According to Financial Secretary Paul Chan Mo-po, the Hong Kong Special Administrative Region is expected to experience a public deficit of around HK$100 billion ($12.84 billion) during the current financial year, which runs through March 31. That is, relying on the fiscal reserves, the government is due to spend about HK$100 billion more than all the public revenue raised this year.
This sizeable amount, around 5 percent of Hong Kong’s GDP, has become a matter of serious concern and aptly intensified discussion. However, it is worth remembering that we experienced this sort of monetary misery over an extended period, beginning in 1998, and fully recovered fiscally.
The Asian financial crisis (AFC) was triggered by the collapse of the Thai baht in mid-1997, coinciding with China’s resumption of the exercise of sovereignty over Hong Kong on July 1, 1997. As a result of the AFC, the new HKSAR witnessed a severe, extended fall in property prices, plunging public revenues, substantial negative equity stress, and a fierce attack on the Hong Kong dollar peg to the US dollar.
The HKSAR government (with substantial backing from Beijing) delivered a punishing lesson to Western currency speculators, inter alia, by lifting the floundering Hong Kong stock market using fiscal reserves. The peg was safe. Meanwhile, the International Monetary Fund sent experts to encourage expanding the narrow revenue base by introducing a new goods and services tax (GST).
Debate about a GST ensued. Many disparate groups voiced opposition, and the government curtailed the official discussion. Most importantly, as this GST discussion peaked, the years of deficit budgets ended. By 2004, Hong Kong’s public finances were back in surplus. As Fitch Ratings recently noted, they remained in surplus for the next 15 years, until 2019.
How could it remedy what everyone agreed was a grave fiscal crisis for Hong Kong while doing comparatively little? The answer lies in Hong Kong’s substantial long-term reliance on land-related revenues.
Hong Kong under British rule developed the use of land as a long-term, fundamental revenue source. Land has continued to play this role ever since, to an extent not seen in any other First World jurisdiction. In the developed world, primary urban land has been sold off into private hands. In Hong Kong, however, the government leases land while retaining an indefinite, profit-sharing, core proprietorial interest in it.
Henry George, a 19th-century American taxation theorist, is widely regarded as the “patron saint of land taxation”. Inspired by his work, one of his followers, Lizzie Maggie, created the precursor to the game of Monopoly. Had George thoroughly understood the Hong Kong system, he may have adopted key aspects of what he saw into his exceptional taxation framework.
After the AFC and the 2003 SARS outbreak, property prices in Hong Kong began to rise off the floor. Land-related government revenues rose and then surged. By 2008, the US had triggered the global financial crisis. Interest rates were drastically cut in response, further amplifying the rise in Hong Kong property prices. Hence, Fitch noted those 15 years of surpluses.
Many economic headwinds facing the HKSAR today are similar to those encountered around 25 years ago but they also differ. The current fall in real property values is markedly less than that experienced after 1998. Still, today, Hong Kong is caught in the crosshairs of the colossal US-led project to contain China’s rise, in which Washington’s reckless use of sanctions, tariffs and hostile legislative initiatives all feature heavily.
Moreover, as the recent Fitch report highlights, the demographic challenge presented by Hong Kong’s aging population is growing more acute.
One primary and still controversial option is to reconsider introducing a low-rate GST in Hong Kong. Such taxes are now widespread: Singapore has one, for example, as does the Chinese mainland. They generate public income in good times and bad, even when property prices are falling. Once computerized, they are relatively easy to apply and administer and far less complex than, say, a capital gains tax (CGT). Also, as Hong Kong has shown, a stamp duty can apply as a simple but effective de facto CGT when required, which can then be turned off if needed
Across most of the developed world, however, the COVID-19 pandemic and other pressures (including aging populations) have led to far greater fiscal and debt stress than we see in Hong Kong. Thus, state governments in Australia are urgently resorting to novel uses and massive compounding of land taxation to try to cope with severe financial distress. This is just one of many worldwide, desperate budgetary examples.
Hong Kong’s fiscal reserves — managed by the Hong Kong Monetary Authority (HKMA) — have been significantly reduced in recent years. But they still stood at just under HK$600 billion in November 2024 — rising from HK$550 billion in August. Thus, Hong Kong has been able to weather the challenges of the 2019 insurrection, the COVID-19 pandemic, and the ongoing, massive China containment project while retaining fiscal reserves sufficient to cover 100 percent of annual recurring government spending and about 75 percent of total annual government expenditures. And Hong Kong has not had to raise taxes. Governments across the global West cannot imagine this reserve-backed, public fiscal solvency level.
Meanwhile, according to the HKMA, Hong Kong’s Exchange Fund, which backs the Hong Kong dollar, rose by HK$152 billion in September 2024 to over HK$4.13 trillion.
The paramount factor explaining why Hong Kong has managed its public finances so assiduously, even when faced with grave challenges, is its early adoption of a hefty reliance on land-related revenue raising. Within 40 years of the establishment of British rule in Hong Kong, the new colonial government had already saved sufficient fiscal reserves to cover total government expenditures for one year. That level of exceptional public solvency has been maintained.
Moreover, as the ultimate titleholder of all land, the government has maintained a pecuniary interest in the SAR’s most vital asset. There is a resonance here with how the government of Saudi Arabia, for example, retains ultimate ownership of all untapped oil in that kingdom. Even if the price of oil dips, that primary asset retains its fundamental value — and the potential to increase when demand rises. Although land-related public revenues have shrunk in Hong Kong in recent years, unsold land remains a fundamental government asset, which is likely, over time, to increase in value — even more so than oil. It is one reason why Fitch Ratings expects Hong Kong’s current reliance on deficit spending to shrink before a return to surplus budgets by the 2027 financial year.
However, this does not mean that there is nothing to worry about.
Apart from the aging population, a critical fundamental housing shortfall, and education, health and employment demands, economically hostile initiatives from Washington that affect Hong Kong look set to increase in the coming years.
The good news is that Hong Kong retains its remarkable, grounded capacity to derive substantial revenues from land transactions and sales. The bad news is that Hong Kong’s essential tax base remains as narrow as it was decades ago. Recently, informed suggestions have been made about remedying this (see Ho Lok-sang, China Daily, Dec 22, 2024; Christopher Tang, China Daily, Jan 6, 2025; and Tu Haiming, China Daily, Jan 7, 2025).
One primary and still controversial option is to reconsider introducing a low-rate GST in Hong Kong. Such taxes are now widespread: Singapore has one, for example, as does the Chinese mainland. They generate public income in good times and bad, even when property prices are falling. Once computerized, they are relatively easy to apply and administer and far less complex than, say, a capital gains tax (CGT). Also, as Hong Kong has shown, a stamp duty can apply as a simple but effective de facto CGT when required, which can then be turned off if needed.
The last time a low-rate GST in Hong Kong was considered, around 20 years ago, a sound case was made. But there was one crucial flaw — the projected revenues were not earmarked for specified usage. The GST was generally going to raise more money. The next time any such case is made, all net revenues should be allocated in advance to fund specific, vital future expenditures. And here is an item to place at the top of that list: enhanced age care for the least well-off in Hong Kong.
The author is an adjunct professor in the Faculty of Law, Hong Kong University.
The views do not necessarily reflect those of China Daily.
