The 2026-27 Budget of the Hong Kong Special Administrative Region, handed down recently by Financial Secretary Paul Chan Mo-po, has on balance been well received.
One reason for this is that the government’s consolidated account has delivered a small surplus in 2025-26, rather than the expected deficit of HK$67 billion ($8.56 billion). And after several years of budget deficits following the onset of the COVID-19 pandemic in 2020, the SAR’s public revenue system is expected to deliver surpluses over the next five years, according to Chan.
In Hong Kong, budgets have been in surplus rather than deficit for most of its modern history. As early as in the 1880s, the Hong Kong government had already accumulated fiscal savings — or reserves — sufficient to fund a full year of government expenditure. This healthy fiscal situation has been maintained until now. As of Jan 31, 2026, the fiscal reserves for the first 10 months of the fiscal year 2025-26 was HK$742.2 billion, equivalent to at least 10 months of government spending.
The last time Hong Kong experienced an extended period of deficits was after the Asian financial crisis (AFC) struck in 1997-98. The AFC prompted serious discussion about introducing a new, modern, wide-ranging indirect tax. There was intense debate in 2006 about applying a goods and services tax (GST) (or value added tax) in Hong Kong.
This proposal proved highly controversial, with opposition arising across the political spectrum. The SAR government rather abruptly curbed the discussion by the end of 2006. Political pressure played a significant role in prompting this curtailment, but another factor was pivotal: The budget was moving back into surplus on its own. Revived economic activity, as the SAR pulled away from the AFC, helped.
Hong Kong has thus accomplished what few other modern economies could match. Following a period of extended deficit spending, it has twice returned to surplus budgets without changing its tax system. Still more significantly, the SAR has managed this deficit spending both times without borrowing significantly, thanks to its extremely deep fiscal reserves.
Even after all the recent deficit spending, Hong Kong’s fiscal reserves still comfortably exceeded 80 percent of annual operating public expenditures in late 2025, and we can now expect them to grow further.
One way to understand the advantage the SAR enjoys because of this super-solvency is to consider a notable alternative approach to organizing public finance. The ever-growing United States national debt now exceeds $38 trillion, or over 120 percent of the country’s GDP.
This exceptional level of fiscal integrity in Hong Kong is, above all (and very briefly), the ongoing product of a wise decision, taken in 1842, that the government must hold a core proprietorial interest in all land, in perpetuity. The result is that virtually all privately held land in Hong Kong is leasehold.
In Hong Kong, as our fiscal stability has once more been confirmed, now would be an excellent time to consider creating a new type of future fund, pivotally focused on addressing poverty and inequality in Hong Kong, especially in the areas of basic housing and old-age care
No other modern jurisdiction has pulled off such a successful project on this scale, generating so much public revenue from land-related transactions. Even the famous 19th-century American political economist and “father of the land tax”, Henry George, never conceived of a system as splendidly effective as this.
And it is not just Hong Kong’s fiscal health that is underpinned by this system, but also its conspicuous financial and regulatory stability. Christopher Hui Ching-yu, the SAR’s secretary for financial services and the Treasury, recently highlighted this vital factor as he compared Hong Kong’s commercial consistency with the chaotic financial and regulatory unpredictability of doing business in the US today.
Soon after the US Supreme Court struck down core elements of the current US administration’s signature tariff “revolution”, Mae Anderson, writing for The Associated Press, confirmed how the outlook for business in the US now looks even more “murky”.
The Taxation Institute of Hong Kong (TIHK), in light of the SAR’s fiscal future, recently argued that Hong Kong should once again consider adopting a GST. Given that the SAR’s fiscal position in the immediate future is expected to improve, this was something of a surprise. The TIHK said (as it did in 2006) that introducing a GST would help broaden Hong Kong’s rather narrow tax base. This is true.
However, when you place this recommendation in the wider context of how Hong Kong might best tackle its fundamental long-term poverty and economic inequality challenges, an additional, crucial perspective emerges.
A rarely discussed key reason that the 2006 GST proposal was shelved was that the government never discussed in any detail how the additional GST revenue would be spent. In contrast, the eventual successful introduction of a GST in Australia over 25 years ago highlighted that this new tax would underpin fundamental welfare spending amid rising demand.
In Hong Kong, as our fiscal stability has once more been confirmed, now would be an excellent time to consider creating a new type of future fund, pivotally focused on addressing poverty and inequality in Hong Kong, especially in the areas of basic housing and old-age care. Using modest seed funding from the fiscal reserves, this new future fund could be established by appointing a small, expert, representative board tasked with reviewing relevant existing research and fostering further research on primary future needs.
Once established, a low-rate GST could be introduced, with all revenues (less administrative costs) directed to advancing the central, inequality-relief work of this project. This new tax would, of course, need to incorporate measures to compensate those with the lowest incomes, who are most adversely affected.
The work of this fund, once fully established, would help reduce pressure on long-term government spending. A low-rate GST directed entirely to supporting an equity-enhancing, major public-interest project like this would significantly help build public acceptance of such a new tax. It is a project, too, that resonates particularly well with the “common prosperity” principle presently shaping serious mainland policymaking.
The author is an adjunct professor in the Faculty of Law, the University of Hong Kong.
The views do not necessarily reflect those of China Daily.
