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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