The source text is in Chinese. This English version is for reference only. In case of any discrepancy between this English version and the Chinese version, the Chinese version shall prevail.  

The previous 2 articles ("Accurate Assessment of Fiscal Deficit’s Nature to Ensure Economic Recovery" and "Short-, Medium-, and Long-term Expenditure Control and Precise Allocation to Stabilise Public Finances") provided an in-depth analysis on the challenges faced by Hong Kong’s public finances. 

According to the Financial Secretary, funds raised through government bonds will be allocated to infrastructure investment rather than recurrent expenditure. After accounting for bond issuance revenue, it is observed that, in the 2024/25 fiscal year, Hong Kong’s Capital Account deficit (red bars) will be around HKD 14 billion, whereas the Operating Account deficit (blue bars) will rise significantly to HKD 73 billion, which is more than 5 times the former (see attached chart). 

Under the pressure of expanding deficits and external risks, the Government should adopt a multi-pronged approach to revenue generation. 

To address the Capital Account deficit, the Government should reconsider its bond issuance strategy to provide medium- to long-term funding support for large infrastructure projects. Particularly for the medium- to long-term capital expenditure demands of future major infrastructure initiatives, for instance the Northern Metropolis, the Government should better utilise its available room for bond issuance. 

Currently, the government’s debt-to-GDP ratio stands at just 9.3%, remaining lower than that of other Asian economies such as Singapore and South Korea. However, the majority of the bonds recently issued by the Government are short-to-medium term, with most maturing within the next 5 years. Rather than continuously relying on short-term bonds, which increases refinancing costs and uncertainty, the Government should consider issuing medium- to long-term bonds (i.e. 5–10 years) to tie in with the funding cycles of major infrastructure projects. This would also satisfy the great demand from insurers, banks, and institutional investors for long-term Hong Kong dollar bonds and improve the yield curve to further develop the local bond market. 

The Operating Account has shown a more significant deficit. The following 4 feasible targeted measures are recommended for increasing revenue. 

Measure 1: Increasing Tobacco Tax and Optimising Betting Duty

In recent years, many scholars and institutions have suggested imposing an additional 1% salaries tax on high-income individuals, specifically increasing the standard tax rate from 16% to 17% for annual incomes above HKD 5 million. 

In addition to the increase in salaries tax, the raising of tobacco tax and the optimisation of betting duty structures are likely of higher feasibility. The World Health Organization suggests tobacco taxes should account for at least 75% of the retail price, yet Hong Kong’s current rate is merely about 65%. The Hong Kong Council on Smoking and Health has envisaged that increasing the tobacco tax to meet the international standard would reduce smoking prevalence from 9.1% to 8.8%. As highlighted by several tobacco control groups, the enhancement of Government enforcement actions against illicit cigarettes will generate billions of dollars of revenue annually, thereby alleviating pressure on public health in the long run. Therefore, this measure is an effective means of achieving multiple objectives. 

Regarding betting duty, apart from the basketball betting duty currently under review, the Government may appropriately adjust the rate of Mark Six lottery betting duty. According to the Betting Duty Ordinance, the betting incurs 25% tax on turnover, along with an additional 15% directed toward the Lotteries Fund, 6% to the commission of Hong Kong Jockey Club, and the remaining 54% to the prize fund. If the prize fund ratio be adjusted downwards to 49% and the betting duty be raised to 30%, around HKD 400 – 500 million of revenue will be generated annually, with minimal impact on the winners. 

Measure 2: Introducing a Pet Tax or Other Innovative Taxes 

Goods and Services Tax (GST) is receiving extensive discussion as a broad-based tax with a relatively stable source of revenue. However, given the uncertainty surrounding the local economy and the complexity and potential social impact of GST, careful evaluation is necessary. As an illustration, Singapore had conducted over a thousand public consultations and lowered the profits tax rate to balance the overall tax burden prior to the phased introduction of GST during a period of economic stability. 

