HK finance chief unveils $20.4 billion plan to stabilise economy as deficit peaks

The counter-cyclical measures include spending vouchers of HK$5,000 for each resident. PHOTO: AFP

HONG KONG - Hong Kong's finance chief has unveiled a HK$120 billion (S$20.4 billion) blueprint to stabilise the badly battered economy, which includes loans for the jobless and vouchers to fuel consumption, even as the budget deficit hits a record high.

"Hong Kong will record a deficit for a number of years after achieving a surplus for 15 years," said Financial Secretary Paul Chan in his budget speech on Wednesday (Feb 24).

He said the budget deficit for the current financial year 2020 ending March 31 is estimated to peak at HK$257.6 billion- coming in lower than previous estimate of HK$300 billion.

Fiscal reserves are expected to be HK$902.7 billion by end-March.

"In the past year, we have increased government expenditure substantially to combat the epidemic and roll out relief measures, which resulted in our fiscal reserves dropping sharply in two years from the equivalent of 23 months of government expenditure to 13 months," Mr Chan said.

While a pickup is expected in government revenue in the coming financial year 2021, he still expects a fiscal deficit of HK$101.6 billion - equivalent to 3.6 per cent of gross domestic product - due to the counter-cyclical fiscal measures and the continued increase in recurrent expenditure.

Government revenue for FY2020 is projected to be HK$543.5 billion, 5.1 per cent lower than the original estimate, led by lower-than-expected land premiums.

Government expenditure for FY2020 is estimated to hit HK$820.4 billion or 12.2 per cent higher than the original projection, mainly due to the need to boost the anti-epidemic fund and other measures.

Total government revenue for FY2021 is estimated to be HK$591.1 billion, while the expenditure is projected to be HK$727.8 billion.

The upside is that Hong Kong's economy is expected to grow by 3.5 to 5.5 per cent this year.

But Mr Chan warned that the progress of economic recovery depends on the development of the epidemic.

He noted that cross-boundary movement of people and tourism activities will take time to resume and the economy will face significant challenges in the first half of the year.

But a stronger momentum is expected in the second half of the year, in line with an expected rebound in the global economy.

Last year, Hong Kong's economy shrank 6.1 per cent - the largest annual decline on record and also the first time the city registered two consecutive years of contraction - while unemployment rate peaked at 7 per cent.

The counter-cyclical measures laid out in the speech include spending vouchers of HK$5,000 for eligible residents and HK$15 billion of guaranteed loans for the jobless at fixed interest rate of one per cent.

The proposals to reduce profits and salaries tax in the year of assessment 2020/21 by 100 per cent capped at HK$10,000 will help 128,000 businesses and 1.87 million taxpayers.

The government will earmark HK$934 million to boost tourism - one of the hardest hit industries during the pandemic - with the Hong Kong Tourism Board set to receive HK$765 million to fund promotional offers for when cross-boundary travel resumes.

To boost revenue, Mr Chan proposed raising the stamp duty on stock trading to 0.13 per cent, from 0.1 per cent.

The announcement triggered shares of the Hong Kong bourse operator to plunge 8.8 per cent by the end of trading on Wednesday, while the Hang Seng was down three per cent.

Mr Chan said "this is not the time to introduce new taxes" and that fighting the epidemic and reviving the economy are "our current priorities".

"As businesses and individuals are generally under considerable financial pressure amid the prevailing economic environment and the epidemic, I consider that it is not the appropriate time to revise the rates of profits tax and salaries tax, which are our major sources of revenue," the finance chief said, adding that he will monitor the situation and adjust accordingly.

He added that the government will rein in spending by freezing new hires in the civil service and implement an "expenditure reduction programme" across all departments.

Chief Executive Carrie Lam later voiced support for the proposals, particularly the continued investment in innovation and technology that she said would position Hong Kong well in the development of an international innovation and technology centre in the Guangdong-Hong Kong-Macau Greater Bay Area.

Mrs Lam added that she was "gratified" that her goal of Hong Kong achieving carbon neutrality before 2050, announced in the 2020 Policy Address, was given due regard in the budget. "The continued issue of green bonds and promotion of new energy transportation will go a long way towards that objective."

Hong Kong plans to issue green bonds regularly and expand the scale of the Government Green Bond Programme.

Mr Chan has proposed doubling the borrowing ceiling of the Programme to HK$200 billion to allow for further issuance of green bonds totalling HK$175.5 billion within the next five years.

The government will also issue no less than HK$24 billion of Silver Bonds and no less than HK$15 billion of iBond this year. Both are higher-interest bonds that protect against inflation, the former being only for senior citizens.

Describing Mr Chan's task as "very challenging", PwC Hong Kong tax partner Agnes Wong predicted that the government will incur a deficit not just in the current financial year but also the coming four years.

"If you look at this year's budget, the other revenue stream comes from the issuance of the bonds. So issuing more bonds - the green and silver bonds - that probably can help with the revenue," she noted.

Ms Wong stressed that as Hong Kong competes with rivals like Singapore in areas like trading, intellectual property and as a regional hub for family offices, greater tax incentives will help attract more foreign investments.

An example would be the government's move last month to introduce an amendment bill to provide tax concessions for carried interest issued by private equity funds operating in Hong Kong.

Mr Bernard Chan, convenor of the non-official members of the Executive Council, expressed the council's support for the proposals.

He said Mr Paul Chan has to strike a balance between incurring financial deficits and providing relief as resources are limited.

He added: "He has to work with the fact that there is no guarantee that our economy will rebound by the end of this year or even next year, because we just don't know how long this pandemic will last. So, he needs to save enough for future days too. I think he's already done the best he can."

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