The Hong Kong and Singapore Budgets released last week highlight some long-term economic challenges facing both cities and how their respective governments differ in their policy response, Fitch Ratings said yesterday.
The credit ratings agency noted that robust growth in both cities has been accompanied by a perception of widening inequality, leading to social and political pressures.
Both also face long-term challenges, such as the rising income disparity, sustaining economic growth and ageing populations.
Singapore's response has been to adopt "a more explicitly redistributionist fiscal policy", the report noted. Its Budget includes a proposal to raise the top marginal tax rate to fund a social welfare programme for the elderly poor, the Silver Support Scheme.
Hong Kong, by contrast, introduced tax cuts in its Budget and set up a sovereign wealth fund to provide financial support to address the ageing population and the potential structural deficit this may cause.
"The emphasis of Singapore's growth policy seems to be on strengthening total factor productivity, partly through fiscal incentives," Fitch Ratings said.
These include measures like a wage credit scheme and corporate income tax rebates.
Hong Kong's approach is to boost infrastructure expenditure. The government's long-term fiscal plan calls for capital expenditure to rise by an average of 9.9 per cent per year until 2019.
The Fitch analysis showed that Hong Kong is spending slightly less on "identifiable social items" as a percentage of GDP than in 2000, while for Singapore, the percentage is about the same.
The fiscal positions for both cities are likely to remain strong in the medium term, added Fitch, which expects policymakers in both jurisdictions to continue to place a high priority on long-term fiscal sustainability.
"It is also notable that both governments have a tendency to budget on the conservative side and have historically outperformed their fiscal plans," the report said.
In the case of Singapore, the fiscal balance has outperformed the Budget for the past 11 consecutive years.