Deloitte outlines key recommendations for 2024 Policy Address to drive economic growth and innovation

HKSAR Chief Executive John Lee is set to deliver the 2024 Policy Address on 16 October, which is expected to outline measures to bolster the Government’s three main objectives of driving Hong Kong’s economy, enhancing citizens’ livelihood, reinforcing the city’s competitive edge and exploring new areas of growth, and seizing both national and international opportunities, aligning with the “four musts” and “four proposals” put forward by President Xi Jinping.

Over the past year, a series of policies targeting key areas such as finance, innovation and technology (I&T), and talent have contributed to the local economy’s steady performance. The real GDP has grown by 2.8% and 3.3% year-on-year in the first two quarters, with the latest unemployment rate remaining low at 3%. Yet, the city’s economic prospects are not without challenges, as geopolitical tensions, interest rate volatility, and a global slowdown pose potential headwinds.

Deloitte China Southern Region Managing Partner Edward Au says, “Hong Kong must navigate today’s shifting global economy and evolving technological landscape by adopting a sustainable, dynamic development model for high-quality growth, economic diversification, and enhanced governance. A robust public finance system is crucial to laying the groundwork for igniting new economic engines like the Northern Metropolis and harnessing artificial intelligence (AI) to transform our city into a global I&T powerhouse.”

“As an international financial centre and one of the world’s largest cross-border wealth management hubs, Hong Kong has huge potential to become a premier destination for global family offices and asset owners. Through proactive integration into the overall development of our country and leveraging Hong Kong’s unique advantages, we can propel our city toward a future of continued progress and prosperity while contributing to the modernisation of our country.”

To drive economic growth and infrastructure development supported by traditional and innovative sectors, Deloitte suggests a set of policy measures for the upcoming Policy Address that are focused on four key areas including public finance, the development of the Northern Metropolis, I&T, and financial markets.

Public Finance: Forging a path toward fiscal sustainability

The Government’s counter-cyclical spending during the COVID-19 pandemic, while vital to supporting citizens and small and medium enterprises (SMEs), has led to deficits in four out of five fiscal years since 2019/20. Fiscal reserves have shrunk by over a third, from HKD1.1 trillion to HKD730 billion. According to the Government’s medium-term forecast, excluding bond revenues, substantial deficits are projected for the next few years, with a fiscal balance unlikely before 2027/28.

Deloitte China Tax Partner Polly Wan says, “We firmly believe that the Government’s financial foundations remain fundamentally sound, yet it is important to tackle the ongoing deficit by diversifying revenue sources and exercising prudent expenditure control. To ensure sustainable public finances for Hong Kong’s future social and economic development, we suggest establishing a task force dedicated to a comprehensive, root-and-branch review of public finances. Furthermore, instituting an advisory committee on new taxes can enable a thorough review of the tax system, evaluating the impact of new tax options or adjustments, while preserving our city’s simple and competitive tax system.”

Deloitte also recommends that the Government continuously review the civil service establishment, aiming for efficiency through technology, streamlined processes, and strategic staffing, without compromising the quality of public services. Other proposed measures include increasing airport departure tax by 50%, introducing land and sea departure tax, and adjusting the HKD2 Concessionary Fare Scheme and certain public service fees.

Polly Wan adds, “While exploring revenue-generating and cost-saving measures, equally important is to be mindful of regional integration of the Greater Bay Area (GBA) as well as financial capacities of SMEs and citizens, including cross-boundary students and workers.”

Northern Metropolis: Piloting ‘local districts’ with public-private partnerships

The Government is spearheading an array of visionary infrastructure and development projects poised to deliver monumental long-term economic and social benefits. However, the scale and ambition of these initiatives demand substantial financial resources, highlighting the need to leverage market capital and forge deeper, more innovative partnerships with the private sector.

