In light of recent recommendations from the International Monetary Fund (IMF), experts and lawmakers in Hong Kong are urging a shift toward more strategic spending to address the city’s financial challenges. The IMF acknowledged Hong Kong’s gradual approach to financial consolidation as essential for promoting ongoing economic recovery.
During discussions on Saturday, experts expressed doubts that the local government would follow the IMF’s advice to broaden the tax base. This is crucial for managing the increasing costs associated with the city’s rapidly aging population and for funding economic growth initiatives. The IMF projected a modest economic recovery for Hong Kong, forecasting a GDP growth rate of 2.7 percent for both 2024 and 2025. However, the report also raised concerns about potential declines in external demand, particularly from mainland China, which could hamper recovery efforts. “The risk of a sharper slowdown in mainland China, possibly due to escalating trade tensions or a deeper property market adjustment, could further undermine confidence in our recovery,” the IMF stated.
They also noted that persistent domestic demand weakness necessitates a focus on policies that bolster local consumption while navigating external and internal challenges. Crucially, the IMF highlighted the need for the government to enhance tax revenues to meet rising expenditures related to its aging citizens and to lay a sustainable foundation for funding essential structural programs aimed at boosting growth. Suggestions included increasing the progressivity of personal income taxes on higher earners and exploring new revenue streams such as excise taxes, value-added tax (VAT), and taxes on capital gains and dividends.
In response, Financial Secretary Paul Chan Mo-po remarked that the government would carefully evaluate the IMF’s proposals, emphasizing its commitment to a cautious fiscal strategy that maintains Hong Kong’s competitive edge through a simple, low-tax regime. He indicated that the city might face a fiscal deficit of nearly HK$100 billion (about US$12.8 billion) this financial year, a significant rise from earlier projections. Lawmaker Wendy Hong Wen warned of potential risks associated with a “structural deficit” due to fluctuating revenue from land sales and real estate activities.
She advocated for improvements in the efficiency of project approvals rather than a reduction in the number of projects. Ryan Ip Man-ki, vice-president of the Our Hong Kong Foundation, echoed concerns over the rising costs associated with welfare and healthcare driven by an aging society. He pushed for smarter spending strategies, such as prioritizing primary care and preventive healthcare to minimize hospital expenditures.
Professor Heiwai Tang, from the University of Hong Kong, stressed the importance of considering new tax structures, noting the misconception that higher taxes would harm long-term productivity. Utilizing Singapore as a benchmark, he argued for a broadened tax base, including the introduction of VAT to address mounting financial pressures.
Despite its past challenges, including the failed push for VAT in 2006, financial scholars emphasize the urgency of re-evaluating taxation strategies to resolve Hong Kong’s structural income issues. The necessity for timely implementation, however, is compounded by the limited tenure remaining for current officials. The IMF’s guidance followed its recent visit to Hong Kong in November for analysis. The report pointed out that the city’s ongoing efforts to attract skilled labor have been constructive but require continuous evaluation to ensure their effectiveness.
Interestingly, Hong Kong regained its title as the world’s freest economy in the 2024 “Economic Freedom of the World” report, as compiled by the Fraser Institute, and ranked third globally in the recent Global Financial Centres Index. This highlights the city’s resilience and potential for growth as it navigates its economic landscape. As Hong Kong contemplates the path forward, the interplay between strategic financial measures and taxation policy will be critical in addressing current and future economic challenges.
