In his New Year message for 2024, Chief Executive John Lee Ka-chiu declared that, “Invigorating the economy and improving the livelihood of the people” were his top priorities, and quite rightly so. These goals have become more pressing than ever, as Hong Kong people’s Shenzhen shopping-spree fever hobbles domestic consumption, and the slow return of civil aviation services to full capacity puts a lid on air passenger arrivals.
At this critical juncture, all eyes are on the financial secretary’s budget for the financial year 2024-25. Will he be able to manage our public finances in a way that ensures greater financial stability, provides sufficient resources to grow the economy and also helps those in the lowest income strata?
This is no easy task for any financial leader. Expectations are high for Financial Secretary Paul Chan Mo-po to address the most urgent tasks — cure Hong Kong’s fiscal imbalance, stimulate the economy and relieve the poor.
Since Hong Kong registered a record fiscal surplus of HK$138 billion ($17.6 billion) in the financial year 2017-18 and fiscal reserves of HK$1.17 trillion at the end of March 2019, Hong Kong has suffered a sharp reversal of fortune. Its fiscal reserves had dwindled to HK$661 billion (excluding green bond issuance) at the end of November 2023, a 40 percent decline. The fiscal deficit for the first eight months of the financial year 2023-24 has ballooned to HK$164 billion. Not only is the size of the fiscal deficit staggering, the fact that the Hong Kong Special Administrative Region government has been running fiscal deficits for four consecutive years, with no end in sight, has aroused concern among people in Hong Kong and netizens on the Chinese mainland.
The government’s current financial straits have been brought about by a combination of factors, including the 35 percent growth in its recurrent expenditure from 2018-19 to 2022-23, especially in the areas of social welfare, health and education. The fiscal imbalance was aggravated by the political turmoil in 2019 and the subsequent yearlong restrictions induced by COVID-19.
As professors at the University of Hong Kong pointed out in the Hong Kong Economy Green Paper 2024 published recently by the HKU Business School, an aging population, coupled with a rapid increase in healthcare spending, have caused healthcare spending to outstrip the growth rate of the economy at double the speed, and it is projected to constitute 7-9 percent of GDP by 2040.
Unless decisive action is taken to tame the fiscal deficits and return public finances to a healthy balance, runaway public expenditure could give rise to escalating debt, and undermine the ability of the government to provide the necessary resources for growth, economic restructuring and helping those most in need.
Many of the suggestions for balancing the budget put forward thus far are unpalatable. A land departure tax would provoke an outcry from Hong Kong residents and mainland visitors alike. A capital gains tax will kill Hong Kong as a financial center famed for its simple, low taxation. It could end up driving more capital away from Hong Kong.
In sum, the financial secretary must revive public confidence in the government’s ability to restore fiscal discipline, provide new stimulus to the economy and make sensible expenditure-reduction and revenue proposals that will help balance the budget without inflicting undue pain on the people
As for an increase in government fees and charges, public reaction will depend on whether the government would impose a simple, across-the-board increase on a cost-recovery basis, or would choose to hike only those long overdue charges which would not unduly impact the poor, or heighten the burdens on businesses, especially those at the lower end.
Other than raising or introducing new taxes, the government should consider increasing its investment income by asking the Hong Kong Monetary Authority to revise its investment strategy.
For a long time, because of Hong Kong’s linked exchange rate, the HKMA has invested mainly in US dollar-denominated assets. After the global financial crisis of 2008, the HKMA started to set aside a small proportion of the funds under its charge to set up a more aggressive “long-term growth portfolio”, earning higher returns and diversifying away from US dollar-denominated assets.
In view of the highly depressed values of stocks listed on the Hong Kong Stock Exchange, the government should ask the HKMA to invest in high-quality stocks listed on the stock exchange, meaning those that are failsafe, have low price-to-earnings ratios and pay handsome dividends. Maximizing the government’s investment income is a better alternative to raising taxes that drive away business or cause more hardship to the poor.
The government should also stimulate the economy in more imaginative ways. Reducing the duty on liquor with an alcoholic content of 30 percent or more could stimulate the growth of Hong Kong as a center for sales and auctions of high value liquor, and enhance Hong Kong’s status as a center for fine food, wines and spirits.
With the 50,000-seat stadium at the Kai Tak Sports Park coming on stream this year, the government should take more proactive measures to work with the private sector to bring top entertainers to Hong Kong. The phenomenal success of The Eras Tour of superstar Taylor Swift has fully demonstrated how world-class entertainment, sports and cultural events can give the local economy a gigantic boost.
In sum, the financial secretary must revive public confidence in the government’s ability to restore fiscal discipline, provide new stimulus to the economy and make sensible expenditure-reduction and revenue proposals that will help balance the budget without inflicting undue pain on the people.
The author is convener of the Executive Council and a legislator.
The views do not necessarily reflect those of China Daily.
