Revenue Volatility and Fiscal Resilience in Hong Kong: Implications for Public Finance Reform

Abstract

This paper provides a comprehensive examination of Hong Kong’s fiscal sustainability within the framework of modern public finance theory, with particular emphasis on revenue volatility, debt dynamics, and institutional reform. It argues that Hong Kong’s fiscal architecture is structurally fragile due to its disproportionate reliance on highly cyclical and asset-based revenue streams, notably land premiums, stamp duties, and equity market-related income. While historically these revenue sources have generated substantial fiscal surpluses during economic upswings, they have simultaneously obscured underlying structural imbalances and weakened the predictability of public finances. This study further contends that recent expansions in public expenditure, especially in infrastructure investment and long-term development commitments, combined with a prolonged and uncertain timetable for fiscal consolidation, have intensified concerns regarding fiscal credibility and intergenerational equity. Under the Linked Exchange Rate System (LERS), Hong Kong’s absence of independent monetary policy heightens the importance of prudent fiscal management as a primary macroeconomic stabilization tool. By revisiting key historical episodes, including the post-Asian Financial Crisis adjustment and the 2007–2008 asset market boom, this paper demonstrates how temporary revenue windfalls can mask structural vulnerabilities. This paper critically evaluates the proposed introduction of a Goods and Services Tax (GST), arguing that its regressive incidence and high administrative costs limit its effectiveness in the current institutional context. Instead, this study proposes a multidimensional reform agenda encompassing expenditure rationalization, technological modernization of tax administration through artificial intelligence, strategic diversification of revenue sources, and structural reforms in education, healthcare, and infrastructure financing. The paper concludes that Hong Kong must transition from a fiscally reactive model reliant on cyclical revenues and deficit financing toward a resilient, diversified, and institutionally robust public finance framework capable of sustaining long-term economic stability