HONG Kong Financial Secretary Paul Chan faces a tough task this week as he unveils a budget that needs to provide incentives to revive the city’s international image while preventing the fiscal deficit from spiralling out of control.

Economists largely expect Chan to focus his budget address on Wednesday (Feb 22) on what the city will do to attract more foreign talent after years of strict pandemic curbs battered its status as the region’s premiere financial hub.

Chief executive John Lee made reversing an exodus of expats one of his top priorities during his maiden policy address last fall.

Ten of 11 economists surveyed by Bloomberg this month said the government would roll out measures to bring in that talent. Seven of 10 respondents said they expected more incentives — including possible salary tax exemptions — to be announced to alleviate the financial burden faced by businesses and individuals.

Only four of 11 respondents expect the government to give out more consumption vouchers, suggesting a shift away from a popular tactic intended to spur spending during the pandemic.

“Hong Kong needs a very strong set of fiscal support measures to place its economy on a sustainable recovery path” this year, said Woei Chen Ho, an economist at United Overseas Bank. She cited immigration, the loss of appeal the city has among foreign companies and a property market downturn as obstacles for Hong Kong.

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The city has to refocus now that it’s re-opened to China and the rest of the world, with other financial hubs in the region like Singapore trying to dethrone Hong Kong as the top Asian destination for business, talent and capital. Its path towards recovery is challenging, though, as the economy shrank in three of the past four years while the fiscal deficit ballooned.

“After three years of the pandemic and a weak external economy, a high fiscal deficit has accumulated so the economic recovery still needs to be consolidated and investment in the future needs to be supported,” Chan wrote in a blog post on Sunday ahead of the budget speech.

Here’s a look at some key areas economists expect Chan to focus on during his presentation Wednesday morning at the Legislative Council:

Attracting talent

Several economists and other experts either expect or encourage the government to announce financial policies to pull in foreign, high-skilled workers.

One way to do so would be to exempt employees at “strategic enterprises” from paying salary taxes, said Alice Leung, a tax partner at KPMG China.

The city should extend an existing Continuing Education Fund to fully reimburse tuition and examination fees for professionals as a way to “ensure businesses have access to the talent they need for success”, the Association of International Certified Professional Accountants said in a release on Monday.

Incentives could come on the corporate side, too. Consulting firm Deloitte floated a proposal to convince overseas firms to choose Hong Kong for a secondary listing by reducing the stamp duty rate for transferring Hong Kong stock. Chan announced a hike to that duty in his budget address in 2021, contributing to a market selloff.

Officials have already rolled out other talent-focused programmes, including one plan to relax visa rules for high-earners and top university graduates. Most of the applicants so far are from mainland China, with half having recently completed their education, according to local media.

Property taxes

The government could also propose some measures targeting the real-estate sector to help bring in talent and give the ailing market a boost.

Cutting property taxes for first-time homebuyers may make the city more attractive to high-skilled workers, said Iris Pang, chief economist for Greater China at ING Groep. Such reductions would also increase the city’s supply of rental units and lower rent costs, she added.

Hong Kong’s real estate market is one of the world’s most expensive, and housing has been a perennial issue for the city’s leaders. Rising interest rates have weighed on borrowing costs over the last year, which remain strained even amid a recent pullback.

The government may find other ways to tackle the housing crisis. Authorities are expected to roll out around 11 residential sites involving over 19,000 units this fiscal year, the Hong Kong Economic Times reported.

Fiscal pressures

Chan made clear in his Sunday blog post that balancing the budget remains top of mind given the accumulating fiscal deficit.

Deloitte estimated the city’s budget shortfall for the 2022-2023 fiscal year at HK$125.7 billion (S$21.44 billion). That would be deeper than Chan’s forecast last year of a more than HK$100 billion gap.

Hong Kong has enough money to cover a shortfall, but a continued drop in reserves puts future government spending at risk and increases the chance of more borrowing or tax hikes. Economists have previously said that a big deficit would leave authorities less able to support the ageing population.

Six of seven respondents to the Bloomberg survey see the government returning to a fiscal surplus this year, with a median estimate of HK$15.5 billion. Still, the depleted fiscal reserves will spur the government to “turn conservative”, said Gary Ng, senior economist at Natixis.

“It will keep some of its counter-cyclical spendings to ease economic stress and invest further to solve structure problems, but it will come with more bond issuance and a roadmap for potential tax hikes down the road,” he added.

Consumption vouchers

The future of the government’s popular consumption voucher programme remains in doubt.

The programme was instrumental in spurring spending over the past two years as the city’s borders were shut to tourists and as social distancing curbs hit local businesses.

Some economists still expect the government to issue another round — including Ng of Natixis, who foresees officials giving out HK$7,000 per person.

“The Hong Kong government will have no choice but to continue supporting the heavily battered economy despite fiscal pressure,” he said.

Most economists surveyed, though, think the government is done with the programme for now. That thinking was echoed last month by Regina Ip, convenor of the government’s advisory Executive Council, who said there’s no reason to issue vouchers given the city is returning to normal. BLOOMBERG