Hong Kong is currently facing significant fiscal challenges, marked by consecutive years of budget deficits. These challenges stem from demographic shifts, pandemic-induced economic disruptions, and structural inefficiencies, with the recent anticipation of a 2024-2025 budget deficit as high as HK$94.8 billion. This article outlines some primary causes of the deficits and evaluates current solutions for fiscal recovery.

Current Fiscal Imbalance

The Hong Kong government anticipates a consolidated budget deficit of HK$94.8 billion for 2024-2025, nearly double the original estimate. According to PwC Hong Kong, land sales contributed only HK$8 billion—a 76% shortfall compared to the HK$33 billion projection. Stamp duty revenue is similarly expected to reach HK$58 billion, 18% lower than the budgeted HK$71 billion. Meanwhile, profits and salaries tax revenues are down 10%, totalling HK$247.6 billion.

Hong Kong’s fiscal reserves have also declined to HK$733.2 billion, just enough to cover a year’s government expenditure. In the upcoming fiscal year, spending is projected to rise by 6.7%, while revenues are expected to increase modestly by 14.1%. However, this will still result in a fiscal deficit.

Consecutive fiscal deficits started in 2020-2021, amidst Covid-19 with HK$731.1 expenditure and HK$572.5 revenue. The deficit is expected to continue until earliest 2027-2028, with the government aim to improve fiscal reserves estimated at $983.7 billion by the end of March 2028.

Factors Contributing to the Budget Deficit

Demographic Pressures and Rising Welfare Costs

Hong Kong’s aging population and shrinking workforce are significant contributors to its fiscal woes. Welfare and healthcare spending surged by 34.2% over the past five years, reaching HK$343.7 billion in 2024-2025. The Financial Secretary had previously warned about the strain of the aging population, noting that the baby boomer generation’s retirement would significantly increase government liabilities.

Economic recession from COVID-19

The pandemic created long-term financial pressures. Total healthcare spending for 2022-2023 reached HK$284.1 billion, equivalent to 10% of GDP, including HK$44.5 billion in pandemic-related expenses. Public healthcare expenditure alone increased by nearly 20% between 2021-2022 and 2022-2023.

Decline in Tourism and Retail Activity

The Hong Kong Tourism Board reported that while tourist arrivals reached 34 million in 2023, this represented only 60% of pre-pandemic levels. Additionally, tourists’ spending patterns have shifted, with a greater focus on cultural experiences over luxury shopping, causing retail sales to fall by 14.7% in April 2024 alone. This is also exacerbated by the trend of visiting mainland China by Hong Kong residents over weekends, reducing their spending in local shops and restaurants. In October 2023, over 200,000 Hong Kong residents travelled to the mainland every weekend. During the Chung Yeung Festival holiday in 2023, 860,000 people travelled to mainland China, with a single-day record of 365,000 crossings on October 21.

This "northbound consumption" trend has placed immense pressure on Hong Kong's retail and dining industries. The chairman of the Hong Kong Federation of Restaurants and Related Trades, Wong Ka-wai, highlighted that Hong Kong's dining sector struggles to compete with the cheaper services offered in mainland China, causing the closing of many local brands and restaurants.

Weak Property Market

Another key factor is a recession in the property market. Revenue from property-related transactions has been plummeting. Land sales generated just HK$37 billion by October 2024, a mere 11% of the HK$330 billion target. Stamp duty revenue also fell by 40%, reflecting reduced property transactions.

Evaluation of Current Government Policies

The Hong Kong government has implemented several initiatives to address the growing fiscal deficit and to revive the economy. However, their effectiveness remains controversial. Firstly, to reduce labour shortage and reduce the aging population, the government is attracting talent through immigration initiatives. The “High-Talent Pass Scheme,” introduced to attract skilled professionals, has received over 30,000 applications, with approvals primarily granted to mainland Chinese applicants. Although the initiative demonstrates Hong Kong's intent to address labour shortages, there are concerns about the quality of talent and the lack of data on whether these individuals contribute meaningfully to the local labour market. This program could support long-term economic growth if integrated with targeted measures to address sector-specific labour shortages in healthcare, retail, and technology. Secondly, the government has actively promoted initiatives such as “Night Vibes Hong Kong”, aiming to stimulate the night-time economy by organizing events like night markets and extended shopping hours. These efforts are designed to attract tourists and boost local consumption. Despite initial optimism, these measures have faced challenges, including insufficient participation from merchants, labour shortages in key sectors, and a shift in tourist spending habits toward cultural and ecological experiences instead of retail shopping. While visitor numbers are recovering, tourist spending remains below pre-pandemic levels, with retail sales dropping by 14.7% in April 2024. Thirdly, in response to the weak property market, the government recently cancelled three stamp duties aimed at cooling property prices, including the buyer’s stamp duty (BSD), the additional stamp duty (SSD), and the new residential stamp duty (NRSD). This policy is intended to stimulate property transactions and attract buyers, particularly those purchasing a first and second home or entering the market for investment purposes. While these measures are likely to increase activity in the property market, their impact on government revenue remains uncertain, given that stamp duties previously accounted for approximately HK$94 billion annually.

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