Commentary: Hong Kong Budget gives city fighting chance of making it out of crisis
Hong Kong government’s budget aims to keep businesses cash flow positive while boosting consumption. Strong fundamentals mean that once external threats to Hong Kong’s economy disappear, it will bounce back, says Maggie Hu.
HONG KONG: In a bid to kick-start its troubled economy, the Hong Kong government on Wednesday (Feb 26) announced a bumper HK$572.5 billion (US$73 billion) budget.
The measures announced by Financial Secretary Paul Chan to help Hong Kong address a slowdown caused by political protests, a slowing global economy and the outbreak of COVID-19, are projected to lead to a record 15-year high deficit of HK$139.1 billion for this fiscal year.
REELING FROM CURRENT WOES
This made it the first year that it will run a budget deficit since 2006.
Compared to 2019, Hong Kong’s revenue contracted slightly less than 5 per cent but expenditure expanded by more than 13 per cent. The decreased revenue and increased expenditure can be attributed to various factors including the trade war between China and the US, volatility in the global economy, and the social unrest in Hong Kong starting last June.
With no clear end in sight for any of these issues plaguing Hong Kong, a huge question mark hangs over the future of its economy and businesses there and whether these would lead to a substantial loss of jobs.
It is no wonder then that the government has loosened its purse strings to spend big to stimulate the economy.
PROVIDING A LIFELINE
The rolled-out measures in this year’s budget consists of three main parts.
First, the budget aims to support enterprises, safeguard jobs, stabilise the economy and relieve households’ burden.
The key measures include concessionary low-interest three-year loans for enterprises with 100 per cent government guarantees capped at HK$2 million, a reduction of profits and salaries taxes, a waiver of property rates, rent and fees as well as training allowances and subsidies for electricity, water and sewage charges.
Second, the budget aims to strengthen the five pillars of Hong Kong’s economy, namely financial services, tourism, trading and logistics, business and professional services while enhancing Hong Kong’s competitive edge.
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Third, the budget strategically positions Hong Kong to diversify its economy and to be more integrated with the Greater-Bay-Area by increasing investments in developing research and innovation infrastructure to foster research and development (R&D) activities.
SPENDING WHEN IT MATTERS
In general, these measures are timely, rational and pragmatic and a break from the more conservative Budgets Mr Chan has delivered in the last three years.
Although tax rebates and targeted welfare measures had been employed in the past to return part of Hong Kong’s large HK$1 trillion reserves to help people cope with the rising cost of living, the Budgets over the recent period have consistently resisted the temptation of giving sweeteners such as generous cash handouts to the public.
This year it is quite different, as seen from the HK$10,000 cash handout given out to 7 million permanent residents, amounting to HK$71 billion.
Although this expensive measure poses concerns of prudent use, the cash handout should be regarded as a timely remedy to the Hong Kong people who have been reeling from the economic fallout from the social unrest and the ongoing COVID-19 outbreak.
Equivalent to about two-thirds of the 2019 median individual income of Hong Kong, it is indeed a much-needed and substantial assistance to average Hong Kongers.
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As the unemployment rate in Hong Kong is projected to climb up to about 4 to 5 per cent, this cash handout provides direct financial support to those out of work or soon to be laid off.
Furthermore, such a cash handout to Hong Kong permanent resident also demonstrates empathy from the government. Shadowed by the social unrest in the past months, this sweetener, which is also tiered by income, also soothes people psychologically and could reduce societal division.
Despite criticism over the expenditure of a large portion of fiscal reserves accumulated over the years, these are exactly the turbulent times reserves should intend to address. So it is good that the government had the political will to spend during this rainy season.
It is reasonable to assume that if external factors such as the outbreak, social unrest or a larger downturn in the global economy leads to a deterioration in the economic outlook for Hong Kong, the government will be prepared to introduce further relief measures to cope with the situation.
STRUCTURALLY SOUND ECONOMY
The cash handout, together with tax incentives and low-interest loans, could also potentially boost businesses. The effect of the cash handout on boosting consumer spending and thus businesses is more pronounced for the lower to medium income brackets. These are the segments who most likely need the money for daily expenses.
In addition, tax breaks, low-interest loans, allowances and subsidies will help to safeguard jobs and help businesses, especially smaller enterprises who have cash flow issues but provide millions of jobs.
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Although the size of the budget deficit is about 10 per cent of Hong Kong’s total fiscal reserves, the government still needs to tackle three different tasks in the current year, including stabilising the economy, fending off the COVID-19 outbreak and healing societal wounds from the social unrest.
If Hong Kong can ride out this trifecta of the COVID-19 outbreak, the gloomy global outlook, and social unrest, the Hong Kong economy will bounce back. Not to forget the city has strong fundamentals.
What is also worth noting is that despite the current slew of problems facing it, Hong Kong’s government revenue only contracted slightly less than 5 per cent in the past year. This reflects the stability and resilience of Hong Kong’s economy.
That is why despite expectations that the impact of COVID-19 to Hong Kong will be more pronounced going forward, it is quite realistic to assume that its economy will continue to be reasonably stable and resilient.
Maggie Hu is currently an Assistant Professor of Real Estate and Finance at The Chinese University of Hong Kong.