(Bloomberg) -- Hong Kong officials this week will unveil plans on how they’ll solve the mounting challenges facing Asia’s financial capital — chief among them slower growth and the longest string of fiscal deficits in two decades.
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Financial Secretary Paul Chan, who will deliver the city’s annual budget Wednesday, has already flagged a focus on reining in spending that helped push the budget deficit into the red for the third year in a row. The government is also considering tweaks to increase capital, from raising taxes on the highest earners to capping a transport subsidy for seniors and legalizing basketball sports betting.
“In the face of the fiscal deficit caused by multiple internal and external challenges in the past few years, this budget will propose an enhanced ‘fiscal consolidation’ strategy,” Chan wrote Sunday in a brief blog post, adding that the city will balance the need to “strictly control” public spending while maintaining services that residents rely on.
Policymakers in Hong Kong are nearing a crossroads, with dwindling avenues for generating revenue and an economy that’s expected to remain under pressure this year. While officials may be wary of raising the low taxes that have made Hong Kong an attractive place to live and visit, there may be limited options for generating the kind of revenue needed to plug an expected shortfall of HK$100 billion ($12.9 billion) for the current fiscal year ending March.
The city has historically relied on the property sector to drive receipts and make up for its low income taxes and the lack of consumption levies. At its peak in 2018, land premium — what developers pay for land use — contributed more than HK$165 billion to government coffers, but it fell to just HK$20 billion last year. The sector remains in a protracted downturn, with prices plunging since 2021 and nearing the lowest levels since 2016 in recent months.
That’s provided one of the biggest drags on Hong Kong’s economy, with gross domestic product growth slowing to 2.5% last year from a 3.3% pace in 2023. While officials expect continued expansion, the outlook was revised lower by groups including the ASEAN+3 Macroeconomic Research Office. Meanwhile, consumer spending remains constrained, with the total value of retail sales plummeting for ten straight months through December, the longest streak since the pandemic.