How Hong Kong can utilise fiscal reserve to support economic growth

The region's fiscal reserve as of the end of 2023 was roughly 23% of GDP.

With Hong Kong's fiscal reserve remaining a key credit strength of the region, experts suggested that the government conduct a comprehensive review of its tax system.

According to Fitch, Hong Kong's reserve will "remain under pressure in the next few years amidst modest deficit reduction."

"The reserve has declined from its pre-pandemic peak of 41% of GDP, as the government used it to cushion the economic fallout from the 2019-2020 protests and Covid-19 pandemic," Fitch reported.

In the budget, the government has already proposed various revenue initiatives such as a salary tax hike for high-net-income individuals and a resumption of hotel accommodation tax collection.

According to KPMG,  such measures "will increase government revenue in the short term without significantly impacting the majority of citizens and businesses."

This is why KPMG suggested that "the government comprehensively review the tax system to allow Hong Kong to maintain its competitiveness."

Stanley Ho, tax partner at KPMG China, said the government could provide further tax incentives and exemptions to attract global companies to establish regional headquarters in Hong Kong, such as adopting 50% of the normal tax rate (i.e. 8.25%) for profits derived from regional headquarters in the city.

Additionally, KPMG recommended "introducing special tax loss measures, promoting investment in start-ups and scientific research projects, and easing the current stringent tax deduction conditions for interest payments to enhance the tax system."