PwC recommends a series of growth-boosting measures for the next Hong Kong budget

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The firm forecasts a consolidated budget deficit of HK$94.8 billion, nearly twice the HKSAR Government's original forecast.

Hong Kong, 8 January 2025 - Given a higher-than-expected budget deficit, PwC Hong Kong (PwC) has outlined a series of recommendations for the Government’s consideration in the formulation of its next budget. Echoing the Financial Secretary’s call to press ahead with economic development, PwC’s recommendations aim to bolster Hong Kong as a leading international financial centre and as a hub for international shipping and trade. 

Sluggish property transactions throughout 2024 have affected revenues from land sales and stamp duty. Based on PwC’s latest estimates, revenue from land sales will be approximately HK$8 billion, which is 76% lower than the Government’s original estimate of HK$33 billion. Stamp duty is expected to generate HK$58 billion – 18% lower than the budget estimate of HK$71 billion. Revenues from profits tax and salaries tax will stand at HK$247.6 billion – down 10% from the original projection of HK$275.6 billion.

The macro-economic factors outlined above are evident in Hong Kong’s reserves. PwC estimates that, as of 31 March 2025, the fiscal reserves will drop to HK$639.8 billion, equivalent to approximately ten months of government expenditure. This is the lowest level of fiscal reserves registered by the Government – the highest level being 28 months.

If government spending continues to rise at the current rate without measures being implemented to reverse this trend, the Government is projected to face a deficit in the next four fiscal years. To address and mitigate this challenging financial position, the Government should prioritise a comprehensive review of public expenditure in the coming years and strengthen the implementation of measures to contain its growth. However, a careful balance must be struck to manage the fiscal implications and their impact on the public.

"The global economy is expected to encounter increased uncertainties in 2025, driven by geopolitical tensions, a deceleration in the pace of interest rate reductions and other factors that could hinder a swift economic recovery. These headwinds will also be felt in Hong Kong. PwC Hong Kong anticipates that the Government will record a consolidated budget deficit of HK$94.8 billion, which includes net proceeds of government bonds amounting to HK$95.8 billion. This figure is nearly double the Government’s original forecast." said Jeremy Ngai, PwC South China (incl. Hong Kong SAR) Tax Leader. "We support the Financial Secretary’s call to press ahead with economic development, providing the impetus to accelerate economic growth. Now, more than ever, it is vital that Hong Kong leverages its strategic location within the Greater Bay Area (GBA), and acts as a super-connector between the Chinese Mainland and the rest of the world, supports innovative industries and retains talent to drive the city’s future growth."

Build and retain a skilled workforce

In alignment with the Government’s initiatives to build and attract a skilled workforce, Agnes Wong, PwC South Private Clients and Family Office Tax Leader suggested: "It is important to create a welcoming environment for international talent. Consideration may be given to establishing a comprehensive one-stop facilitation service that includes streamlining the visa application process, aligning talent with suitable employment opportunities and arranging educational facilities for their children to ensure a smooth transition and integration. Additionally, tax rules should be enhanced to allow a more favourable unilateral tax relief for taxes paid by individuals in tax treaty jurisdictions."

Beyond attracting international talent, it is crucial to address the needs of local talent. She recommended providing tax deductions to employers to encourage investment in upskilling and reskilling their workforce. This approach would elevate the skill levels of the local workforce, ensuring they can keep pace with the fast-changing business environment.

Leverage Hong Kong’s strengths

To establish Hong Kong as a premier family office hub, PwC Hong Kong recommends expediting the implementation of proposed enhancements to the single family office tax concessions. Agnes said: "Expanding the classes of specified assets eligible for tax concessions to include fine arts and collectibles can address the unique needs of family offices. Given that the New Capital Investment Entrant Scheme and the family office tax concession share similar objectives of attracting asset owners to settle in the city and explore its diverse investment opportunities, aligning the qualifying investment lists under these two measures would ease investment decisions for family offices and individuals aspiring to settle in Hong Kong."

To further strengthen the family office ecosystem and industry in Hong Kong, Agnes added: "Additional measures should be introduced to complement the tax concessions. These include accelerating Hong Kong residency status for principals and immediate family members of eligible family offices, streamlining employment visas for foreign investment professionals and offering tax concessions such as preferential tax rates to eligible family offices."

Agnes applauds the Government’s plans to introduce tax concessions for commodity trading businesses as part of its strategy to strengthen Hong Kong’s position as an international shipping centre. She explained: "Shipowners and commodity traders are primary users of shipping routes and maritime services, which play a crucial role in this ecosystem. Their presence and operations in Hong Kong can significantly drive the maritime services industry, thereby boosting demand for related financial and professional services. Building a robust commodity trading ecosystem in our city will further solidify Hong Kong’s status as an international financial, shipping and logistic hub. Furthermore, the Government’s proposal to enhance the existing preferential tax regime for the maritime sector is a timely response to the imminent implementation of the global minimum tax in Hong Kong. We strongly recommend accelerating the enactment of the proposed enhancements to the current maritime sector tax concessions to ensure the sector’s continued competitiveness."

