Hong Kong to consider new taxes

Surging expenditures and poor revenues makes move necessary.

Hong Kong said its expenditures have more than doubled from nearly $200 billion in 1997-98 to over $400 billion in 2013-14. Recurrent expenditures have also almost doubled, from $150 billion to over $290 billion. GDP, however, has grown by only 60% for the same period.

Revenue, now about 20% of GDP, is unlikely to grow significantly, said Financial Secretary John Tsang. Public expenditure has stayed at around the same level in recent years.

To increase spending, the government would need to increase revenue by raising taxes or borrowing. Tax hikes, however, would overhaul Hong Kong’s simple and low tax regime and undermine its competitiveness.

Tax revenue, accounting for more than 60% of total government revenue, will top $280 billion in 2013-14. Two-thirds will come from direct taxes such as profits tax, tax under personal assessment, property tax and salaries tax.

The balance of one-third will come from indirect taxes such as rates, motor vehicles first registration tax and duty on dutiable commodities.

In 1997-98, government services with charges determined on a cost-recovery basis generated nearly $12 billion in revenue, equivalent to 4% of government revenue. In 2011-12, revenue from this source dropped to only $10 billion, or a share of only 2% of revenue.

Total government revenue for 2013-14 is estimated to be $435.1 billion, with earnings and profits tax estimated at $189.4 billion, and land revenue estimated at $69 billion. This would lead to a $4.9 billion deficit.

Fiscal reserves are estimated at $729.1 billion by the end of March 2014, representing approximately 34% of GDP or equivalent to 20 months of government expenditure.

For the four-year period between 2014 and 2017, the annual average growth rate will be 4% in real terms, with an annual average underlying inflation rate of 3.5%.

Increasing infrastructure spending will lead to a capital-account deficit for the four-year period. Fiscal reserves are estimated to reach $850.3 billion by the end of March 2018, representing 31% of GDP or 21 months of government expenditure.