HK budget deficit to hit HK$38.3 billion, PwC forecasts

January 15, 2020 16:06
PwC Hong Kong tax partners Jeremy Choi and Agnes Wong conduct a press briefing following the release of the audit firm's report on the Hong Kong budget on Wednesday. Photo: PwC.

The Hong Kong government is expected to record a budget deficit of HK$38.3 billion for the fiscal year 2019-2020, its first deficit in 15 years, PricewaterhouseCoopers (PwC) said on Wednesday.

The audit firm projected lower than expected revenues from the government’s land sales, profit tax and stamp duty in the fiscal year.

In view of a series of relief measures costing over HK$25 billion since last August, PwC expects the government’s expenditures to hit HK$617.3 billion, while fiscal revenue is projected to reach HK$572.7 billion, less than the government’s original projection by 8 percent. 

The estimated deficit also takes into account the proceeds of HK$7.8 billion from the issuance of green bonds and HK$1.5 billion for the repayment of bonds and notes.

Total revenue from profit tax and salaries tax will stand at HK$212.7 billion, 8 percent lower than the government’s original projection, while stamp duty is expected to generate HK$61.5 billion, nearly 20 percent lower than the original forecast.

Land sales are expected to contribute HK$127.1 billion, more than 10 percent lower than the original estimate.

According to PwC estimates, income from the Capital Works Reserve Fund (CWRF), which includes premium income received from the government’s land transactions, will reach HK$127.1 billion, 11 percent less than the original estimate.

But the audit firm noted that the government tends to understate its revenue and overstate expenditures, based on the historical trend.

Despite the projected deficit for the first time since fiscal year 2003-2004, Hong Kong’s fiscal health remains very strong, with an estimated fiscal reserve of HK$1,132.5 billion by the end of March 2020, equivalent to 22 months of government expenditure, PwC said.

It expects slow but positive growth in the next four fiscal years until 2024.

In response to current economic difficulties, the government could relieve the financial burden on individuals through increasing multiple types of allowances with regard to the salaries tax, PwC recommends.

It also suggests that the government introduce group loss relief and allow tax loss to be carried backward for three years, with the aim of helping local businesses improve their cash flow.

The government should do more than offering short-term support and relief measures, according to the audit firm.

“Hong Kong needs to strengthen its competitiveness to retain and attract businesses, investments and talent, with a view to revitalizing the economy and achieving greater success in the future,” PwC Hong Kong tax partner Jeremy Choi said in a press release.

To foster a diversified economy, the audit firm proposes a comprehensive review of the city's tax system, in view of the changing international tax landscape and emerging business models.

Proposed measures include introducing tax incentives favorable for businesses’ innovation and technology-related expenditures, such as extending the research and development tax deduction to cover subcontracted R&D activities in the Greater Bay Area, and providing refundable credits for R&D expenditure and innovation and technology investments for startups.

The government can provide tax and non-tax incentives to attract overseas talent to work and stay in Hong Kong, in order to attract high-tech enterprises, venture capital funds and overseas technological talent to come to Hong Kong, PwC said.

It also encourages the government to offer competitive tax or fiscal incentives for regional headquarters, trading hubs, family offices and the asset management industry, as well as extend the profits tax exemption for privately-held funds to institutional asset owners.

Moreover, to leverage the economic potential of the Greater Bay Area, PwC proposes a reduction in mainland China corporate tax rate from 25 percent to 16.5 percent for branches set up in the Greater Bay Area by Hong Kong companies, with the goal of encouraging cross-border investments.

Financial Secretary Paul Chan Mo-po has hinted there will be no cash handouts in his upcoming budget, despite strong calls for such a measure from various sectors, saying it could lead to a deficit of up to HK$100 billion.

Choi agreed that a universal cash handout initiative, say, HK$10,000 for each citizen, can possibly result in a HK$100 billion budget deficit for the government.

He suggests that handing out consumption coupons to specific groups of citizens is a better choice to encourage consumption and stimulate the local economy.

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