Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Hong Kong’s long-running property market downturn has become a growing threat to its low-tax hub status, experts have warned, as years of fiscal deficits force the government to seek new revenue sources.
The city will need to consider reviewing its tax structure when financial secretary Paul Chan unveils its budget next week, according to economists and multiple people close to policymakers in the territory.
Hong Kong’s government has historically relied on land sales for revenue, imposing low rates on income and corporate profits — with a progressive salaries tax topping out at 17 per cent — and no capital gains or sales taxes.
But a years-long slowdown in China’s property market, combined with the rising costs of the city’s ageing population, have weighed on Hong Kong’s balance sheet.
The territory, which still boasts low debt and high fiscal reserves, has recorded deficits in four of the previous five financial years, and Chan has forecast another for 2024-25, raising alarms about Hong Kong’s future financial health.
A Hong Kong lawmaker who asked to remain anonymous said increasing the income tax for high earners had been “floated” among other ideas in recent budget consultations with officials.
Some content could not load. Check your internet connection or browser settings.
Analysts warned that raising taxes on residents or companies — which would come on top of a tax rise for top earners last year — could erode one of the city’s competitive advantages as a financial hub.
“Hong Kong faces the challenge of its traditional revenue sources not working as before,” said Heron Lim, an economist at Moody’s Analytics. “The worry is that this is not a cyclical downturn but actually structural in nature.”
For years, Hong Kong’s finances have been upheld by a government monopoly on land supply in one of the world’s most expensive real estate markets.
Land sales to developers, supplemented by revenue from stamp duties and other taxes related to property transactions, long provided a core source of government income.
George Xu, Asia-Pacific director of sovereign ratings at Fitch, said Hong Kong’s ability to offer “a very simple and low-tax system” was thanks to “huge” property sector tax revenues.
“But if that’s not the case — if the property-related revenue sources like land premium will remain subdued or extremely low for an extended period of time — that should bring a lot of challenges to the current tax model.”
Revenue from the land premium — which developers pay for land use — fell to HK$20bn (US$2.5bn) last year, down from about HK$70bn in 2023 and HK$143bn in 2022. Plummeting commercial rents and residential property prices, as well as ample inventory, have depressed tycoons’ appetite for new developments. It is expected to fall further this year to HK$10bn-HK$15bn, according to real estate agency Knight Frank.
Stamp duties have also fallen as real estate transactions have slowed.
Some content could not load. Check your internet connection or browser settings.
Economists who argue that the territory is still in good financial health point to Hong Kong’s low debt and more than HK$600bn in fiscal reserves, amounting to more than 20 per cent of GDP.
But government finances have come under increasing pressure in recent years following the coronavirus pandemic and as healthcare and social spending costs rise for Hong Kong’s ageing population. Its fiscal reserves are now about half of the peak of almost HK$1.2tn in 2019.
Planned mega-developments such as the HK$225bn Northern Metropolis project near the border with Shenzhen will further raise spending, said analysts.
Hong Kong’s economy expanded just 2.5 per cent in 2024, and UBS has forecast 2 per cent growth this year. US President Donald Trump’s additional 10 per cent tariff on Chinese exports — which is set to include Hong Kong — will damage business sentiment, said analysts.
“In the short run, it’s difficult to see a very big rebound,” said Gary Ng, senior economist at Natixis. “Such uncertainties may [affect] investment and growth potential . . . [and] eventually affect competitiveness.”
In February last year, authorities raised the personal tax rate for top earners to 15 per cent on their first HK$5mn of annual income and 16 per cent on their remaining income. The move affects about 12,000 taxpayers of the territory’s 7.5mn people.
Some tax professionals and lawmakers have expressed support for raising the corporate or personal income tax rate further, pointing to rival hub Singapore’s 24 per cent top income tax rate.
“Hong Kong can still remain competitive among other peer jurisdictions — a lot of them still have higher rates,” said Winnie Shek, a Deloitte China tax partner and president of Hong Kong’s taxation institute, an industry body.
A government spokesperson said it had received proposals from various sectors during its budget consultation but declined to comment on them individually.
They added that the territory would “maintain [its] simple and low-tax competitive advantage” while exploring revenue from “those who could afford to pay more”.
Data visualisation by Haohsiang Ko
