Hong Kong yesterday unveiled a record budget deficit, pledging cash handouts to residents and business tax breaks to soften the blow to the recession-hit economy from often-violent protests and the COVID-19 outbreak.
While the measures are not expected to arrest the downturn in the territory, they would provide households and companies hit hard with some financial relief, analysts said.
However, longer-term questions remain over whether the stimulus can restore public trust in the most unpopular administration since the former British colony returned to Chinese rule in 1997, according to opinion polls.
“Hong Kong has been saving for a rainy day. This is it, this is the rainy day,” Union Bancaire Privee chief Asia investment strategist Anthony Chan said. “There is also political reasoning behind the relief and emergency measures.”
The territory recorded its first budget deficit in 15 years in this fiscal year, at HK$37.8 billion (US$4.85 billion), or about 1.3 percent of GDP.
In his budget speech, Hong Kong Financial Secretary Paul Chan (陳茂波) flagged deficits for the next five years.
The 2019-2020 budget included more than HK$30 billion to cushion the hit from the protests, which saw activists and police clashing in shopping malls and in the financial district. It also included HK$30 billion in handouts for health authorities, small and medium-sized enterprises, and low-income residents.
“No one could have predicted that social incidents would break out in the middle of the year, which not only hit our economy, but also broke our hearts,” Paul Chan told legislators. “Before we could sort things out, there was an unexpected outbreak of the novel coronavirus disease. Preventing and fighting against the epidemic ... are our top priority.”
For the 2020-2021 fiscal year, he said he expected a budget deficit of 4.8 percent of GDP, or HK$139.1 billion, a record in nominal terms.
In 2003-2004, when Hong Kong faced a recession caused by the SARS outbreak, the deficit reached 5.3 percent of GDP, ANZ analysts said.
The projected shortfall, which was larger than most analysts expected, accounts for lower revenues, as well as another HK$120 billion in mostly one-off relief measures, including handouts of HK$10,000 to Hong Kong residents aged over 18, tax breaks for companies and other subsidies.
Paul Chan said that while public spending was large, current circumstances were unique and the payouts would not impose a long-term fiscal burden.
Fiscal reserves are estimated at HK$937.1 billion by the end of March 2025, down from a forecast of HK$1.1 trillion for next month, a drop that leaves economists relaxed about the currency peg to the US dollar.
Also included in the budget are funds for the Hong Kong Department of Justice to launch a HK$450 million campaign to promote the rule of law, entitled “Vision 2030 for Rule of Law.”
The goal is to “strengthen our community’s understanding of the concept of the rule of law and its implementation,” Paul Chan said. “Respect for the rule of law and independence of the judiciary are among the cornerstones underpinning Hong Kong’s success.”
Hong Kong Chief Executive Carrie Lam (林鄭月娥) praised the budget plans.
“In these unprecedented times, I am confident that the 2020-21 budget proposals will provide effective and targeted support to help the Hong Kong community withstand the current difficulties and gear up for a brighter tomorrow,” Lam said in a statement.
However, many economists disagreed.
“This is obviously untargeted and regressive, and will not solve the problem of those most severely hit,” Natixis chief Asia Pacific economist Alicia Garcia Herrero said. “It is like throwing a drop in the ocean for many, while you could have used that amount to cure the injuries of only a few.”
Ahead of the budget, accounting firm KPMG pushed for handouts, but in the form of electronic vouchers to encourage direct spending, rather than saving or moving the cash abroad.
Daiwa Capital Markets chief economist for Asia ex-Japan Kevin Lai (賴志文) said that he was skeptical Hong Kongers would rush out to spend their cash windfall.
“That sounds a lot, but would you go out and spend it? The answer is no,” Lai said. “The economic benefits will only be marginal. Shops and restaurants are screaming [out] for business. It’s not going to help.”
Additional reporting by Bloomberg
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