In late February, the government released the 2025-26 Budget titled “Accelerating development through reform and innovation.” The Institute acknowledged its pragmatic approach to fiscal consolidation while aiming to maintain the quality of public and social services and was pleased to note that the budget incorporated, in part, several of its prior recommendations.
As announced in the Financial Secretary’s speech, the city logged an estimated HK$87.2 billion deficit, taking into account the issuance of government bonds of HK$130 billion and repayments of HK$22.1 billion. The current fiscal year deficit marks the third shortfall in a row after the city recorded a deficit of HK$122 billion in 2022-23, and HK$101.6 billion in 2023-24.
Short to medium term measures
The Hong Kong government has announced several measures to increase revenue in the short to medium term to address the fiscal deficit. To better reflect the “user pays” principle, the government has proposed several adjustments to government fees and charges to increase its revenue. This includes increasing the air passenger departure tax; charging an application fee of under various talent and capital investor admission schemes and raising visa fees; reviewing and adjust tolls for major tunnels and trunk roads, annual license fees for electric private cars, parking meter charges, and fixed penalties for traffic offenses; and charging a boundary facilities fee for private cars departing via land boundary control points. The government also anticipates the implementation of the global minimum tax proposal under BEPS 2.0 will generate approximately HK$15 billion annually starting from 2027-28.
In addition to these revenue-generating measures, the government announced plans to reduce recurrent expenditure by 7 percent cumulatively through the fiscal year 2027-28 and a pay freeze for civil servants in 2025-26. As projects capital works expenditure are expected to increase to HK$120 billion annually, the government aims to leverage public-private partnerships and expects to issue government bonds reaching approximately HK$150 billion to HK$195 billion worth of bonds each year over the five-year period from 2025-26 to 2029-30 under the Government Sustainable Bond Programme and the Infrastructure Bond Programme.
Need for comprehensive tax review
Beyond the short-term measures presented in the budget, over the long term, the Institute believes the government should undertake a thorough review of Hong Kong’s tax system to improve the certainty of tax treatment and find long-term solutions for a stable fiscal future. This review should also look into issues like enhancing tax breaks for research and development, and intellectual property-related businesses, to help Hong Kong stay ahead of the game.
The last comprehensive review of the Inland Revenue Ordinance was over 45 years ago, during which global economic and tax developments have undergone significant changes. Hong Kong has always adhered to a simple tax system, but this year, the government’s two major revenue sources, stamp duty and land sales revenue, have significantly declined, revealing the problems arising from a narrow tax base.
Since researching and implementing a new tax type takes at least five to 10 years, even if it is not an ideal time to introduce new taxes, a review should be initiated as soon as possible to maintain the overall competitiveness of the system. If considering the introduction of new taxes, detailed research and consultation are required, and social consensus must be obtained, which may take years. The government should plan early.
Long term economic expansion
To address the Hong Kong government’s deficit and promote long-term economic expansion, a focus on sustainable development is essential. Expanding the economy improves citizens’ living standards and increases government revenue in the long term. The government should actively explore new revenue sources and feasible options to support future economic development and ensure the long-term well-being of society.
Hong Kong’s robust legal environment, simple tax system, excellent infrastructure, and diverse culture make it a leading international financial centre. To enhance the business environment and attract investment, the government could review the two-tier profits tax system, lower the tax rate for small- and medium-sized enterprises (SMEs), or raise the threshold. SMEs account for over 98 percent of all enterprises in Hong Kong, providing numerous job opportunities and being a crucial pillar of the economy. Targeted support for SMEs is vital. Additionally, to attract foreign investment, eligible regional headquarters could enjoy a 50 percent profits tax reduction and subsidies for consulting and legal fees for companies relocating to Hong Kong.
Addressing talent gaps is crucial for enhancing workforce competitiveness. Doubling the basic allowance for salaries tax for parents of newborns and for healthy and skilled retirees aged 65 and above can encourage workforce re-entry. Providing time-limited subsidies or tax incentives for specific industries, simplifying visa procedures, and offering subsidies for private education for overseas talents’ children can attract and retain skilled professionals.
By implementing these strategies and implementing a robust modern tax regime, Hong Kong can ensure sustainable development, support SMEs, revitalize its economy, and address talent gaps, ultimately contributing to long-term economic expansion and helping to address the government’s deficit.
