Hong Kong’s current fiscal deficit problem is historically the worst, and prolonged economic weakness is why balancing the budget this time around is so difficult. Hong Kong’s real GDP in 2023 was still lower than that of 2018, while its real GDP per capita in 2023 (six years after 2017, the last peak) is still lower than that of 2017. In contrast, during the last episode of serious fiscal deficit after the great recession of 1998, in which Hong Kong’s GDP dropped 5.9 percent, per capita GDP in 2000 was already higher than the pre-recession figure in 1997. A strategy to heal Hong Kong’s fiscal deficit therefore must include not only a shot in the arm for the economy, but also solidarity in the community to bring back fiscal health.
An article of mine, co-authored with my colleague Gary Wong, in Asian Education and Development Studies, in 2020, found that a 1 percent increase in housing prices tends to bring about a 0.6228 percent rise in government revenue. With housing prices persistently weak, land-based revenues have plunged, leading to a huge deficit. The government is making a major effort to attract talent and technology-intensive companies to come to Hong Kong with notable success. But we will not be able to retain a low-tax regime with a weak housing market.
Prior to 1997, much of the strength of the housing market was driven by purchases from tenants living in public rental housing (PRH). This was in part because of a policy to reduce benefits for “well-off households” living in PRH implemented since 1987, and in part because tenants were covertly allowed to own properties without fear of being driven out of PRH. With extremely low rent, many PRH tenants have accumulated a lot of savings that will allow them to buy homes.
Instead of luring well-off households to buy Home Ownership Scheme (HOS) flats at deep discounts under the “green form” policy, we should tighten the rules. Presently PRH tenants with four household members and a monthly household income of HK$92,851 ($11,950) to HK$154,750 are required to pay two times rent instead of being asked to move out. These are very high-income families. It does not make sense to allow them to stay and pay two times rent or to give them a big discount to buy an HOS flat.
Changing the policy will invigorate the private market, save the government money, and also reduce the waiting time for PRH applicants.
Another policy that will raise government revenue without much pain is to use a “fine, legalize, and tax” approach to unauthorized structures. There is now a proposal to revise the Buildings Ordinance to stamp out illegal structures through severe fines and even imprisonment. But if an illegal structure does not cause harm to anyone and can be certified safe, it can be legalized and the concerned properties reassessed for property tax and rates. Certification for safety is good for 5 years, and the “conditionally legalized structures” will need to be certified safe again every 5 years. This way, the government can collect additional revenues. Professionals will have more business, and owners will have peace of mind using the conditionally legalized structures. I would strongly advise that this “legalize and tax” approach should also be applied to the many “small houses” where Unauthorized Building Works have now been tolerated under the Reporting Scheme for Unauthorized Building Works (UBWs) in New Territories Exempted Houses. By dealing with such UBWs with the “legalize and tax” approach, the government would avoid being seen as tolerating the UBWs, which could lead to suspicion of unfairness.
An important impetus for the Hong Kong economy must be promotion of the self-reliance spirit. Instead of offering deep discounts and using the ballot to decide who is the lucky buyer, it is far better to build basic HOS housing units that should be available for all residents
I would also propose that, if an owner has intruded onto government land and occupied it illegally, the Development Bureau should determine if the illegally occupied land has an alternative use. There are many cases where government land may be too patchy or otherwise impossible to develop anyway. If so, why not simply legalize the ownership and tax the owners properly?
Another easy way to raise revenues is to remove the standard tax rate that protects high income people from having to pay their fair share under a system with progressive marginal tax rates. In the last budget the financial secretary made a small step toward tapping the resources from the highest paid. Under the new measure, which has actually made things even more complicated, residents pay a standard rate of 15 percent on the first HK$5 million of net income, then 16 percent for any excess over that amount. There is no public policy justification for protecting this high-income group from “paying too much tax.” Our top marginal tax rate, at 17 percent, is already low enough, and far lower than that of Singapore, which is 24 percent. Singapore had a budget deficit of S$3.6 billion ($2.6 billion) in the fiscal year 2023.
Another way to raise our revenues is to reserve “pricey land” for the private market, instead of for building HOS or PRH housing. Pricey land, defined as land where the per square foot usable space when built up is expected to be higher than median, should be sold on the open market for private development. This will allow the government to get more land-based revenues, from profit tax, land premiums and rates. More importantly, this will give an incentive for those living in PRH or HOS housing to move out and buy better quality private flats in better locations.
An important impetus for the Hong Kong economy must be promotion of the self-reliance spirit. Instead of offering deep discounts and using the ballot to decide who is the lucky buyer, it is far better to build basic HOS housing units that should be available for all residents. I propose that the average price should be about eight times the median annual household income for economically active families. This works out to about HK$3.68 million. Each unit should be around 400 square feet and must be adequately served by public transportation. Buyers must live in these units and must not hold any other property. These units can be resold any time without repaying any land premium.
The author is an adjunct research professor at Pan Sutong Shanghai-HK Economic Policy Research Institute and Economics Department, Lingnan University.
The views do not necessarily reflect those of China Daily.
