People enter a shopoping mall in Causeway Bay on January 1. A goods and services tax could provide Hong Kong with much-needed revenue. Photo: Elson LI
Opinion
Mike Rowse
Mike Rowse
Why it’s time for Hong Kong to go the way of Singapore on GST
With the city facing a massive deficit, it must prioritise spending where it matters and find new sources of revenue
A goods and services tax implemented at the wholesale level might not be too onerous, and would reassure investors in government bonds of the city’s financial health
The budget that Financial Secretary Paul Chan Mo-po presents to the Legislative Council this week will be the toughest of his career. In his last budget speech, Chan had forecast a cash shortfall in the current financial year of HK$54.4 billion (US$6.96 billion) after taking into account bond sales of HK$65 billion.
In recent months, Chan has indicated the shortfall could exceed HK$100 billion. Major accounting firms have issued similar figures. As at December 31, 2023, the city had a deficit of HK$208.9 billion, offset by bond proceeds of HK$66.6 billion, leaving a net cash outflow of HK$142.3 billion.
January is normally a good month for revenue as first instalments of salaries tax come in, but February and March will no doubt be in deficit, so the end December numbers are a reasonable proxy for the whole financial year.
Leaving aside that persistent deficits on this scale put us perilously close to breaching Article 107 of the Basic Law, the present situation has important implications for government finances in terms of spending, revenue raising and the market for government bonds.
On spending, one does not need to be a genius to see that running a substantial deficit constrains our scope for extra spending. Despite this, at least one major political party is advocating a new round of consumption vouchers, but it’s not clear where the money for this is to come from. While the vouchers are popular, another round of them would be irresponsible. We need to get serious.
Chan would do well to fund all the initiatives set out in Chief Executive John Lee Ka-chiu’s policy address in October last year. Lee outlined a number of worthy improvements, particularly in services for the elderly and less well-off. Nobody is pretending that everything is perfect, but we must prioritise better if wish to improve. We cannot afford to lavishly spend on matters that lack the urgency of others.
Chief Executive John Lee Ka-chiu meets the media on the day of his policy address at the government headquarters on October 25, 2023. Photo: Sam Tsang
Ideas are already being floated, such as an across-the-board cut or freeze in civil service salaries. That would be controversial and socially destabilising, but having ministers and perhaps Legco members set an example of sacrifice might find favour, especially if there is a need for tough decisions on livelihood matters that affect the whole community.
Various government bureaus and departments must again cut one per cent from their budgets. Most could probably trim comfortably, but that might not be enough. Major surgery in one or two areas cannot be ruled out.
On revenue raising, hints have been dropped to suggest public service fees and charges are set to be changed after being frozen, in some cases for many years. Water and some hospital rates all seem set to rise. As these affect grass-roots communities, the price hikes must be kept within reason.
That is likely to put pressure on luxury expenditure items such as private cars. We probably have the best public transport system in the world so there is no need to assist the wealthy’s desire for travel in self-owned vehicles, especially if we can find it within ourselves to introduce a path to legitimise Uber (Hong Kong is the one of the few financial hubs in the world yet to do so).
Parking charges and penalties must all be set for review. All routine services, such as the issuing of passports, need to be brought up to full cost recovery level.
Illegally parked cars in Mong Kok in December 2019. As the number of private cars increases, Hong Kong must review parking charges. Photo: Dickson Lee
I really wonder whether all of this will be enough to balance the books. We seem to be at the beginning of a structural shift in public finances where we cannot rely on high property prices to carry us through forever. That suggests we need a major new source of revenue. Some have floated the idea of a capital gains tax, but this kind of goes against the grain of Hong Kong as a capitalist city par excellence.
Partly for that reason I would think we might have to bear the unbearable and consider implementing a goods and service tax. This need not make us less competitive. Singapore has had such a tax for years and increased the rate to 9 per cent from January 1 this year.
We could start lower – say 3 or 5 per cent – and collect at the wholesale level to keep administration simple. This will not be introduced in the budget this time because the scheme needs to be further fleshed out. But we have been mulling the idea for quite a while so don’t be surprised if Chan drops a heavy hint that he is getting close to a decision.
Finally, there is the matter of government bonds. It is important to remember these are borrowings – sums that have to be repaid one day, not fruit of the magic money tree. By the end of December, the government had outstanding green bonds of HK$188.6 billion and a further HK$243.8 billion of bonds under its general bond fund.
One thing for certain is more bonds will have to be sold in 2024-25 to maintain fiscal reserves at a reassuring level. I would estimate at least HK$100 billion, perhaps including some for infrastructure purposes as trialed in last year’s budget. It will be certainly easier to market the bonds, and keep interest rates modest, if investors can see a coherent credible plan to repay them within a reasonable timescale.