Deloitte China Strategy and Economic Advisory Partner Alvis Kong says, “We support the Government’s ‘local districts’ development approach, which harnesses market forces to co-invest in the Northern Metropolis and other new areas. Unlike traditional public-private partnership, partnering enterprises in ‘local districts’ take on a far more comprehensive role, extending beyond mere construction and industry operation to include crucial preliminary land formation and infrastructure development.”

Given the scale and complexity of the Northern Metropolis, Deloitte suggests a phased approach by piloting ‘local district’ in mature areas with industry development potential. In addition to clearly defining district asset portfolios and rules for potential investors, the Government could broaden partnerships and harness unique strengths of diverse enterprises by inviting local firms, mainland state-owned and private companies, and international corporations to participate in district development.

Alvis Kong adds, “To bridge the gap until the Northern Metropolis land becomes market-ready, we propose implementing ‘transitional arrangements’ to enable leading-edge industries to establish a foothold in Hong Kong and exploring ‘non-in-situ land exchange’ to boost developer participation.”

Innovation & Technology: Accelerating AI application and talent attraction

With ‘new quality productive forces’ becoming an intrinsic requirement and an important focus of the country’s efforts to promote high-quality development, I&T will be pivotal in strengthening Hong Kong’s economic resilience and maintaining its international competitiveness. As economies worldwide adapt to the transformational shifts brought about by AI, the European Union introduced its Artificial Intelligence Act last month, marking the world’s first comprehensive legal framework for AI.

Edward Au says, “We support the Government to establish a bold, long-term vision for AI integration, exploring diverse application scenarios in public services areas from primary healthcare to education to financial regulations. To popularize the use of AI with a risk-based approach, we suggest adopting a robust regulatory system for AI, which clarifies the legal responsibilities of developers and users to foster a culture of responsible innovation and application in the AI sphere.”

The I&T industry requires not only top-tier experts but also skilled, experienced technicians who may not hold university degrees. To address this crucial gap, Deloitte proposes the introduction of a new ‘intermediate’ visa category within the existing Quality Migrant Admission Scheme. By adopting a flexible approach to the qualification certification mechanism, the Government could fine-tune talent attraction strategies based on current industry needs.

Financial markets: Expanding family offices sector and new growth markets

The Third Plenary Session of the 20th Central Committee of the Communist Party of China and the Resolution have reaffirmed Hong Kong’s status as an international financial centre. Leveraging the city’s role as a ‘super-connector’, the Government should continue to actively facilitate financial flows between the city, the GBA, and international markets. To reinforce Hong Kong’s traditional strengths in financial services, Deloitte recommends intensified efforts to promote cross-boundary investment, advance the development of the family office industry, and explore new growth markets such as the ASEAN and the Middle East.

Deloitte Private Hong Kong Leader Anthony Lau says, “Family offices have emerged as a vital engine of growth for Hong Kong's wealth management industry, with over 2,700 single family offices calling the city home. The Government could capitalise on this momentum by advocating for a ‘three-step strategy’ with its mainland counterparts to pave the way for mainland high-net-worth individuals to establish family offices in the city. We also recommend creating a new ‘Family Office Connect’ channel for cross-border investments through Hong Kong-based family offices, on top of the existing connectivity schemes.”

To optimise the Cross-boundary Wealth Management Connect Scheme in the GBA, Deloitte suggests expanding the range of investment options available to participants, further encompassing a wider variety of financial instruments, including more fund and bond choices.. As Hong Kong continues to build economic ties with the Middle East market, Deloitte recommends offering a 5% profits tax concession for regional fund management headquarters established in Hong Kong by Gulf Cooperation Council (GCC) sovereign wealth funds, thereby strengthening the city’s role as a ‘super-connector’ between GCC sovereign funds, mainland markets, and other major Asia-Pacific economies.

Anthony Lau adds, “The New Capital Investment Entrant Scheme has shown promising results by attracting over 500 applications in just six months and is poised to inject over HKD15 billion into the local economy. To maximise the scheme’s potential, the Government could consider implementing continued enhancements such as accepting jointly held assets, streamlining the asset verification process, and clarifying investment portfolio details.”

Click here to view the full set of recommendations.