Fiscal deficit to reach HK$109 billion – PwC

Hong Kong needs to increase its competitiveness by attracting businesses and talent. Effective policies to support pillar and emerging industries, as well as efficient infrastructure, should embrace user-friendly Smart Government platforms and strengthened GBA collaboration

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Hong Kong, 4 January 2023 – PwC expects the HKSAR Government to record a HK$109 billion consolidated budget deficit for the fiscal year 2022/23, based on projected revenue of HK$681 billion and expenditure of HK$790 billion.

PwC’s latest estimate is that total revenues from profits tax and salaries tax will stand at HK$234.8 billion, against the Government’s original projection of HK$247.2 billion. Stamp duty is expected to generate HK$95 billion. Land sales revenue will amount to approximately HK$80 billion – 33% lower than the original estimate of HK$120 billion. The estimated expenditure of HK$790 billion is close to the original forecast of HK$807.3 billion. PwC estimates fiscal reserves of HK$848.1 billion as at 31 March 2023 – equivalent to around twelve months of total Government expenditure.

To help revive businesses and individuals after COVID-19 and to increase Hong Kong’s competitiveness, we recommend the Government consider providing tax and non-tax support to targeted industries and talent. To relieve the financial burden on businesses and individuals, we recommend that the Government continue to provide a 100% tax reduction of 2022/23 profits tax, salaries tax and tax under personal assessment, with an increased cap of HK$25,000 per case. We suggest increasing all allowances under salaries tax by at least 10%, as these have not been reviewed for at least four years. Given the recent rise in interest rates, we suggest increasing the deduction cap for home loan interest to HK$150,000 per year of assessment and extending the maximum deduction period to 25 years. We also recommend the same adjustment to the deduction cap for domestic rent.

PwC South China and Hong Kong Tax Leader, Charles Lee, said: “Due to challenges such as the ongoing pandemic and geopolitical issues, we expect Government expenditure to remain high. While we are confident that the fiscal reserve will return to positive growth in the coming year – especially after the reopening of the borders – the Government should consider long-term plans for financing infrastructure through alternative means, such as securitisation and infrastructure funds. PwC welcomes the measures to attract investment and talent and to support long-term growth proposed by the Government in the Policy Address. We would also like to see the development of effective tax and non-tax incentives to support both pillar and emerging industries. These can help revive Hong Kong's economy and increase its competitiveness as part of the GBA and as a soon-to-be member of the Regional Comprehensive Economic Partnership (RCEP).”

To further attract businesses and investments, PwC recommends that the Government introduce competitive tax, non-tax and financial incentives for companies that choose Hong Kong as their regional headquarters, trading or intellectual property hubs. It should also consider resuming the Capital Investment Entrant Scheme. To attract overseas talent, the Government needs to enhance the liveability of the city. For example, it could provide incentives such as housing subsidies, cash bonuses and tax deductions for children’s education, as well as better double tax relief.

The Government should further enhance Hong Kong’s status as an international financial centre by expanding the unified fund exemption regime to cover institutional asset owners, private fixed income and credit funds, as well as digital assets. Tax and financial incentives to encourage the financing of ESG projects should also be considered. PwC recommends the Government develop tax policies to address emerging industries such as digital assets, the metaverse and Web3. The Government could also provide one-stop shop services to help talent register their self-developed intellectual property and start their entrepreneurship journey in Hong Kong.

PwC Hong Kong Tax Partner, Agnes Wong, said: “With the gradual lifting of travel restrictions and quarantine requirements around the world and the reopening of the borders with the Mainland, Hong Kong needs to get ready for a travel boom and to seize the opportunity to return to pre-COVID levels of economic growth. In line with the Government’s efforts to develop Hong Kong as an international shipping and aviation hub, we encourage the Government to work with other GBA cities to promote maritime and aircraft leasing. We look forward to further details of the new tax concession measures announced in the Policy Address to attract high value-added maritime enterprises and the enhancement of the aircraft leasing preferential tax regime. We also suggest that the Government consider fiscal and non-tax measures to encourage green shipping and carbon tracking.”

“It is important for the Government to consider all proposed plans and measures carefully and to take into account stakeholders’ concerns during implementation, and execute them efficiently and effectively through a Smart Government. To provide a better business and living environment, the Government needs to provide quality services through user-friendly platforms. The development or enhancement of such platforms, including the e-tax filing system, is critical. In particular, as tax rules become increasingly complex, the Government should make use of tools to administer the law and facilitate taxpayers’ compliance in a streamlined manner,” said PwC Hong Kong Tax Partner Kenneth Wong.

Appendix

PwC’s other suggestions 

Michael Cheng, PwC Asia Pacific, Mainland China and Hong Kong Consumer Markets Leader, said: "After a number of major countries and regions relaxed their travel restrictions, many people flew out of Hong Kong. This resulted in local retail sales in December being lower than expected. Mainland China will lift quarantine requirements for inbound travellers from 8 January. We expect the retail market will grow after the border between Mainland China and Hong Kong is re-opened, although the retail sector in Hong Kong will still rely on local consumption in the short term and it may be difficult to return it to the level seen before the pandemic. To boost consumer sentiment and stimulate the retail market in Hong Kong, we recommend that the Government continue to distribute consumption vouchers in the new year, with a sum of about HK$3,000-5,000 in three instalments. The Government should provide support for retailers to improve the quality of their products and services, to reduce costs and increase their competitiveness. The Government can also provide more incentives to retailers to expand their customer base outside Hong Kong to the Greater Bay Area and thus boost their revenue." 

Albert Wong, PwC Hong Kong Public Sector Consulting Partner, said, “One of the initiatives in the Government's recently-announced Hong Kong's Innovation and Technology Development Blueprint is to accelerate the building of a smart government and to put into practice the concept of ‘citizen-centric, digital-first’. While the ongoing e-government audit is an important step in the Government's digital transformation, equally important is the triple-win situation created by the implementation of the improvement initiatives identified in the exercise – this includes providing a good user experience for stakeholders, enhancing the effectiveness and efficiency of the Government, and providing a set of practical use cases for start-ups, which will in turn help these companies export their smart technologies to overseas markets. Therefore, a robust ‘data ecosystem’ – where data can be effectively shared and applied across government departments and stakeholders in a secure environment – coupled with a secure, reliable and widely used digital identity authentication method, are important considerations to ensure the effective operation of digital government.”

Simon Booker, PwC Hong Kong Public Sector Consulting Partner, said, “The FY23/24 Budget promises a transformation in the scale and pace of delivery of major infrastructure projects in Hong Kong.  First and foremost is the Northern Metropolis - a transformational project to provide new jobs and housing for 2.5 million people.  The fore-runner to this ambitious project is the Lok Ma Chau Loop - which is the development site that will accommodate the Hong Kong-Shenzhen Innovation and Technology Park (HSITP).  The HSITP is to be developed in partnership with the private sector - leveraging finance and resources from investors and operators to deliver new high-tech jobs and investment.

This partnership model between Government and the private sector will also be deployed to deliver other iconic infrastructure projects in Hong Kong.  The “Lantau Tomorrow” development - a new Central Business District - will also be co-funded between Government and investors. This reflects a renewed focus by Government on partnership models to fund costly infrastructure and support the positioning of Hong Kong as a regional centre of Infrastructure Finance.   Similar models are also to be considered to deliver more affordable housing.  We expect to see more opportunities for bank lending, trusts and institutional investors as the Government ramps up its focus on co-financing infrastructure projects and continues to develop Hong Kong’s green and sustainable finance capability.”