The three Deloitte China tax partners, Doris Chik (left), Polly Wan (center), and Roy Phan (right) at the Feb 5, 2024 press conference to detail the auditing firm’s suggestions regarding Budget 2024-25. (OSWALD CHAN / CHINA DAILY)

Global auditing firm Deloitte says raising profits tax by a certain percentage point rather than levying a new tax could tackle the budget deficit, but it believes the Hong Kong Special Administrative Region government is more likely to announce new expense-cutting measures, in Budget 2024-25, to rein in the soaring budget deficit. 

“We do not recommend levying new tax items such as sales tax or capital gains tax because it is important for Hong Kong to maintain a low and simple tax regime,” Deloitte China Tax Partner Polly Wan said at a Monday press conference.

In the first nine months of the financial year 2023-24 (April to December 2023), the administration registered a cumulative budget deficit of HK$142.3 billion after taking account the proceeds of HK$66.6 billion proceeds from green bond issuances

“Moreover, the administration has to conduct extensive consultations when levying a new tax, and will have to incur administrative costs. Businesses also will incur huge administrative costs to satisfy the compliance demand related to the levying of capital gains tax or sales tax,” she added.

READ MORE: Deloitte: HKSAR may record budget deficit of over HK$131b

Rather, Wan argued, the government can consider raising the profit tax rate by a certain percentage point to gauge how much incremental income it can bring.

Deloitte expects Hong Kong SAR to record a budget deficit of HK$117.2 billion ($15 billion) for the financial year of 2023-24, 115 percent higher than the government’s original forecast of HK$54.4 billion made last February. 

The projected increase in budget deficit is mainly due to the decrease in land premium and stamp duties by HK$78 billion and HK$25 billion respectively. But the expected full-year government expenditure reduction of HK$26.4 billion, and the anticipated increase of profits tax and salaries tax of HK$8.9 billion will narrow the budget deficit.

In the first nine months of the financial year 2023-24 (April to December 2023), the administration registered a cumulative budget deficit of HK$142.3 billion after taking account the proceeds of HK$66.6 billion proceeds from green bond issuances. In last financial year (2022-23), the administration incurred a budget deficit of HK$122.3 billion.

Deloitte also estimates the government’s fiscal reserves will fall to HK$717.6 billion at end-March this year, equivalent to 10 to 11 months of government expenditure, compared with HK$834.8 billion as of the end of March last year.

Wan says the financial position of the government deteriorated rapidly because the city’s property and stock market are in the downward cycle. As Hong Kong’s tax base is narrow, she argues, government revenues which depend heavily on the land premium and stamp duties revenues are very volatile and cyclical.

“We do not recommend to disburse electronic consumption vouchers for this financial year because the government needs to spend money within its limits. In addition, we think the tax rebate measures Deloitte suggest can help to alleviate the financial burden of taxpayers to a certain extent,” Wan said.

READ MORE: Chan eyes restoring fiscal balance amid ballooning deficit

“To our knowledge, the financial market is not worried about the current public finance status of Hong Kong as the government had already attempted to slash expenditure,” Wan said.

Another tax partner, Doris Chik, said that the fundamental way to deal with fiscal deficit is to revitalize the economy through encouraging corporate investment and enhancing Hong Kong’s economic momentum and competitiveness. 

She recommended that the government should strengthen the promotion of Hong Kong as a regional business hub; encourage initial public offerings in Hong Kong by allowing deduction of IPO costs capped at HK$5 million; as well as encourage innovation and technology development in the city and refine the tax system relating to intellectual property.