Shaping a diverse economy for sustainable growth; EY recommends the Government to diversify Hong Kong’s economic portfolio and optimize the use of public resources

Ernst & Young Tax Services Limited (EY) estimates that the Hong Kong SAR Government (the Government) will record a fiscal deficit in the financial year 2024-25 of HK$98 billion, which is more than double the HK$48 billion originally forecasted in the Government’s Budget announced in February 2024.

As a result of the estimated deficit for the fiscal year 2024-25, Hong Kong’s fiscal reserves will be reduced to HK$637 billion as of 31 March 2025.

Jasmine Lee, EY Hong Kong and Macau Managing Partner, says: “Over the past year, external factors such as the challenging global economic environment and ongoing geopolitical tensions are still creating uncertainties for the recovery of economy in Hong Kong, resulting in another year of deficit. It is time for the Government to further diversify Hong Kong’s economic portfolio and optimize the use of public resources to foster growth in a stable and sustainable manner.”

Land premium is expected to be almost 70% lower than the original estimate of HK$33 billion. On the other hand, the relaxation of stamp duty measures adopted since 2023 to stimulate the stock and property markets seem to have limited impact and stamp duty revenue is also expected to be around 30% lower than the original estimated HK$71 billion. Tax revenue, due to changes in investment and consumer preferences, is experiencing a drop this year as well.

Lee says: “In view of the current economic environment, the fiscal reserves are likely to be continued to be under pressure with forecasted deficits for the coming few years. New revenue streams should be explored, and careful fiscal management is needed to ensure long-term economic stability. The “affordable user pays” principle should be taken into account when considering fiscal measures, so as to avoid taking any hasty actions that may affect local economic recovery and people’s livelihood.”

Opening up new horizons

Wilson Cheng, EY¹ Hong Kong and Macau Tax Leader, says: “Despite the financial industry has always been a traditional pillar of our economy, the Government should also diversify Hong Kong’s economic portfolio and proactively expand markets through provision of tax and other incentives.”

The Government has proposed in the 2024 Policy Address to enhance the funds and family office tax incentives, which we believe would attract more investment into Hong Kong and consolidate Hong Kong’s position as an international financial center. Apart from profits tax concessionary measures for the wealth management sector, we propose that tax incentives should also be introduced for Real Estate Investment Trusts (REITs) and commodity traders to further develop these two industries in Hong Kong.

The significance of the real estate market in Hong Kong’s economy is undeniable. A robust REIT market can stimulate economic growth by attracting both local and international investors. The influx of capital can then be used for driving economic growth across different sectors. The growth of the REIT market can also stimulate various professional services such as property agency, property management and valuation.

Stamp duties payable on the transfer of REIT units are now waived as proposed in the 2024-25 Budget. We propose to take more steps forward to revitalize the REIT market, such as exempting stamp duty for existing REITs acquiring new properties, refunding stamp duty for newly formed REITs and providing a profits tax incentive for qualifying REITs.

Ricky Tam, EY¹ Tax Services Partner, adds on: “We welcome the Government’s proposal to promote commodity trading in Hong Kong and facilitate an international commodity exchange to set up accredited warehouses in Hong Kong. Hong Kong, as a renowned international port, our strategic location and advanced infrastructure well-positions us to be a key hub for maritime services in Asia and beyond.”

Riding out challenging times

It is undeniable that the landscape of global trade has been undergoing a significant transformation, where the traditional model of physical trade is gradually being supplemented and even replaced by digital trade. Consumer preferences have also shifted towards using digital platforms, instead of personally visiting the retail stores. Digital platforms which are not operating in Hong Kong might not be subject to profits tax in Hong Kong despite they generate revenue from Hong Kong customers.

Paul Ho, EY¹ Financial Services Tax Leader for Hong Kong, says: “In order to bring about a fairer environment for the Hong Kong retail industry and Hong Kong digital platforms, we recommend the Government to review whether the current tax legislation effectively captures the income derived by non-residents which provide certain digital services and contents in Hong Kong.”

The pandemic and the resulting global economic downturn have heavily impacted Hong Kong’s economy in recent years. Despite we have seen gradual economic recovery, the Government should remain cautious on the use of its fiscal reserves.

Ho says: “It might be worthwhile to revisit whether the existing support measures are really relieving the hardship of those genuinely in need. A more targeted approach should be adopted in order to maintain a healthy level of fiscal reserves.”

The Government has announced in its previous Budget that the Government Public Transport Fare Concession Scheme for the Elderly and Eligible Persons with Disabilities (i.e. the $2 Scheme) and Public Transport Fare Subsidy Scheme would be reviewed to ensure these subsidies are provided in a financially sustainable manner. The Government could consider setting tiered subsidies to achieve a more equitable allocation of public resources.

We believe that the proposed fiscal measures will help Hong Kong continue to grow as an international financial, maritime and trade center, as well as combat the fiscal pressure our economy is experiencing right now.

1. Ernst & Young Tax Services Limited

-Ends-

Notes to Editors

EY | Building a better working world

EY exists to build a better working world, helping to create long-term value for clients, people and society and build trust in the capital markets.

Enabled by data and technology, diverse EY teams in over 150 countries provide trust through assurance and help clients grow, transform and operate.

Working across assurance, consulting, law, strategy, tax and transactions, EY teams ask better questions to find new answers for the complex issues facing our world today.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients, nor does it own or control any member firm or act as the headquarters of any member firm. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. EY member firms do not practice law where prohibited by local laws. For more information about our organization, please visit ey.com.

This news release is issued by the EY China practice, a part of the EY global network. The Chinese member organizations of EY reserve the final right to interpret this press release. Any comments or statements in this press release should not be construed as professional advice or advice on any matter. Without the written consent or authorization of EY, the name, logo and trademark of EY shall not be used or quoted.