Economists expect prudent Hong Kong budget as city looks to tackle deficit

HONG KONG: Hong Kong's financial chief Paul Chan is set to deliver the annual budget speech on Wednesday (Feb 26). 

Economists and businesses are expecting a measured and prudent budget to help the city tackle a daunting fiscal deficit and weather a highly uncertain economic environment this year.

Hong Kong is looking at a projected deficit of almost HK$100 billion (US$13 billion) – double the city’s target – for the 2024-25 financial year.  

This will be the third year in a row that the financial hub is facing a fiscal deficit. 

OCBC Hong Kong’s economist Cindy Keung said this is likely due to lower-than-expected government revenue. A key sector that the city's government depends on is revenue from land sales, which remains weak amid an ongoing property market downturn. 

To reduce spending, the government will likely focus on cost-saving measures including a salary review of the civil service and revising a transport subsidy for seniors. 

While trying to retain its reputation as an international financial and trading centre, Hong Kong’s economy, however, continues to face issues like structural shifts and weak global demand.

Observers believe it is necessary for the city’s authorities to consolidate its spending and remove some stimulus measures implemented during the COVID-19 pandemic.

INCREASING GOV REVENUE

One suggestion by the city’s business community is a levy on digital activities of non-Hong Kong resident e-service providers.

“Based on estimates, for 2024, there could be US$3.5 billion digital service revenue generated and assuming we apply a 5 per cent digital service tax rate, it could perhaps generate HK$1.4 billion,” said Mr Wayne Lau, chairman of the taxation committee at the Hong Kong General Chamber of Commerce. 

“We want to create a level playing field for Hong Kong-based digital service suppliers, as compared with the non-digital service suppliers, which basically do not make any economic contributions to Hong Kong.” 

Higher taxes are one way to raise government revenue. In the previous budget, Hong Kong increased taxes on those who earned more than HK$5 million annually. 

Some observers believe the government may expand that income bracket to tax more high-earning individuals.  

OCBC Hong Kong’s Ms Keung noted: “Adjustment in profit and salaries tax rates may be more impactful for revenue enhancement than others (as these rates have been) kept at persistently low levels."

With appropriate and targeted policies, economists say Hong Kong may be able to save some HK$14 billion this fiscal year.

PLUGGING GAPS

Another area which Hong Kong could exploit is that of money flowing back into the city, with more attractive policies to court family-office investments and initial public offerings.

Ms Keung said Chinese firms are increasingly choosing Hong Kong as their top choice for listing companies, over the once-favoured United States. 

“This sort of flow should be captured by the Hong Kong government with the right set of policy,” she added.

Some analysts suggest the government also look at plugging existing gaps – including those in real estate – to encourage more business activities. 

The city has been seeing a significant rise in the number of empty offices.  

As at the end of last year, the overall office vacancy rate stood at 17 per cent with some 15 million square feet of space unused. This, compared to the office vacancy rate of below 4 per cent about a decade ago.  

“The working practice has changed. How people use commercial space has changed,” said Mr Marcos Chan, head of research at real estate advisory CBRE Hong Kong.  

“Can office buildings be useful for something else, like for industrial buildings? The government should consider broadening the use of commercial space under the current or existing planning framework.”

SMALL BUSINESSES

Meanwhile, the city’s small- and medium-size enterprises (SMEs) are hoping for more funding and financial support amid rising costs. 

Most retail and food and beverages (F&B) businesses in the city lament a slow recovery since COVID-19. 

For instance, at the London Restaurant – which serves dim sum and other traditional local dishes – located in the bustling Mong Kok district, business has dropped by up to 30 per cent compared with pre-pandemic period.  

Its 73-year-old assistant general manager William So, who has worked there for the past 46 years, said the eatery used to be packed to the brim. Now, there are some empty tables even during peak periods.

“I hope the government won't forget about us SMEs, while also taking care of the bigger businesses,” he told CNA, adding that government help has been insufficient.

“What SMEs need are actually some simpler procedures, making it easier for them to do business and to encourage them by not imposing too many strict rules regarding issues like environment and food.”

SMEs are also hoping for government help in the budget for expansion into new markets in Asia and the Middle East, as well as support in technology and innovation.

Last year, Hong Kong saw a 2.5 per cent economic growth, just touching its forecast of between 2.5 and 3.5 per cent.

This year, analysts expect the government to lower its growth forecast to between 2 and 3 per cent, as Hong Kong navigates potential disruptions in an ongoing trade dispute between China and the US.

Despite the challenges ahead, observers say they hope the government will use the budget to boost residents’ and investors’ confidence with clear policies that will set the direction for how the city steers its way through rough waters.