Rex Ho, PwC Asia Pacific Financial Services Tax Leader, recommended: "To solidify Hong Kong’s status as a premier international financial centre, the Government should expedite the implementation of the proposed enhancements to preferential tax regimes for investment funds and carried interests. Consideration should also be given to waiving the buy-side stamp duty on stock trading to invigorate capital market activity and attract more investors. Providing stamp duty exemptions to market intermediaries would further facilitate smoother and more cost-effective transactions, thereby enhancing overall market efficiency and liquidity. 

As the Renminbi (RMB) gains prominence in international trade, particularly within the Belt and Road jurisdictions, ASEAN and the Middle East, Hong Kong should further expand its offshore RMB business to drive growth. This includes optimising mutual market access schemes, attracting additional RMB flows to enhance offshore liquidity and diversifying offshore RMB products by introducing innovative RMB financial instruments."

Make innovation pervasive

Kenneth Wong, PwC Hong Kong Tax Controversy Services Leader, said: "To foster innovation and complement the recently implemented patent box regime, it is imperative for the Government to relax intellectual property-related tax rules and extend enhanced tax deductions to cover R&D activities undertaken in the GBA. Providing grants specifically aimed at product development and preferential corporate tax rates for qualifying companies, such as drone manufacturers and software and technology providers, would significantly support the development of the low-altitude economy. Currently, the Government operates several funding programmes under the Innovation and Technology Fund. Further streamlining the vetting and disbursement process will be conducive to encouraging a vibrant innovation ecosystem in Hong Kong."

PwC Hong Kong has put forth a series of strategic recommendations aimed at bolstering Hong Kong’s position as a leading international trade centre. Kenneth elaborated: "These recommendations include offering competitive tax and non-tax financial incentives to attract more multinational enterprises to establish their regional headquarters in Hong Kong. Such strategies are in alignment with Hong Kong's ambitions to develop a robust headquarter economy, showcasing a clear and forward-looking vision for the future. Hong Kong serves as a pivotal gateway for Chinese investments seeking to expand internationally. Currently, Hong Kong has signed tax treaties with 51 jurisdictions, which presents a substantial opportunity for growth compared to the over 90 treaties that Singapore has established. Negotiations should prioritise significant trading partners and Belt and Road jurisdictions, as expanding this network is crucial for reducing double taxation. This, in turn, will enhance Hong Kong’s status as an international trade centre."

Albert Wong, PwC Hong Kong Public Sector Consulting Partner, said, "Enhancing support for new industrialisation in Hong Kong is crucial to the development of Hong Kong as an international I&T centre and commercialisation of R&D outcome. The Government could intensify its efforts by expanding initiatives such as extending the funding scope of the New Industrialisation Funding Scheme to assist manufacturers in upgrading existing production facilities and equipment. Adjusting the funding matching basis would also be beneficial. This approach would facilitate the adoption of Industry 4.0 technologies and the development of modular and agile manufacturing lines, and strengthen the local commercialisation capabilities. Ultimately, it enables companies to offer product personalisation and adapt to the evolving needs of customers."

Wilson Chow, PwC China’s Artificial Intelligence Leader and PwC’s Global Technology, Media and Telecommunications (TMT) Industry Leader, said: "AI adoption in public services is essential for streamlining processes, enhancing service design and delivery, and achieving operational efficiency, especially a midst of the budget deficit situation. The Government should lead AI deployment by allocating resources for pilot programmes, such as automated immigration clearance systems using facial recognition in collaboration with the Shenzhen Government. Additionally, cultivating an advanced AI ecosystem by encouraging collaboration between Cyberport, HKSTP, and AI incubators in the GBA can establish Hong Kong as a regional hub for AI start-ups."

Infrastructure

Simon Booker, Government and Infrastructure Partner, Asia Pacific, PwC Hong Kong, said, "For infrastructure development, engaging the private sector early in planning and financing infrastructure projects is critical. The private sector allows financing of such projects via Public-Private Partnerships (PPP), bond issue and loan facilities, as well as valuable expertise to enhance project efficiency. For strategic planning and financing purposes, publishing a 5 to10-year infrastructure plan will enhance transparency and attract global investments. For projects with costly private capital, the Government should use Multilateral Development Banks (MDBs) and expand the Hong Kong Investment Corporation's role to de-risk projects and attract private investments."

Develop silver economy

Echoing the Government’s plan to develop the silver economy, Kenneth recommended: "The Government should consider providing tax and fiscal incentives to help enterprises in silver hair technology, health products and care services to develop innovative products and services. Tax incentives should also be enhanced to encourage senior employees to remain in the workforce and contribute to the economy. This includes offering tax/financial incentives to employers who hire senior employees with modest earnings, and providing tax benefits to senior employees who choose to stay in the workforce.

Furthermore, the Government can act as a facilitator to foster collaboration among enterprises, research institutes, and medical institutions to develop elderly-focused medical and healthcare products. Organising regular exhibitions for silver hair products can also drive market expansion and increase awareness."

The above recommendations are focused on four key pillars: building and retaining a skilled workforce; leveraging Hong Kong’s strengths; making innovation pervasive and developing the ‘silver’ economy. PwC is confident that there are a range of measures that can be implemented in order to bolster Hong Kong as a leading international wealth management and financial centre, as well as an international shipping and trade centre.