Shaping a diverse economy for sustainable growth EY recommends the Government to diversify Hong Kong’s economic portfolio and optimize the use of public resources

Boosting revenue and adopting targeted fiscal measures is crucial to managing deficits.

Ernst & Young Tax Services Limited (EY) estimates that the Hong Kong SAR Government (the Government) will record a fiscal deficit in  the financial year 2024-25 of HK$98 billion, which is more than double the HK$48  billion originally forecasted in the Government’s Budget announced in February 2024.  

As a result of the estimated deficit for the fiscal year 2024-25, Hong Kong’s fiscal  reserves will be reduced to HK$637 billion as of 31 March 2025. 

Jasmine Lee, EY Hong Kong and Macau Managing Partner, says: “Over the past  year, external factors such as the challenging global economic environment and  ongoing geopolitical tensions are still creating uncertainties for the recovery of  economy in Hong Kong, resulting in another year of deficit. It is time for the  Government to further diversify Hong Kong’s economic portfolio and optimize the use  of public resources to foster growth in a stable and sustainable manner.”  

Land premium is expected to be almost 70% lower than the original estimate of HK$33  billion. On the other hand, the relaxation of stamp duty measures adopted since 2023  to stimulate the stock and property markets seem to have limited impact and stamp  duty revenue is also expected to be around 30% lower than the original estimated  HK$71 billion. Tax revenue, due to changes in investment and consumer preferences,  is experiencing a drop this year as well. 

Lee says: “In view of the current economic environment, the fiscal reserves are likely to  be continued to be under pressure with forecasted deficits for the coming few years.  New revenue streams should be explored, and careful fiscal management is needed to  ensure long-term economic stability. The “affordable user pays” principle should be  taken into account when considering fiscal measures, so as to avoid taking any hasty  actions that may affect local economic recovery and people’s livelihood.”  

Opening up new horizons 

Wilson Cheng, EY Hong Kong and Macau Tax Leader, says: “Despite the financial  industry has always been a traditional pillar of our economy, the Government should  also diversify Hong Kong’s economic portfolio and proactively expand markets through  provision of tax and other incentives.” 

The Government has proposed in the 2024 Policy Address to enhance the funds and  family office tax incentives, which we believe would attract more investment into Hong Kong and consolidate Hong Kong’s position as an international financial center. Apart  from profits tax concessionary measures for the wealth management sector, we  propose that tax incentives should also be introduced for Real Estate Investment  Trusts (REITs) and commodity traders to further develop these two industries in Hong  Kong. 

The significance of the real estate market in Hong Kong’s economy is undeniable. A  robust REIT market can stimulate economic growth by attracting both local and  international investors. The influx of capital can then be used for driving economic  growth across different sectors. The growth of the REIT market can also stimulate  various professional services such as property agency, property management, and valuation.  

Stamp duties payable on the transfer of REIT units are now waived as proposed in the  2024-25 Budget. We propose to take more steps forward to revitalize the REIT market,  such as exempting stamp duty for existing REITs acquiring new properties, refunding  stamp duty for newly formed REITs and providing a profits tax incentive for qualifying  REITs. 

Ricky Tam, EY Tax Services Partner, adds on: “We welcome the Government’s  proposal to promote commodity trading in Hong Kong and facilitate an international  commodity exchange to set up accredited warehouses in Hong Kong. Hong Kong, as a  renowned international port, our strategic location and advanced infrastructure well positions us to be a key hub for maritime services in Asia and beyond.” 

Riding out challenging times 

It is undeniable that the landscape of global trade has been undergoing a significant  transformation, where the traditional model of physical trade is gradually being  supplemented and even replaced by digital trade. Consumer preferences have also  shifted towards using digital platforms, instead of personally visiting the retail stores.  Digital platforms which are not operating in Hong Kong might not be subject to profits  tax in Hong Kong despite they generate revenue from Hong Kong customers.  

Paul Ho, EY Financial Services Tax Leader for Hong Kong, says: “In order to bring  about a fairer environment for the Hong Kong retail industry and Hong Kong digital  platforms, we recommend the Government to review whether the current tax legislation  effectively captures the income derived by non-residents which provide certain digital  services and contents in Hong Kong.” 

The pandemic and the resulting global economic downturn have heavily impacted  Hong Kong’s economy in recent years. Despite we have seen gradual economic recovery, the Government should remain cautious on the use of its fiscal reserves. 

Ho says: “It might be worthwhile to revisit whether the existing support measures are  really relieving the hardship of those genuinely in need. A more targeted approach  should be adopted in order to maintain a healthy level of fiscal reserves.” 

The Government has announced in its previous Budget that the Government Public  Transport Fare Concession Scheme for the Elderly and Eligible Persons with  Disabilities (i.e. the $2 Scheme) and Public Transport Fare Subsidy Scheme would be  reviewed to ensure these subsidies are provided in a financially sustainable manner.  The Government could consider setting tiered subsidies to achieve a more equitable  allocation of public resources. 

We believe that the proposed fiscal measures will help Hong Kong continue to grow as  an international financial, maritime and trade center, as well as combat the fiscal  pressure our economy is experiencing right now.