Deloitte projects HKSAR budget to near breakeven for FY2021/22 with HKD0.4 billion deficit

Deloitte expects the HKSAR government to record a deficit of HKD0.4 billion for the fiscal year 2021/22, well below the HKD101.6 billion shortfall projected by the Financial Secretary in February. This better-than-expected fiscal outcome is the result of an increase in estimated revenues from stamp duty and land premium, and an expected drop in government expenditure. 

"The outlook for Hong Kong's fiscal health is brighter as the local economy stays on track to recover from the pandemic, backed by the resilience of our businesses and communities," says Deloitte China Southern Region Managing Partner Edward Au. "This economic strength – and the vast potential in Greater Bay Area (GBA) development – are opportunities for the government to advance its economic diversification agenda by boosting investment to enhance the long-term development of key industries and improve citizens' welfare and livelihoods."

"Capturing the GBA’s potential by deepening regional integration and enhancing cross-boundary tax policy should be a priority. Introducing policies that reinforce Hong Kong’s status as an international financial center, promote its position as a regional innovation and technology hub, and boost its already massive appeal as the main gateway to the Chinese Mainland, can only strengthen its distinctiveness."

Rising land sales brighten fiscal outlook 

Although the budget deficit was HKD115.7 billion for the first six months of the fiscal year (April-September 2021), there will be a surplus of HKD115.3 billion in the second half (October 2021 - March 2022), based on Deloitte's current projections. Fiscal reserves are estimated to stand at HKD927.4 billion by the end of March 2022, equivalent to 16.8 months of government expenditure.  

Compared with the same period in the last fiscal year (October 2020 – March 2021), projected revenues from stamp duty and land premium will increase by HKD16 billion and HKD28.5 billion respectively, with direct taxes estimated to decline by HKD20 billion. Overall government spending is expected to drop by HKD43.5 billion, largely on last year's high base due to the Cash Payout Scheme and Employment Support Scheme. 

Prioritizing the Greater Bay Area and sustainable development 

"Despite the relatively strong recovery of the financial and real property markets, pandemic uncertainties continue to weigh on the outlook for sectors such as tourism, retail, and international trading," says Deloitte China Tax Partner Sarah Chan. "Tax reliefs will remain critical to easing people's financial burden in the short term, and a more sustainable economy and collaboration within the GBA will be key to boosting competitiveness and growth in the longer run."

With the GBA providing new impetus for Hong Kong’s economy, three suggested policy measures could promote broader and deeper collaboration among businesses and talent across the region. In addition to extending the scope of qualified R&D expenditure to cover subcontracted activities in the GBA, the introduction of a list of designated R&D institutes in the GBA could boost synergy in the region's innovation and technology development. In addition, enhanced deductions of education expenses for HKSAR residents, especially young people aspiring to build their careers in the GBA, will facilitate the flow of talent.

"Sustainable development is increasingly important for governments across the world, and Hong Kong is no exception. To build a more sustainable economy, we would support the government’s development of forward-looking strategies geared towards our key and emerging industries based on a comprehensive review of existing laws and regulations," adds Chan.

In the financial sector, Deloitte proposes introducing tax exemptions for family offices establishing in Hong Kong while fulfilling certain substance requirements. The tax exemption should be broad enough to cover different types of investment income including interest income derived from fixed income investments (to ensure a level playing field, Deloitte also suggests that the existing Unified Funds Exemption regime be extended to funds that primarily derive interest income from qualifying assets). 

Deloitte also recommends measures to further Hong Kong's position as an Intellectual Property (IP) hub. These include launching a holistic review of the city's tax law to expand the scope of the definition of IP, enhancing the deduction of IP development or acquisition costs, nurturing IP talent, and introducing incentives for taxing income arising from IP. 
To fulfil the government's 2050 net zero pledge, Deloitte also suggests enhancing deductions of expenditure for using approved technologies or engaging designated organizations whose work aligns with the city's climate action plan. 

Supporting individuals to ride out the storm

"The series of COVID-19 stimulus packages rolled out by the government, including the consumption voucher scheme, have lifted our economy out of recession," says Deloitte China Tax Partner Polly Wan. "However, with an uneven recovery across sectors, tax measures to alleviate people’s financial burden will be crucial to strengthening Hong Kong's post-pandemic economy."

To this end, Deloitte proposes wide-ranging relief measures, including a salaries tax waiver, and tax deductions for rental and education expenses, annuity premiums, MPF voluntary contributions, and VHIS premiums. 

1. One-off tax waiver of 2021/22 Hong Kong Salaries tax for all taxpayers capped at HKD10,000;
2. A tax deduction for tenants’ rental expenses for their principal residence, capped at HKD100,000 per year;
3. An additional tax deduction for self-education expenses paid by non-working spouses on the taxpayer's tax return to better equip and enable non-working spouses to return to work when necessary;
4. Extend the tax deduction for self-education expenses to courses or formal training provided by qualified education providers to enhance the skills and employability of laid-off workers;
5. Increase the maximum deduction for qualifying annuity premiums and tax deduction MPF voluntary contributions to HKD100,000 per year;
6. Increase the maximum deduction for qualifying premiums paid under the voluntary health insurance scheme to HKD10,000 per year.