Hong Kong economy to remain in a slump as government records first deficit in 15 years

Hong Kong usually runs balanced budgets or surpluses, since its pegged currency system commits it to fiscal prudence.
Hong Kong usually runs balanced budgets or surpluses, since its pegged currency system commits it to fiscal prudence.PHOTO: REUTERS

HONG KONG – Slammed by a perfect storm of trade war, prolonged unrest and the coronavirus outbreak, Hong Kong’s already frail economy is likely to remain in a slump in the year ahead even as the government carves out a stimulus package worth more than HK$120 billion (S$21.6 billion) to aid industries and residents. 

But Financial Secretary Paul Chan expressed hope in his budget delivery on Wednesday morning (Feb 26) that once the coronavirus outbreak blows over, the economy will bounce back. 

For the first time in 15 years, the government recorded a budget deficit of about HK$37.8 billion for financial year (FY) 2019/20, representing 1.3 per cent of gross domestic product (GDP). This is expected to widen to HK$139.1 billion or 4.8 per cent of GDP the next financial year.

Hong Kong’s economy this year is projected to shrink by up to 1.5 per cent or grow by up to 0.5 per cent.

From 2021 to 2024, economic growth is expected to be an average of 2.8 per cent per year, lower than the 2.9 per cent growth the past decade.

The budget deficit comes as the government handed out stimulus packages of over HK$60 billion in the past six months, including four rounds of relief measures to help businesses weather the effects of the trade war and prolonged protests, as well as last week’s Anti-epidemic Fund to mitigate the coronavirus outbreak, and cash handouts.

“Although the impact of the epidemic on our economy in the near term could possibly be greater than that of the severe acute respiratory syndrome (Sars) outbreak in 2003, and the labour market is also subject to significant pressure, Hong Kong’s economic fundamentals remain solid and therefore our core competitiveness will not be shaken,” said Mr Chan.

He added that in the medium term, the economic outlook of Hong Kong remains positive, driven by growth in Asia and China. 

In 2004, the budget deficit hit a high of HK$63.3 billion due to the Sars outbreak the previous year. The government had then unveiled stimulus measures amounting to 0.9 per cent of GDP in 2003, comprising loan guarantees, reduction of government fees and property tax, as well as salary tax rebates and creation of some 20,000 short-term jobs. 

Hong Kong has been caught in the United States-China trade war that has created uncertainty but the economy, particularly the hospitality and retail sectors, was further weakened by anti-government demonstrations spanning over seven months. 

Amid the struggle to contain the city’s biggest political crisis, a further blow came in the form of the ongoing coronavirus outbreak.

 
 
 
 

In the third quarter last year, the economy slipped into recession. For the full year in 2019, the economy shrank 1.2 per cent, marking the first annual decline since the recession in 2009.

Besides allocating money to boost the various sectors, Mr Chan said that, pending approval from parliament, he would disburse HK$10,000 to Hong Kong permanent residents aged 18 or above, to boost domestic consumption and ease people’s financial burden. 

The move will cost the government HK$71 billion and is estimated to benefit about seven million people. 

To support small businesses, the government will roll out a concessionary low-interest loan, reduce profits tax and waive rates for non-domestic properties.

To ease Hong Kongers’ burden, the government will reduce salaries tax and personal tax for FY2019/20, give extra allowance to eligible social security recipients, foot a month’s rental bill for lower-income tenants living in public rental units and pay the examination fees for candidates sitting the 2021 Hong Kong Diploma of Secondary Education Examination.

The government will also beef up healthcare manpower and services, boost industries including transport and logistics and financial services, as well as continue to develop Hong Kong’s technological capabilities.

In his concluding remarks, Mr Chan urged people in the city to set aside differences to move towards progress.

“Hong Kong may have all sorts of shortcomings, but it is our home which allows diversity and freedom of development.

“Even if we have been disappointed, we can choose to feel hopeful for our future. Even if we are striving for different goals, we can work together to put aside our differences, make room for resolving conflicts, and drive Hong Kong forward.”

The city’s biggest pro-Beijing party, the Democratic Alliance for the Betterment and Progress of Hong Kong, said the budget reflects ground sentiments, while the pro-Beijing Business and Professionals Alliance for Hong Kong described the budget as one that has given a “life-saving straw” to struggling businesses. 

 
 
 

Meanwhile, the pan-democracy camp blasted the additional HK$5 billion funding earmarked for the police, with the Civic Party saying it would not vote for the planned spending unless funding towards the police is cut.

PwC Hong Kong tax partner Agnes Wong welcomed the budget, saying it is comprehensive, and calling it “one of the best budgets” as it caters to many sectors and individuals.

“At the moment, it’s important for people to keep their jobs. For businesses, they can survive in the current situation with the short-term relief he announced,” she said.

Even though there would be a deficit in the coming five years, Ms Wong noted that Hong Kong’s fiscal strength is still comparable to other countries, given the “very strong reserves’’. 

The next step, she said, is to watch how the government can properly roll out the measures so that they are effective. 

Economics professor Terence Chong of the Chinese University of Hong Kong noted that Mr Chan may have dished out cash handouts for political reasons but “it won’t help much” to fuel domestic consumption as people may not want to spend the money.

He said the measures this year are not much different from the past, but the key here is not the amount the government can give, but how fast it can provide the help.

“Money is given out to everyone but it is not focused or targeted. The protests and the trade war have affected specific sectors and there is different impact on different industries.”