for Hong Kong are more vulnerable to economic downturns as compared with other countries. The Government should accord more priority to indirect taxation. Indirect tax items, which have not been adjusted for years, should be reviewed."

Nevertheless, it is also admitted that "steps to broaden the tax base are bound to be controversial, as evidenced by the lack of public support for a proposed goods and services tax (GST) in the context of the Government's public consultation on tax reform conducted in 2006."

Financial Secretary John Tsang said the report "presents a clear warning which calls for serious attention." He said he will invite the group to give a more comprehensive analysis and projections on its recommendations for the Government and the community to discuss.

However, during his recent budget speech, Tsang concluded that, having regard to the competitiveness of Hong Kong and the impact on the community, there is little room for major tax hikes, and that "it would be controversial to propose any new taxes, which need thorough consideration and public discussion."

TAGS: environment | compliance | tax | tax compliance | property tax | goods and services tax (GST) | environmental tax | fees | Hong Kong | revenue statistics | tax reform | services

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