Although the Hong Kong Special Administrative Region is expected to register another budget deficit in the 2024 fiscal year, the SAR can weather the issue through proactive fiscal policy adjustment, prudent risk management, and consider leveraging the government bond issuance capacity to maintain fiscal sustainability.

HKU Business School on Thursday released the “Hong Kong Economic Policy Green Paper 2025” which examines various facets of Hong Kong’s economic domains, from fiscal deficits and stock market dynamics to housing affordability.

Based on the findings of the green paper, HKU Business School asserts that Hong Kong’s structural deficit is at a moderately high level, which cannot be passively alleviated by economic growth alone but requires proactive fiscal policy adjustments.

READ MORE: Chan: Budget deficit to fall below HK$100b in 2024-25

The issue of Hong Kong’s structural budget deficit can be illustrated by the observation that structural surplus fluctuations account for 80 percent of the city’s total fiscal surplus, and land income contributes 20 percent of fiscal income, with its volatility driving 60 percent of revenue fluctuations that pose a high risk to public finance, the paper said.

“Hong Kong’s structural budget deficits are closely related to the government’s policy choices in livelihood, healthcare, pensions and housing. That means the SAR has considerable control over fluctuations in its deficits,” argued Liu Yang, associate finance professor at HKU Business School.

In his Sunday blog, Financial Secretary Paul Chan Mo-po revised the predicted budget deficit for this fiscal year to below HK$100 billion ($12.8 billion), more than double the HK$48.1 billion deficit forecast in his budget speech last February.

As at end-November 2024, the SAR was operating on a deficit of HK$143.2 billion for the first eight months of the current fiscal year. The SAR has been in the red during the 2019 to 2023 fiscal years, with the exception of 2021.

Liu said that Hong Kong’s decline in fiscal reserves reflects the administration’s efficient utilization, and the level of reserves remain among the highest globally with limited downside risks. As at end-November last year, SAR’s fiscal reserves stood at HK$591.4 billion.

As one of the proactive fiscal policies, Liu said the SAR should leverage its government bond issuance capacity to raise funds for infrastructure investment to maintain long-term fiscal sustainability, while at the same time conducting risk assessments and management to control debt risks.

“The debt servicing costs for Hong Kong bonds are even lower than that of US Treasury bonds, suggesting Hong Kong SAR’s exceptional creditworthiness, the supply-demand imbalance in the bond market, and other structural factors,” Liu said.  

Hong Kong's budget deficit is expected to more than double to HK$98 billion in the 2024-25 fiscal year, Ernst & Young Tax Services Ltd said on Thursday. The global accounting firm predicted that the city’s fiscal reserves will decline to HK$637 billion by March 2025.

EY recommends expanding tax concessions for real estate investment trusts and commodity traders to stimulate economic growth. The firm suggests additional measures including stamp duty exemptions for existing REITs acquiring new properties, refunds for newly formed REITs, and profits tax incentives.

A robust REIT market could attract both domestic and international capital, creating a multiplier effect across professional services sectors including property management, valuation, and agency services, according to EY.

READ MORE: Tackling city’s budget deficit needs multipronged strategy

EY tax services partner Ricky Tam proposed tax concessions for qualified commodity transactions, such as gold trading, and related services, including insurance and shipping.

Paul Ho, EY financial services tax leader for Hong Kong, recommended the government to “review whether the current tax legislation effectively captures the income derived by nonresidents who provide certain digital services and content in Hong Kong”.

Digital platforms that are not operating in Hong Kong might not be subject to profits tax in Hong Kong despite generating revenue from Hong Kong customers, EY said.