HONG KONG: The expiration of tax breaks and increased stamp duties from property transactions will help ease the surging deficit in the operating account of the Hong Kong government, according to international accounting firm Deloitte.

It is estimated that the government will have a surplus of HK$60 billion in the six months between October 2009 and March 2010, with which to address an existing deficit of HK$64.8, the accounting firm said yesterday.

The projected surplus is higher than a HK$50 billion surplus recorded from the same period during the previous year, and, given overall government accounts, revenues and liabilities, it "will ease the growing deficit, but is not sufficient to offset the total deficit," said Yvonne Law, national chief knowledge officer and partner at the firm. That is because an array of stimulus measures including tax rebates and allowances, along with general expenses between April and September this year have already cost the government HK$64.8 billion, exceeding the projected HK$60 billion surplus that Deloitte forecast, which will leave the government with a net HK$4.8 billion deficit.

"There is another factor that would help ease the deficit - the coming six months is the government's tax-collecting period," Law added.

Over the past few years, the Hong Kong government's coffers have alternated between having massive deficits and equally massive surpluses. The city may record substantial deficits this year and next due to heavy expenditures, said Raymond Tang, a senior manager in the tax service division of the firm.

Law warned the narrow tax base in Hong Kong attributable to an aging population and falling fertility will add financial pressure on the SAR government.

"Hong Kong's tax base is incredibly narrow. This is worrying for the government," she said.

Despite the low tax rate by Western standards, Hong Kong's top 200,000 taxpayers pay 80 percent of the total taxes collected. Alternatively, just 40,000 taxpayers pay 60 percent of all income tax, Guy Ellis, a tax partner at PricewaterhouseCoopers (PWC), said in a report.

In the corporate sector, 800 companies pay 60 percent of the profit tax. Two-thirds of the working population of 3.7 million don't pay income tax at all, according to PWC.

This is not necessarily a good thing, as not paying tax removes incentives from the population to monitor its government, Ellis said.

He thinks the government's tax revenue is also disproportionately dependent on very volatile economic indicators such as the stock market and real estate. When recessions bite, these tax resources collapse - but the government, with monthly expenses of HK$20 billion per month - still has to operate.

(HK Edition 11/14/2009 page2)