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Hong Kong, 20 January 2022 – PwC expects the HKSAR Government to record a HK$ 9 billion consolidated budget deficit for the fiscal year 2021/22, which is substantially less than the Government’s original estimate of HK$ 101.6 billion, based on projected fiscal revenue of HK$ 676.4 billion and expenditure of HK$ 685.4 billion for the year.
Strong growth in exports of goods and increased local spending due to the consumption voucher scheme provided favourable conditions for further economic revival. However, with the fifth wave of the epidemic involving rapid spread of the Omicron variant, Hong Kong's economy is still full of uncertainties in the new year.
Agnes Wong, PwC Hong Kong Tax Partner, said: “With the fifth wave of the pandemic affecting businesses and the general public, the next two months will be key. Government expenditure may have to increase. We propose relieving the financial burden on individuals through a number of measures. These include increasing the HK$ 3.75 billion in the fifth round of the Anti-epidemic Fund. We also expect a repeat of the consumption voucher scheme for an amount no less than half the last round’s. All salaries tax allowances should be increased by at least 10%. This includes child allowance (HK$ 150,000), basic allowance (HK$ 150,000) and the married person’s allowance (HK$ 300,000).
“Assuming the fifth wave is tackled quickly and the border with Mainland China reopens thereafter, Hong Kong’s economy could be back in growth mode in 2022. However, with current uncertainties around COVID and pressure on major economies, we believe that Hong Kong needs to redouble its efforts to enhance its competitiveness. We urge the Government to take action by reviewing the effectiveness of existing tax incentives to strengthen the economy and consolidate pillar industries.”
Based on PwC’s latest estimate, total revenues from profits tax and salaries tax will stand at HK$ 219.4 billion, against the Government’s original projection of HK$ 197.2 billion. Stamp duty is expected to generate HK$ 116.1 billion - 26% higher than the original forecast of HK$ 92 billion due to the duty rate increase. With the sale of a prime urban site, land sales revenue will likely amount to approximately HK$ 125 billion – 28% higher than the original estimate of HK$ 97.6 billion. Expenditure is estimated to be HK$ 685.4 billion, which is 1% lower than the original forecast of HK$ 692.7 billion.
Before the fifth wave of the epidemic, the Government had revised its GDP growth forecast to 6.4% for 2021. “The Government has been facing deficits for the last two years and PwC has forecast a deficit of HK$ 9 billion this year. We recommend maintaining a balanced approach to spending – building up resources for external uncertainties alongside measures to revitalise the economy in the medium to long term,” said Agnes Wong. PwC’s estimate of fiscal reserves of HK$ 918.6 billion as at 31 March 2022, are equivalent to only around 15 months of total Government expenditure.
Once the epidemic is under control, PwC urges the Government to take long-term measures to revitalise the economy. The Government has helped develop Hong Kong as a green finance hub and introduced funding programmes to develop green businesses. To further expand these initiatives, PwC suggests that the Government provide tax incentives to issuers of and investors in green bonds. This will provide financial support for continuing education in ESG and tax incentives or financial subsidies for investing in green industries (e.g. renewable energy), especially at the start-up stage of businesses. These tax incentives will support Government measures and targets, such as the installation of electric vehicle charging facilities by 2035, as announced in the policy address.
The policy address also outlined initiatives for Hong Kong to capitalise on economic collaboration between Hong Kong and the rest of the Greater Bay Area (GBA). To facilitate economic integration, PwC urges the Government to amend the tax law to allow tax depreciation allowances and/or deductions for fixed assets and intellectual property used, and for research and development activities undertaken, in the GBA by Hong Kong companies. This will support the policy objective of encouraging Hong Kong businesses to expand into the GBA. We continue to propose that the Government lobby Mainland authorities to encourage cross-border investments through more favourable tax rates. The GBA Youth Employment Scheme offers golden opportunities for young talent to play a role in international businesses operating in the GBA, as well as encouraging the exchange of knowledge and skills. “Given the increasing participation of Hong Kong in the development of GBA and closer financial co-operation, one critical area for businesses is to build a sustainable workforce and keep it competitive. We hope the Government can further enhance the scheme’s attractiveness by introducing GBA-friendly tax measures to attract more diverse talent and create career opportunities for Hong Kong graduates in the GBA,” added Kenneth Wong, PwC Hong Kong Tax Partner.
Over the longer-term, PwC proposes a comprehensive review of Hong Kong’s tax system. International tax reforms brought about by the OECD’s BEPS 2.0 project, include a global minimum corporate tax of 15% from 2023. Given this, we recommend that the Government start the legislative process as soon as possible to provide certainty to affected corporations. They should simplify the compliance process as much as possible and prepare for the introduction of electronic tax filing in order to maintain a business-friendly environment. We hope the Government can review existing tax concessionary regimes, especially in the context of a post-BEPS 2.0 era, and introduce more non-tax incentive measures as soon as possible.
“It is encouraging to see that the Government has recently put forward a number of initiatives to boost Hong Kong’s competitiveness through consolidating pillar industries, thus boosting the city’s status as a hub for regional headquarters (RHQs). RHQs have a multiplier effect on local economic growth. They create business opportunities that benefit all sectors, attracting diverse talent to the city,” said Kenneth Wong.
PwC urges the government to commit to implementing and enforcing anti-epidemic measures to revive Hong Kong's economy from the COVID-19 pandemic, and further enhance the resilience of Hong Kong's long-term competitiveness through cooperation in the Greater Bay Area and pillar industries.