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The theory of fiscal constitutionalism – essentially the idea, promoted by the Nobel Prize-winning economist James M Buchanan, that the state’s powers of taxing and spending ought to be constitutionally constrained – seems to enjoy quite widespread support, but successful attempts to put it into practice have been few and far between.

Hong Kong is exceptional: its Basic Law – the territory’s mini-constitution, itself subordinate to the Chinese Constitution – contains provisions aimed at confining the government’s powers of taxing and spending. Article 107 requires the Government to ‘strive’ to balance its budget, and Article 108 accords constitutional status to the territory’s famous (or infamous) ‘low tax policy’. These provisions are instructive as to both the merits and the mechanics of the theory.


On 30 June 1997 the British colony of Hong Kong became a Special Administrative Region (SAR) of the People’s Republic of China, but its low taxes survived unscathed: the maximum rate of tax on personal income is still only 15 per cent and the corporate rate is 16.5 per cent. Moreover, the burden is actually much lighter than the rates of tax suggest: the allowances are so large that most people pay no income tax at all; the rules relating to deductions, depreciation and perks are all exceptionally generous; there is no tax on offshore income, dividends or capital gains; and there is no general indirect tax.

The most important change is that, whilst the Colonial Government entered into no double tax treaties at all, the SAR Government has entered into as many as possible: 44 to date and another 14 under negotiation. Consequently, the territory is an even more attractive tax haven than before.

The fiscal firewall

It may be helpful to note that Article 106 of the Basic Law provides for what is colloquially called the ‘fiscal firewall’, by which is meant the total separation of Hong Kong’s public finances from those of the mainland. It is as follows:

The Hong Kong Special Administrative Region shall have independent finances. The Hong Kong Special Administrative Region shall use its financial revenues exclusively for its own purposes, and they shall not be handed over to the Central People’s Government. The Central People’s Government shall not levy taxes in the Hong Kong Special Administrative Region.

During the colonial period, the British Government extracted substantial revenues from Hong Kong in the form of the ‘Defence Contribution’, which the Colonial Government paid to the British Government – ostensibly for Britain’s defence of the colony from outside aggression. In fact, it was only until the late 1950s that the British Government maintained seriously that it could defend the colony militarily. In 1949, following the victory of the communists in the mainland, Britain quadrupled the garrison in Hong Kong. But in 1954, it was substantially reduced again. British troops were stationed in Hong Kong right up until midnight on 30 June 1997, but it was not pretended that this was to defend the colony from aggressors. Rather, it suited the British Government’s own purposes to have them there. In any event, Beijing has deprived itself of the opportunity to follow the British practice, for Article 14 of the Basic Law provides that ‘[e]xpenditure for the garrison [of the People’s Liberation Army troops stationed in Hong Kong] shall be borne by the Central People’s Government.’

The balanced budget requirement

Article 107 of the Basic Law provides:

The Hong Kong Special Administrative Region shall follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.

This allows considerable flexibility. It does not require that the SAR Government actually balance its budgets, only that it ‘strive’ to do so. Similarly, it does not require that the Government keep expenditure within the limits of revenue, only that it ‘follow the principle’ of doing so. What this means is obviously debatable.

From 1945 until 1997, the Hong Kong Government almost always operated at a surplus, as a result of rapid economic growth and minimal public spending. Consequently, it accumulated large reserves, usually standing at more than 12 months’ total public spending (so that the interest on them is itself a significant source of revenue). Since 1997, it has sometimes operated at a deficit, though it has also repeatedly made supposedly one-off tax cuts, and in 2011 it even made a gratuitous, no-strings-attached hand-out of HK$6,000 to almost every adult resident in the territory (most of whom had never paid any tax). The Government itself has maintained that a single annual deficit does not necessarily entail non-compliance with Article 107; rather, it says, Article 107 requires only that the Government balance its budgets over some longer period of time.

Article 107 requires not only that the SAR Government attempt to balance its budgets, but also that it ‘strive to … keep the budget commensurate with the growth rate of its gross domestic product’. In other words, the Government must strive not to increase public spending as a proportion of GDP, even if it could do so without running a deficit. In recent decades, public spending has usually been about 20 per cent of GDP (exceptionally, since COVID-19, the Hong Kong Government has run very large deficits which it has funded from its reserves). The principle that public spending should expand no faster than the economy itself has obvious attractions but also an obvious flaw: it was never explained by the Colonial Government, and has yet to be explained by the SAR Government, why it should be accepted that the current low level of public spending, expressed as a percentage of GDP, is optimal.

The vagueness of Article 107 suggests that it might not be justiciable. In other words, it is perhaps symbolic or ‘directory’ rather than ‘mandatory’. But even if it is merely symbolic, the symbolism is powerful, as is evidenced by the fact that debates on how the SAR Government might best respond to its occasional budgetary difficulties have made repeated reference to it.

The constitutional status of the low tax policy

Article 108 of the Basic Law provides:

The Hong Kong Special Administrative Region shall practise an independent taxation system. The Hong Kong Special Administrative Region shall, taking the low tax policy previously pursued in Hong Kong as reference, enact laws on its own concerning types of taxes, tax rates, tax reductions [sic], allowances and exemptions, and other matters of taxation.

The first sentence is a component of the fiscal firewall; the second authorises the SAR Government to legislate on ‘matters of taxation’ and also accords constitutional status to the SAR’s ‘low tax policy’. But Article 108 is imprecise in the extreme: the term ‘low tax policy’ is obviously vague, and ‘taking’ a policy ‘as reference’ does not necessarily mean adhering to it.

It seems likely that the Basic Law’s reference to Hong Kong’s ‘low tax policy’, like its references to the balancing of the budget, is symbolic rather than justiciable. The SAR Government has sometimes experienced budgetary difficulties which were, by its own fortunate standards, quite serious: it has occasionally operated at a deficit. Should it experience further difficulties, it might seek to redress them by increasing taxes. But any increase in taxation will presumably encounter opposition from those affected, so it is likely that the justiciability of Article 108 will at some point be put to the test.

Article 108 was enacted to protect Hong Kong’s richer residents from the possibility that democracy might one day lead to a steep progressive income tax. But it is also conceivable that a tax favoured by the establishment could be challenged under Article 108. In particular, the Hong Kong Government has several times in the past proposed to introduce a value-added tax (VAT) to fund cuts in the already-low rates of income tax – and these proposals have enjoyed considerable support from the business community. It could be said that a tax on rice, for instance, even at a low rate, would not be in accordance with Hong Kong’s traditional low tax policy. Again, the courts might hold that Article 108 is not justiciable, in which case it might ultimately fail to serve its purpose (protecting the affluent from populist tax increases). Conversely, if the courts were to hold that Article 108 is justiciable, they would presumably find it necessary to define the ‘low tax policy’, which seems troublesome.


The Hong Kong Government’s low tax policy and relatively meagre public spending have long been regarded by some commentators as exemplary and by others as grossly inadequate. The anti-democratic measures recently taken by the SAR Government have provoked widespread dismay, but the Hong Kong people mostly seem content with the balance of light taxes and meagre public spending – though that appearance may be deceptive.

Articles 107 and 108 of the Basic Law are important to the SAR and potentially instructive for the rest of the world. But they are challengingly vague, and it is unclear whether the Hong Kong courts, or the Central People’s Government, or neither will enforce them. It seems likely that at some point both their justiciability and their meaning will be put to the test.


Further reading

For a lengthier version of this article with references, see Michael Littlewood, “The Taxing and Spending Powers of the Hong Kong Government” (2020) 24 Asia-Pacific Journal of Taxation 15-31, also available here:

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