To the rescue
Chan sees record HK$139b deficit as govt picks up massive relief tab
Hong Kong Financial Secretary Paul Chan Mo-po unveils his much-awaited 2020-21 Budget on Wednesday, committing HK$120 billion ($15.4 billion) to bail out residents and businesses reeling from an economic downturn precipitated by months of social unrest and exacerbated by the novel coronavirus outbreak.
Financial Secretary Paul Chan Mo-po on Wednesday rolled out his much-awaited 2020-21 Budget with a package of “counter-cyclical” measures worth a whopping HK$120 billion ($15.4 billion) to help Hong Kong get back on its feet amid a recession brought about the triple blows from the global trade tensions, the 9-month-old social unrest and the coronavirus epidemic.
In his fourth budget presented to the Legislative Council, Chan said the government’s aim is to stimulate the local economy, support battered enterprises, safeguard jobs and relieve the people’s financial hardships.
The package includes a host of sweeteners for hard-hit businesses and residents, including profit-tax cuts and low-interest loans of up to HK$2 million for enterprises to be fully guaranteed by the government, as well salaries tax deductions capped at HK$20,000, plus an anticipated cash handout of HK$10,000 to all adult permanent residents.
All-time high deficit
Chan projected a record HK$139.1 billion deficit, equivalent to almost 4.8 percent of Hong Kong’s gross domestic product, for the next financial year, largely fueled by the relief measures. It would also be the first budget deficit in 15 years and the government also expects to be in the red in the coming five consecutive fiscal years. The government had earlier forecast a deficit of about HK$37.8 billion for the 201920 year against a projected surplus of HK$16.8 billion.
The financial chief warned that the city faces “enormous challenges” this year and the outlook is “far from promising” in the near term. While the impact of the coronavirus epidemic on the local economy could possibly be greater than that of the SARS outbreak in 2003, he believes Hong Kong should be able to recover once the epidemic is over.
“Only with such a budget can we help our community local enterprises ride out their difficulties.”
“As tax receipts and land premium income are projected to decrease, coupled with the largescale countercyclical measures that will lead to continued increase in recurrent expenditure, we’ve to assess prudently how the measures will affect government incomes in the coming financial years,” Chan said in his one-and-a-half-hourlong speech.
According to estimates by Bloomberg Intelligence, the HK$120 billion stimulus package amounts to about 20 percent of the government’s revenues in 2018-19, and 4.2 percent of the city’s GDP in 2018. However, it’s predicted the relief effort still cannot prevent the local economy from falling into recession territory with a negative 0.4 percent growth this year.
Chief Executive Carrie Lam Cheng Yuet-ngor hailed the budget proposals as “bold and substantive”, reflecting the government’s “unequivocal commitment” to overcoming adversity and helping the people in need.
“While the government should make good use of Hong Kong’s healthy fiscal reserves accumulated over the years to help our city weather the storm, the financial secretary’s forecast of budget deficits continuing in the next few years serves as a reminder that Hong Kong needs economic growth to generate more revenue to support our social development,” Lam said in a statement.
Based on a projected yearly economic growth rate of 2.8 percent and estimated an annual recurrent expenditure growth rate of between 4.3 and 8.6 percent in the coming five fiscal years, the government expects to record budget deficits in the corresponding period. As a result, the government’s fiscal reserves will dwindle from more than HK$1.13 trillion in 2019-20 to HK$930 billion in the 2024-25 year.
The government had predicted Hong Kong’s growth rate will be around negative 1.5 percent to 0.5 percent this year after the local economy contracted by 1.2 percent last year — the first annual contraction in a decade.
The city faces enormous challenges this year and the outlook is far from promising in the near term.” Paul Chan Mo-po, financial secretary
Economists’ remarks
Analysts expressed mixed views over whether this financial year’s budget deficit will spiral into a structural budget deficit issue for Hong Kong.
“In the longer term, though, the fiscal stress could rise if the economy continues to underperform. Heavy reliance on revenue from capital gains taxes and fees on land use means the health of the government’s finances swing with the business cycle and property market. At the same time, an aging population is limiting the economy’s growth capacity and increasing the government’s cost burden,” said Wan Qian, an economist at Bloomberg Economics (Hong Kong). Other economists begged to differ. “The substantial fiscal easing in Hong Kong’s budget for 2020-21 should provide a degree of support for economic activity in the face of slower global and domestic growth, given Hong Kong’s high level of fiscal reserves provides a large scope for fiscal easing without a significant credit impact,” said Martin Petch, senior credit office vice-president of US-based credit rating agency Moody’s Investors Service.
CPA Australia Divisional President Greater China 2020 Anthony Lau said: “If the cash payout scheme and the other one-off relief measures are excluded, the (next year) fiscal deficit will be about HK$59 billion. This is equivalent to about 2 percent of GDP, which is still below the internationally accepted level of a budget deficit of 3 percent of GDP.”
“Hong Kong’s rich financial reserves come from collective contributions from every member of society over the years, and the government should make good use of our resources to further invest in the city’s future,” said Stanley Ho, co-chairman of the Association of Chartered Certified Accountants’ Hong Kong Tax Sub-committee.