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jogohsw 15 November 2008 Singapore News | 8 Comments

HONG KONG – Hong Kong is heading for a record HK$80 billion (US$10.3 billion) budget deficit for 2008/09 after offering tax concessions and handouts and as a weakening economy depresses public revenues, Deloitte forecast on Thursday.

Analysts say Hong Kong’s economy is heading for recession within the next six months, after four years of robust growth averaging 7.3 per cent annually.

Government revenues already appear to be falling with the government posting a HK$48.6 billion deficit for April-September, eight times last year’s HK$5.6 billion deficit for the same period.

A full-year deficit of HK$80 billion would reverse a record HK$123.7 billion surplus for 2007/08. It would also top a HK$63.3 billion deficit in 2001/02 when the government was suffering the effects of the bursting of the global dotcom bubble.

Deloitte said the government would remain in the red in 2009/10, forecasting a deficit of HK$20 billion, compared with the government’s forecast HK$49.2 billion surplus for 2009/10.

However, Yvonne Law, tax partner at Deloitte, said two consecutive deficits should be manageable because the government had huge fiscal reserves, totalling HK$444.3 billion at the end of September.

Volatile fiscal balances are a feature of Hong Kong’s government finances thanks to a small tax base – salaries tax is a flat 15 per cent and there are no sales or capital gains taxes. Two years ago the government proposed a goods and services tax to expand the tax base but was forced to abandon the plan in the face of public opposition.

‘The structural problem of a small tax base means that during an economic downturn (government) income falls but expenditure remains static,’ Ms Law said.

Government income will be hit by a 50 per cent drop in the stock market this year as well as falling property prices and worsening corporate profits.

Deloitte said contributors to its estimated HK$80 billion deficit would include a HK$29 billion decline in land premiums; HK$20 billion from falling stamp duty revenue; and HK$15 billion from a drop in corporate profits tax. Salaries tax would decline by HK$6 billion, it said.

Government expenditure, meanwhile, is rising as the government offered HK$40 billion worth of temporary tax concessions and handouts in its annual budget in February when the economy was still strong. In the summer it provided HK$11 billion in relief for the elderly and low-income groups to cope with rising inflation, which peaked at 6.3 per cent in August.

Chief Executive Donald Tsang said last month that the government faced a ‘huge’ fiscal deficit for the year ending March 2009 as a result of the global financial crisis but the government has yet to revise its initial forecast for a HK$7.5 billion deficit.

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