Speech at Panel on Financial Affairs

Briefing by the Financial Secretary on Hong Kong’s latest overall economic situation and 2024-2025 Budget consultation

Public finance

Members expressed concern about the huge fiscal deficit and the decreasing revenue from land sales currently faced by the Government, and how it could continue to make financial provisions for the various initiatives set out in the 2023 Policy Address while adhering to the principle of prudent management of public finances. Members suggested that the Administration conduct a review of public expenditures and welfare systems when drawing up the 2024-2025 Budget, with a view to reducing unnecessary expenditures and streamlining manpower in line with the Government’s long-standing policy of keeping expenditure within the limits of revenues.

FS advised that as compared to the pre-handover era, various terms of the Government of the Hong Kong Special Administrative Region had substantially increased their inputs in areas such as people’s livelihood, healthcare, social welfare and education in response to the aspirations of the public. On the efforts to increase government revenue, the Government had introduced a special football betting duty in the 2023-2024 Budget, and announced that a progressive rating system for domestic properties would be introduced in 2024-2025. While raising revenue, the Government had to take into account the impact of such measures on the burden of the public and enterprises, and considered it not appropriate to introduce other new taxes under the current economic climate. As such, the Administration would continue to seek to increase revenue from profits tax and salaries tax through economic development. It was envisaged that Hong Kong would continue to face enormous economic challenges in the coming year, and fiscal deficits would inevitably persist. In the medium term, the Government would endeavour to achieve a consolidated fiscal balance while deficits and surpluses might appear in different parts of the year. Taking advantage of the low financing ratios, loans would be borrowed as appropriate to support infrastructure projects, and private investors would be brought in to engage in innovation and technology (“I&T”) and infrastructure development projects. The reduction in epidemic-related expenditure could substantially help reduce the fiscal deficit. The Government estimated that the consolidated deficit for the whole year might slightly exceed $100 billion, which was higher than the estimate made in February 2023 when this year’s Budget was announced, accounting for about 3% to 4% of Gross Domestic Product (“GDP”).

Economic forecasts

Members pointed out that the Government’s real GDP growth forecast for 2023 as a whole was 3.5%-5.5% at the beginning of the year, which was revised to 4.0%-5.0% in the August round of review. At that time, there were already queries about whether the revised forecast was too optimistic, and suggestion that the lower bound should be set at 3.5% or even lower. It turned out that in the Third Quarter Economic Report released in November 2023, the forecast was revised down to 3.2%. Members enquired about the rationale of the Government in setting the lower bound of the range forecast at 4.0% in the August round of review.

Government Economist (“GE”) advised that when the Government announced the revised forecast of 4.0%-5.0% in August 2023, it had a relatively positive outlook on the economy. However, the market’s confidence in the global and Mainland economies had subsequently become much weaker than the actual situation, which had significantly weakened the incentives for local consumption and investment. As a result, the revised forecast of real GDP growth for the year as a whole made in November was even below the lower bound of the range forecast made in the August round of review.

Tax initiatives

Members expressed concern that Hong Kong’s tax competitiveness might be undermined by the new tax initiatives that Hong Kong had been implementing in response to the requirements of international organizations in recent years, and enquired about the Administration’s measures to restore Hong Kong’s attractiveness to international investors.

FS advised that Hong Kong’s low tax regime and territorial source principle of taxation had all along been an attraction to international investors. In responding to the continuous updating of tax requirements by international organizations, Hong Kong’s position was to meet the minimum requirements without the need to get ahead of other jurisdictions in complying with the relevant requirements, so as to avoid unnecessarily undermining Hong Kong’s tax competitiveness.

III Proposed refinements to the Regime of Automatic Exchange of Financial Account Information in Tax Matters

List of participating jurisdictions

Members expressed support for the proposed amendments to the AEOI regime. Noting that Hong Kong was actively expanding into the markets of ASEAN, Middle East and Central Asia, members asked why some jurisdictions in these regions, such as Vietnam, Laos, Iran and Uzbekistan, were not included in the list of participating jurisdictions.

The Administration advised that Hong Kong exchanged information with AEOI partner jurisdictions on the basis of bilateral Comprehensive Avoidance of Double Taxation Agreements or the multilateral Convention on Mutual Administrative Assistance in Tax Matters (“the Convention”). Individual jurisdictions would decide whether to accede to the Convention for the purpose of AEOI taking into account their actual situation in taxation and their technical readiness. As an international financial centre, Hong Kong maintained an open mind on the exchange of financial account information. If the jurisdictions mentioned by members acceded to the Convention and participated in AEOI, the Inland Revenue Department (“IRD”) and the Financial Services and the Treasury Bureau would actively explore the exchange of information with the tax authorities of these jurisdictions, subject to their preference and actual situation, and would update in a timely manner the list of reportable jurisdictions and the list of participating jurisdictions.

IV Plan for the 2026 Population Census

Cost estimates

Members enquired about the cost estimates of 26C and requested the Administration to set out in detail in the funding proposal or budget to be submitted to the Finance Committee (“FC”) the overall cost implication of the re-engineering initiatives on the population census, together with an itemized cost breakdown (including recurrent expenditure and non-recurrent capital expenditure).

C&SD replied that as a rough estimate based on a 10-year period for comparison purpose, the overall costs involved in the first 10 years after the introduction of the re-engineering initiatives (during which 26C and the 2031 Population Census would be conducted), including the establishment of the IT systems for population censuses, manpower resources and other operating costs, would be reduced by about 40% as compared with the past practice of conducting one census and one by-census during the period, with a saving of about HK$600 million. As regards the non-recurrent expenditure of HK$250 million on IT, about HK$180 million would be spent on the development of the IT systems, while the remaining HK$67 million would be spent on the expansion and transformation of the new data collection platform into a Departmental Data Collection Platform. C&SD added that the costs of 26C, other than the development of the IT systems, would be reflected in the Budget of the coming year.