SINGAPORE - The Hong Kong and Singapore Budgets released last week highlight some of the long-term economic challenges facing both cities - and how their respective governments differ in some key ways in their policy response, Fitch Ratings said on Monday.

Here is more on what Fitch said:

Public finances should remain substantial credit strengths for both countries over the foreseeable future despite some divergence in policy response, said the credit ratings agency.

Both Hong Kong and Singapore have prospered in the era of globalisation but robust growth has been accompanied by a perception of widening inequality, leading to social and political pressures. Long-term challenges shared by both include rising income disparity, the need to strengthen the supply side to underpin growth, and aging populations, it added.

In response, Singapore is adopting a more explicitly redistributionist fiscal policy. The latest Budget proposes to raise the top marginal tax rate (to 22 per cent) to fund a social welfare programme for the poor and elderly - the Silver Support Scheme. Hong Kong, by contrast, is introducing tax cuts as part of its latest Budget round. To address the ageing population and the potential structural deficit this may cause, Hong Kong will also establish a sovereign wealth fund to provide support to the Budget over the long term.

The emphasis of Singapore's growth policy seems to be on strengthening total factor productivity, partly through fiscal incentives. These include extending a wage credit scheme and corporate income tax rebates.

Hong Kong's approach is to boost infrastructure expenditure to deepen the capital stock, while letting the supply side take care of itself to a greater degree. The government's long-term fiscal plan calls for capital spending to rise by a compound annual growth rate of 9.9 per cent from financial year 2015 to FY19.

Fitch's analysis suggests Hong Kong is spending slightly less on identifiable social items as a percentage of GDP (gross domestic product) than in 2000, whereas in Singapore the percentage is about the same.

The share of expenditures on social items in both has been rising in recent years after dipping in the early 2000s. Nonetheless, the fiscal positions for both cities are likely to remain significant sources of credit strength over the medium term. Fitch expects that policymakers will continue to place a high priority on long-term fiscal sustainability.

Hong Kong continues to forecast surpluses through to FY20, which means it will accumulate fiscal reserves in nominal terms over the medium term. In Singapore, the Budget plan includes a deficit of $6.7 billion in FY15; however non-budget sources of revenue will mean that the overall general government balance will remain in surplus.

It is also notable that both governments have a tendency to Budget on the conservative side, and have historically outperformed their fiscal plans. In the case of Singapore, the fiscal balance has outperformed the Budget for the past 11 consecutive years.