Buildings are seen from Victoria Peak at night in Hong Kong, on Aug 28, 2019. (PAUL YEUNG / BLOOMBERG)

Deloitte China expects the Hong Kong government to have a budget surplus this financial year as the economic recovery in 2021 is expected to generate higher-than-expected land-premium and stamp-duties income while the government’s non-recurrent expenditures are predicted to decrease.

But the auditing business advisory firm expects the surplus to turn into a deficit in the following financial year, as tax revenue dries up and expenditures related to the pandemic continue to mount.

Deloitte China said it expected the government to post a budget surplus for the 2021-22 financial year of HK$58.8 billion ($7.53 billion), which is significantly different from the government’s original, February 2021 forecast of a budget deficit of HK$101.6 billion. Fiscal reserves are predicted to reach HK$986.6 billion as of the end of March this year.

Deloitte China predicted the Hong Kong government will have a budget deficit of HK$34.2 billion for the 2022-23 financial year because of the estimated reduction in salary-tax revenue, profits-tax receipts and land premiums, as well as the expected increase in government expenditures

However, with the prevalence of the COVID-19 pandemic, which may hamper the city’s economic growth prospects, Deloitte China predicted the Hong Kong government will have a budget deficit of HK$34.2 billion for the 2022-23 financial year because of the estimated reduction in salary-tax revenue, profits-tax receipts and land premiums, as well as the expected increase in government expenditures.

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Deloitte China said the government should inject more stimulus into the city’s economy, which is beleaguered by the pandemic, although it is difficult to estimate the impact of such sweeteners on the government financial position.

“As the electronic consumption program can relieve the financial burden of households and boost the economy, we recommend the government launch the second electronic Consumption Voucher Scheme and other tax relief measures based on the principle of ‘making ends meet’,” Deloitte China Tax Partner Polly Wan said at the Tuesday news conference.

“Since we are unable to predict whether the government will launch more financial relief measures to shore up the economy, it is difficult to predict the time when the government may again see a budget surplus,” Wan added.

Deloitte China Tax Director Alfred Chan noted that Hong Kong’s gross domestic product rebounded quite quickly in 2021, when the COVID-19 pandemic eased. 

“Assuming the pandemic will ease gradually later this year, we expect the city’s economy will further improve. We are cautiously optimistic that the government may achieve a small budget surplus in the financial year of 2023-24,” he said.

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In addition to implementing short-term sweeteners, the Hong Kong government also needs to tackle the thorny issue of long-term tax reform, which accounting firms in the city have requested for years. Expanding the city’s narrow tax base is one of the focuses of the tax reform.

Deloitte China argues that the administration should strive to maintain the niches of a simple and low-tax regime when embarking on tax reform. Hong Kong has a simple and low-tax regime that emphasizes a territorial, source-base of taxation, and does not levy taxes on offshore incomes.

“Whether the government should expand its narrow tax base, it has to monitor its financial position. If the government can maintain balanced budgets in the future, Hong Kong should keep its simple and low-tax regime to attract overseas direct investment into the city,” Wan said.

Chan said that, instead of enhancing the narrow tax base, the government should devise more tax measures to attract various enterprises from different economic sectors to come to Hong Kong so that more companies will pay taxes. 

“When the economic pie is bigger, the government can have a steady stream of tax receipts so that the administration can rely less on land-premium and other non-recurrent income to achieve long-term fiscal sustainability,” he said.

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Deloitte China proposed a raft of tax relief measures to improve people’s livelihoods and alleviate the financial burden of enterprises. These measures include a salaries tax waiver, and tax deductions for annuity premiums, Mandatory Provident Fund voluntary contributions, and Voluntary Health Insurance Scheme premiums.

It also called for long-term tax measures to enhance Hong Kong’s position in the Guangdong-Hong Kong-Macao Greater Bay Area as well as to strengthen the city’s economic competitiveness in the family offices business, intellectual property trading, and its marine-hub status.