Hong Kong needs to raise taxes to counter budget deficit— IMF board

Continued weakness of land premium revenues is a problem.

The executive board of the International Monetary Fund (IMF) recommended raising taxes in Hong Kong in order to meet the city’s aging-related and investment spending needs.

Suggestions include further increases to the progressivity of personal income taxes, with higher rates for top earners; raising excise taxes; introducing a VAT; and taxes on capital gains.

It also recommended that Hong Kong introduce taxes on dividends, common in other international financial centers.

“Hong Kong SAR’s low-tax regime has helped the economy’s competitiveness in recent decades, but a transition to a higher and broader tax revenue base is needed to maintain the territory’s balanced budget target and underpin the territory’s macro-financial resilience,”  the IMF executive board said in a 23 January 2025 report, based on recently concluded discussions with authorities.

The IMF holds bilateral discussions with members, usually every year, under Article IV of the IMF’s Articles of Agreement.

In the report, the board highlighted the continued growth in social welfare, health, and infrastructure spending as Hong Kong’s population got older.

Hong Kong’s budget is also challenged by the continuous weakness of land premium revenues. As a result, its fiscal deficit in FY2024/2025 is projected to remain at a ‘sizeable’ 5.2% of its GDP.

Hong Kong already laid out plans to introduce more taxes in 2025, such as a plan to phase in a global corporate minimum tax.

Authorities have also introduced changes to its tax measures in recent years— including a second tier to the salaries tax regime for ultra high-income earners, changes to the property tax,and reinstatement of the hotel accommodation tax.

However, these measures provided “only a modest offset to lost revenues,” the IMF said.