Opinion | How to avoid structural deficit and keep vibrancy
By Ho Lok-sang
Financial Secretary Paul Chan Mo-po reported that in the current fiscal year ending on March 31, Hong Kong is likely to have a fiscal deficit of about HK$140 billion ($17.85 billion). A huge deficit as big as this, and much higher than the HK$56 billion which had been forecast, can only be due to unexpected circumstances.
There is no doubt the deficit will decline significantly as the economy recovers. However, given that Hong Kong's economic growth has been weak for more than a decade, the chances are that "normal growth" may still be too low for the deficit to turn into a surplus during good times. Under the requirements of the Basic Law, we need to balance the budget over the cycle so that the surplus during good times should offset the deficit during bad times.
A review of the track record of Hong Kong's economic growth after the 1997 handover, unfortunately, is disheartening. Before the handover, the average annual growth rate from 1984 through 1997 was 6.1 percent. After the handover, from 1998 through 2003, the average growth rate dropped to 1.6 percent. I had warned of weak growth and fiscal deficits resulting from the Tenants Purchase Scheme (TPS) in an article in the South China Morning Post on March 24, 1998. After the TPS was terminated, from 2004 to 2010, the average growth rate shot up to 5.1 percent. (Termination of the TPS was announced in November 2002, but the last phase continued to sell in 2003.) After the Special Stamp Duty (SSD) was introduced in 2010, from 2011 to 2022 the average growth rate fell to 1.5 percent. With the SSD still impeding housing transactions, I am afraid the economy will have a rough time picking up strength, and fiscal revenues may fall short of expectations over the longer term.
Although the SSD succeeded in eliminating speculative demand, it also reduced homeowners' incentive to trade up, leading to shrinkage in supply. Starter home prices shot up. The financial secretary has reduced the normal stamp duty for homebuyers, ... but the resulting savings cannot offset the higher prices that they have to pay in order to buy a starter level home because supply is reduced
In 1997, secondhand housing market transactions averaged 12,155 per month. After the TPS was introduced, secondhand housing market transactions fell to 4,267 per month from 1998 to 2003. After the TPS was terminated, secondhand housing market transactions rose to 7,815 per month, and economic growth picked up to 5.1 percent. After the SSD was introduced in 2010 and then enhanced in 2012, from 2013 through 2022 monthly secondhand home transactions dropped to 3,721. Economic growth fell to anemic levels.
I am disappointed that the special administrative region government chose not to abolish the SSD which has significantly reduced trading-up activities and thus led to a shrinkage in the secondhand supply of starter level homes. Although the SSD succeeded in eliminating speculative demand, it also reduced homeowners' incentive to trade up, leading to shrinkage in supply. Starter home prices shot up. The financial secretary has reduced the normal stamp duty for homebuyers, "to ease the burden on ordinary families of purchasing their residential properties, particularly small and medium residential units", but the resulting savings cannot offset the higher prices that they have to pay in order to buy a starter level home because supply is reduced. It is tragic that middle-income Hong Kong residents are buying grossly overpriced "nano" homes not fit for humans because of a policy that is intended to help them become homeowners.
I understand the government is worried that the abolition of the SSD might send the wrong signals to the market. Speculators may come back. I would urge the government to bravely bring in the capital gains tax to rein in speculation if it wishes. Capital gains tax is not the monster that some people think. Most countries, including the United States, Canada and the United Kingdom, have a capital gains tax. If it is such a monster, why are New York and London ranked higher than Hong Kong by far?
Removing the SSD will definitely kickstart the trading-up process. This is likely to increase the prices of bigger homes, as trading-up activities mean greater demand for them. But because trading-up activities will lead to a larger supply of secondhand starter-level homes, their prices are likely to fall, not rise. If the government is worried about speculation, please bring in capital gains tax. Many countries, including Canada, make half of capital gains taxable as income, while exempting capital gains from the principal residence.
Trading-up activities are truly important to the service economy — brokerages, banking, insurance, renovation works, retail (home furnishings, appliances, in particular), legal services. As the housing market returns to normal, consumption will increase.
Making homeownership accessible to Hong Kong's young people and to those who come to work in Hong Kong is important. The government should follow Singapore's example in building homes that Hong Kong permanent residents have the right to buy. With a much bigger population and much less residential land available, Hong Kong should offer only "basic flats" that meet hygiene and safety requirements, and they should sell at a price equal to 10 times household income on average. Buyers must live in these flats and must not own any other property and can resell them to other Hong Kong permanent residents any time without the need to repay the land premium. Those who have become financially ready to move on to better homes in the private market will do so. So these flats will continue to serve those who need them. In this way, vibrancy of the economy will prevail.
The author is the director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.
The article was first published in ChinaDaily.