Moreover, there are views that emphasise the potential benefits of the Digital Services Tax (DST). In the light of the rapid growth of the digital economy, an increasing number of multinational companies are generating profit in Hong Kong through their platforms. Nonetheless, they may not contribute proportionately to the tax revenue. The Hong Kong General Chamber of Commerce estimates that if the Government following overseas examples to impose a tax rate of 3% – 5%, it will generate HKD 1.3 – 1.4 billion of revenue annually. However, given global economic turbulence and escalating trade barriers, DST risks being perceived as a tariff equivalent. Thus, its feasibility requires careful consideration amidst the increasing uncertainties in the current international trading environment. 

There have been suggestions that a pet tax may be more innovative, in which the "User Pays" principle can be implemented. At present, there are about 405,000 pet cats and dogs in Hong Kong, yet the relevant facilities and services remain inadequate. In Berlin, Germany, dog owners are subject to a minimum annual dog tax of HKD 1,000. By implementing a comparable tax on cats and dogs in Hong Kong, about HKD 400 million of revenue can be generated annually. A proportion of the revenue could be allocated to enhancing pet park facilities, expanding pet-friendly public transport (for example the recently introduced holiday pet bus routes), and the remainder could be utilised for the rescue of stray animals and medical purposes, thereby promoting animal-friendly policies and generating new revenues for a win-win outcome in financial and social benefits. 

Measure 3: Optimising Exchange Fund Investment Portfolio 

Optimising the investment strategy of the Exchange Fund enables the Government in achieving revenue generation with relative ease. The Fund, which oversees the Government’s fiscal reserves and the funds of statutory bodies, has total assets in excess of HKD 4 trillion. Given part of this supports the Linked Exchange Rate System (LERS), the Fund should not underwrite recurrent government expenditure. In the face of mounting market volatility, it is imperative to maintain the stability of LERS. 

However, over the past two decades, the average annual return of the Fund was only about 3.4%, which was significantly lower than the performance of the Government of Singapore Investment Corporation, of about 5.8% over the same period. Taking the Norwegian Government’s Pension Fund as an example, it achieved a 13% annual return last year due to its open disclosure and diversified asset allocation. It is, therefore, recommended that Hong Kong appropriately increase the ratio of relatively stable assets with yield potential, such as equity assets, overseas infrastructure and highly rated corporate bonds, in the Investment Portfolio and the Long-Term Growth Portfolio of the Exchange Fund for optimising the long-term return and increasing the investment income of the Government. 

Measure 4: Leasing Naming Rights for Public Facilities 

In addition to adjusting tax rates and asset allocation, the Government could consider leasing naming rights for public facilities to generate a stable, sustainable source of revenue. For instance, the construction cost of Kai Tak Sports Park is the second highest in the world, and its hardware is of top international standards. In comparison, SoFi Stadium, the most expensive stadium in California, the United States, has successfully leased a 20-year naming rights to SoFi, a fintech company, at the cost of approximately HKD 4.9 billion.

Frankly, selling or leasing naming rights for public facilities is not a recent development. In 2013, the Singapore’s government sold the naming rights of the Singapore Sports Hub to Oversea-Chinese Banking Corporation for HKD 300 million. As Hong Kong is reclaiming operational rights for facilities, such as the Western Harbour Crossing and the Tai Lam Tunnel, conditions for generating constant revenue through naming rights deals are maturing. This measure will yield additional annual revenue without burdening citizens. 

Despite taking the revenue from bond issuance into account, the Government is still facing a fiscal deficit of nearly HKD 90 billion. Regardless of the measures adopted, the Government should prevent reactive policymaking. In this article, proposals are put forward for arousing further discussion on feasible revenue-generation measures. Under the context of ongoing global economic and market volatility, the Government’s forecast of a smaller fiscal deficit may be subject to some degree of fluctuation. 

Hence, with a multi-pronged approach and proactive implementation of multifaceted revenue-generation measures, the Government will its revenue base and enhance overall fiscal resilience. Ultimately, it is prudent to set aside funds for contingencies, since delaying until issues escalating can only exacerbate the financial burden and soical costs.